SEC Delays SOX 404 for Smaller Companies and Proposes Delay in Final Phase-in of Acceleration for Some Filers

By: Cydney Posner

Today, the SEC (with Christopher Cox chairing his first open meeting) voted to extend the date by which non-accelerated filers must comply with the internal control reporting requirements of SOX 404 until their first fiscal year ending on or after July 15, 2007. More specifically, the extension delays the need for compliance with certain amendments to Rules 13a-15 and 15d-15, Items 308(a) and (b) of Regs S-K and S-B, Item 15 of Form 20-F and General Instruction B of Form 40. These provisions require companies to include in their annual reports a report of management and an accompanying auditor’s report on the company’s internal control over financial reporting and also require a company’s management to evaluate changes in the company’s internal control. The SEC emphasized that long-standing rules under the Foreign Corrupt Practices Act requiring internal accounting controls remain in place. Among other things, the SEC is awaiting recommendations from the SEC Advisory Committee on Smaller Public Companies as well as an exposure draft from COSO providing guidance for smaller companies on compliance with the COSO internal control framework. For example, the COSO framework relies extensively on systems, whereas smaller companies rely more heavily on individuals; similarly, COSO focuses on segregation of duties, which may not be possible for smaller companies.

The SEC also voted to propose amendments to the "accelerated filer" definition in Rule 12b-2 to:

• create a new category of "large accelerated filer" that would include reporting companies with a public float of $700 million or more; and
• ease some of the current restrictions on the exit of companies from accelerated filer status.

The proposed amendments also would amend the final phase-in of the Form 10-K and Form 10-Q accelerated filing deadlines that is scheduled to take effect next year. Accelerated filers currently are scheduled to become subject to a 60-day filing deadline for Form 10-K annual reports filed for fiscal years ending on or after December 15, 2005 and a 35-day deadline for the three subsequently filed quarterly reports on Form 10-Q. The amendments would subject only the new category of large accelerated filers to the accelerated filing deadline for 10-Ks. The 40-day 10-Q filing deadline would remain in place for all accelerated filers. Accelerated filers with less than $700 million in public float would continue to file 10-Ks on the current 75-day schedule.

The proposal to streamline the exit provisions would allow companies with a public float below $25 million to file their 10-Ks on a non-accelerated basis for same fiscal year in which they drop below the threshold. A similarly streamlined exit provision would apply for termination of large-accelerated-filer status.