SEC Posts Final Rules on 404 Compliance Extension and Proposed Amendments Regarding Accelerated Filing Deadlines

By: Cydney Posner

The SEC today posted the release relating to the final rules relating to the extension of the compliance date, for companies that are not accelerated filers, with regard to management's report on internal control over financial reporting and certification of disclosure in periodic reports.

The release extends the compliance dates as follows:

• A company that is not an accelerated filer must begin to comply with the requirements to provide a report of management and accompanying auditor's report on the company's internal control over financial reporting for its first fiscal year ending on or after July 15, 2007.
• Companies must begin to comply with the provisions of Rule 13a-15(d) or 15d-15(d), whichever applies, requiring an evaluation of changes to internal control with respect to the company's first periodic report due after the first annual report that must include management's report on internal control.
• In addition, during the extended compliance period, a company that is not an accelerated filer may continue to omit the amended portion of the introductory language in paragraph 4 of the certification required by Rules 13a-14(a) and 15d-14(a) that refers to the certifying officers' responsibility for establishing and maintaining internal control, as well as paragraph 4(b). This language, however, must be provided in the first annual report required to contain management's internal control report and in all periodic reports filed thereafter.
• The extended compliance dates also apply to the amendments to Rules 13a-15(a) and 15d-15(a) relating to the maintenance of internal control.

While the definition of an accelerated filer previously applied only to foreign private issuers filing on Forms 10-K and 10-Q, as of December 1, 2005, a foreign private issuer that is an accelerated filer under the Rule 12b-2 definition and that files its annual reports on Form 20-F or Form 40-F must begin to comply with the internal control and related requirements in the annual report for its first fiscal year ending on or after July 15, 2006. A foreign private issuer that is not an accelerated filer under the Rule 12b-2 definition must begin to comply in its annual report for its first fiscal year ending on or after July 15, 2007.

The SEC is also soliciting public comment on the amount of time and expense that companies that are not accelerated filers have incurred to date to prepare for compliance with the internal control reporting requirements, as well as whether different standards and requirements should apply to smaller companies and related matters.

The SEC has also posted proposed rules regarding revisions to the accelerated filer definition and accelerated deadlines for filing periodic reports.

The proposed new amendments would:

• create a new category of accelerated filer, the "large accelerated filer," for issuers that meet the accelerated filer criteria and have a public float (an aggregate worldwide market value of voting and non-voting common equity held by non-affiliates) of $700 million or more, as of the last business day of the issuer's most recently completed second fiscal quarter;
• amend the accelerated filing deadlines so that the 60-day Form 10-K annual report deadline would apply only to the proposed new large accelerated filers (the Form 10-Q quarterly report filing deadline for large accelerated filers would remain at 40 days, with no further reduction; periodic report deadlines for other accelerated filers would remain at 75 days for annual reports on Form 10-K and 40 days for quarterly reports on Form 10-Q);
• allow an accelerated filer with a public float of less than $25 million, as of the last business day of its most recently completed second fiscal quarter, to exit accelerated filer status without a second year's determination or other delay (the current rules provide that an accelerated filer remains one until it becomes eligible to use Forms 10-KSB and 10-QSB, which requires that the issuer meet the small business issuer definition at the end of two consecutive years); and
• allow a large accelerated filer with less than a $75 million public float, as of the last business day of its most recently completed second fiscal quarter, to exit large accelerated filer status.

The proposal also include conforming amendments, including a new check box to the cover page of Forms 10-K, 10-Q and 20-F to indicate whether the issuer is a large accelerated filer, an accelerated filer or a non-accelerated filer. The definition of "accelerated filer" would also be amended to require a public float of $75 million or more but less than $700 million and to clarify that the public float term in this definition means the "aggregate worldwide market value," which conforms to Staff interpretations. The determination of public float would be premised on the existence of a public trading market for the company's equity securities.

The proposed exit amendments would permit a company that falls below the threshold as of its second fiscal quarter to file its annual report on a non-accelerated filer basis for the fiscal year in which that determination is made. For example, if a December 31, 2005 fiscal year-end accelerated filer had less than $25 million in public float on June 30, 2005, it could exit accelerated filer status on December 31, 2005, and would not have to file its Form 10-K for fiscal 2005 on an accelerated filer basis. The issuer could then continue to file all subsequent annual and quarterly reports on a non-accelerated filer basis unless the issuer again meets the accelerated filer definition.

The SEC is also proposing conforming changes to Rules 3-01, 3-09 and 3-12 of Reg S-X.