SEC Further Extends Section 404 Compliance Date for Smaller Issuers and Proposes Changes to Accelerated Filer Rules
Section 404 Internal Control Reporting Extension
At an open meeting held on September 21, 2005, the SEC extended for an additional year the date by which companies that are not “accelerated filers” (generally, reporting issuers that have less than $75 million in public equity float) must comply with the Sarbanes-Oxley Act Section 404 requirement that a reporting issuer include in its annual report both a report of management and an accompanying auditor's report on the issuer's internal control over financial reporting. This extension also applies to the auditors' attestation report on management's assessment of the company's internal control over financial reporting.
Under the extension, non-accelerated filers, including foreign private issuers, will first have to file management's internal control report beginning for fiscal years ending on or after July 15, 2007. In addition, companies must comply with the updating requirements contained in Rules 13a-15(d) and 15d-15(d), as appropriate, after the first annual report that must include the management's report on internal control over financial reporting.
The SEC also extended the compliance dates for amendments to internal control representations that must be included in the certifications required by Exchange Act Rules 13a-14(a) and 15d-14(a). Companies that are not accelerated filers may continue to omit the portion of the introductory language in paragraph 4 and all of paragraph 4(b) of the certification. These sections of the certification relate to internal controls over financial reporting and must be provided in the first annual report required to contain management's internal control report and in all periodic reports thereafter.
The compliance extension will no longer apply if, at the end of a fiscal year prior to the extended compliance date, an issuer becomes an accelerated filer. In such event the issuer will have to provide Item 308(a) and (b) information for its first annual report after that fiscal year in which it becomes an accelerated filer. For instance, a company with a calendar year end, whose public equity float increases to $75 million or more, and otherwise meets the definitional requirements of an accelerated filer under that Rule, must provide the information required by Item 308(a) and (b) and Rules 13a-15 and 15d-15, as applicable, in the first annual report filed after its fiscal year.
In announcing the relief, the SEC stated that the compliance extension was appropriate and part of its ongoing efforts to reduce the burdens of internal controls reporting by smaller companies.
While the extension is certainly welcome news for smaller issuers, we strongly advise non-accelerated filers not to delay their SOX 404 compliance efforts in order both to evaluate fully their internal controls and procedures and also to implement needed compensating procedures to address any identified deficiencies or material weaknesses in a timely and efficient manner.
Revisions to Accelerated Filer Definition and Filing Deadlines
At the same open meeting, the SEC approved a proposal to amend the “accelerated filer” definition in Securities Exchange Act Rule 12b-2 to create a new category of accelerated filers that would include reporting companies with a public float of $700 million or more (a large accelerated filer). The amendments would also ease some of the current restrictions on the exit of companies from accelerated filer status by permitting an accelerated filer to cease reporting as an accelerated filer when its public float drops below $25 million. Large accelerated filers whose public float falls below $75 million would cease to be a large accelerated filer under the proposals.
All accelerated filers are currently scheduled to become subject to a 60-day filing deadline for their Form 10-K annual reports and a 35-day filing deadline for their quarterly reports on Form 10-Q beginning for fiscal years ending on or after December 15, 2005. Under the proposed amendment, the current 75-day Form 10-K annual report filing deadline and 40-day Form 10-Q quarterly report filing deadline will remain in place for accelerated filers with a public float between $75 million and $700 million. So called large accelerated filers with a public float of $700 million or more would become subject to a 60-day Form 10-K annual report filing deadline and 40-day Form 10 Q quarterly report filing deadline. The 30 day comment period on the proposal ends on October 29, 2005. The proposing release can be found at www.sec.gov/rules/proposed/33-8617.pdf
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