By John Filar Atwood
The Council of Institutional Investors (CII) and the Center for Audit Quality (CAQ) support the SEC’s proposed amendments to the definition of “smaller reporting company” (SRC), particularly the plan to require companies with a public float of more than $75 million to continue to be subject to Sarbanes-Oxley Act Section 404(b) reporting. CII and CAQ believe that Section 404(b) is an important investor protection because it provides reasonable assurance from the independent auditor that a company maintained effective internal control over financial reporting.
SEC’s proposal. The Commission has proposed amendments to the definition of “smaller reporting company” that would expand the number of registrants that qualify as SRCs. Under the amendments, a company with less than $250 million in public float would qualify as an SRC. The current threshold is $75 million.
The second half of the definition also would be changed to provide that registrants with zero public float would qualify as an SRC if their revenues were below $100 million in the previous year. The existing definition qualifies companies with zero public float and less than $50 million in revenues in the most recent fiscal year.
CII and CAQ said in their comment letter that they support the amendments and recognize that they would generally promote capital formation by increasing the number of companies that can qualify as an SRC. They also expressed support the proposal’s handling of the relationship between the definition of an SRC and definition of accelerated and large accelerated filers.
Accelerated filers. Although the SEC proposes to increase the SRC threshold to $250 million in public float, it would retain the existing threshold of $75 million in public float for defining an accelerated filer. The proposal also includes an amendment to the accelerated filer definition to eliminate a previous provision that an accelerated filer cannot be an SRC.
CII and CAQ said that the strongly support this approach because it maintains the current accelerated filer public float threshold and provides for the continued protection to investors of approximately 750 additional companies that would qualify for SRC status under the proposal. This is important, according to CII and CAQ, because accelerated filers that are not emerging growth companies must comply with the SOX Section 404(b) auditor attestation requirements.
CII and CAQ are opposed to any amendments that would erode Section 404(b) or increase the accelerated filer public float threshold. In their view, this would significantly impact the quality of financial reporting by public companies to the detriment of investors by allowing many more companies to avoid the Section 404(b) requirements.
SOX 404(b). CII and CAQ pointed to a Government Accountability Office study that found companies exempted from Section 404(b) experience more financial restatements, as compared to non-exempt companies. CII and CAQ also cited academic research that shows that the cost of capital for companies that voluntarily comply with Section 404(b) is lower than peer companies and has decreased for public companies since enactment of the Sarbanes-Oxley Act, especially for smaller companies.
CII and CAQ urged the SEC to adopt the proposals as they are currently written, and expressed their opposition to any efforts to further weaken Section 404(b).