(The news featured below is a selection from the news covered in the Federal Securities Law Reporter.)

Smaller Company Advisory Committee Seeks Comment on Report 

The SEC's Advisory Committee on Smaller Public Companies has published for public comment an exposure draft of its final report and proposed recommendations to the Commission. The committee will consider the comments received before finalizing the recommendations in the report, which is due to be submitted to the Commission by April 23, 2006. Interested parties may submit comments to the committee through April 3, 2006.

The SEC established the advisory committee to examine the impact of the Sarbanes-Oxley Act and other federal securities laws on smaller companies. The committee has been meeting and holding hearings since April 2005.

The committee's initial primary recommendation concerns establishment of a new system of scaled or proportional securities regulation for smaller public companies based on a division of such companies into two groups, microcap companies and small cap companies. Under the recommendation, microcap companies would consist of companies whose outstanding common stock, or the equivalent, comprise the lowest one percent of total U.S. equity market capitalization. Small cap companies would consist of companies whose outstanding common stock or the equivalent comprised the next lowest five percent of total U.S. equity market capitalization. Smaller public companies, consisting of microcap and smallcap companies, would thus in the aggregate comprise the lowest six percent of total U.S. equity market capitalization.

The committee recommended that the SEC develop specific scaled or proportional regulation for these companies. In addition, the draft report recommended that the SEC provide exemptive relief from the internal control reporting requirements of Section 404 of the Sarbanes-Oxley Act.

Accounting Firm Reaction

Two members from "Big Four" accounting firms advised that they no longer support certain provisions of the report. The firms oppose giving smaller companies an exemption from the Sarbanes-Oxley Act Section 404 provisions or permitting them to use a version of Section 404 referred to as "SOX lite." The firms support the additional deferral of the implementation of Section 404 for smaller public companies until more guidance is available and additional experience has been gained to assist smaller companies in its implementation. The dissenting views will be included in the final report.

Alan Beller, the director of the SEC's Division of Corporation Finance, made a final appearance before the committee before returning to the private sector. He assured the group that, although the SEC has seen many changes in personnel, the committee's work continues to attract a high level of interest. Mr. Beller said the draft report, attendant comments and final report will be closely reviewed. He added that some of the ideas the committee intends to submit for SEC consideration are controversial, both inside the Commission and out.

Mark Jensen, with Deloitte & Touche, said the firm's change in position was partly due to conversations with investor groups and other interested parties. The firm is extremely concerned about the costs of Section 404, he added, but its elimination would tip the balance of interests too far out. John Veihmeyer, a partner with KPMG LLP, called for better guidance for issuers on how to assess systems of internal control and for auditors on how to scale their services to smaller companies. KPMG also supports a deferral of the implementation of Section 404 for smaller public companies until a concerted effort is made to understand the differences of smaller public companies with respect to internal controls.

Daniel Goelzer, a PCAOB member and an official observer of the committee, said the PCAOB has not taken a position on the committee's recommendations, but said he informally believes that the alternative proposal for a modified standard could be developed. However, from a policy standpoint, it is outside of the PCAOB's control. Auditing Standard No. 2 became the de facto guidance for management, he said, and if it gets extended to smaller companies, that problem will be exacerbated. The PCAOB's top priority is to make auditing for internal controls effective and efficient, he said.