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Commission Moves to Further Ease Section 404 Compliance Burden

The SEC yesterday extended the compliance date for certain foreign private issuers, and took several other steps to help smaller public companies, foreign private issuers and newly public companies comply with Sarbanes-Oxley Act section 404 reporting requirements. Chairman Christopher Cox said that the proposed relief would give the SEC and the PCAOB additional time to redesign section 404 implementation in a way that is more efficient and cost effective.

Effective upon publication in the Federal Register, foreign private issuers that are accelerated filers, but not large accelerated filers, and that file their annual reports on Form 20-F or Form 40-F, will have their compliance deadline extended by one year. As a result, they will not have to begin providing an auditor's attestation report on internal control over financial reporting in their annual reports until fiscal years ending on or after July 15, 2007.

The SEC said that these foreign issuers will be required to comply only with the section 404 requirement to include management's report in the Form 20-F or Form 40-F annual report filed for their first fiscal year ending on or after July 15, 2006. They will not need to comply with the requirement to provide the accounting firm's attestation report until they file a Form 20-F or Form 40-F annual report for a fiscal year ending on or after July 15, 2007.

The move does not change the date by which a foreign private issuer that is a large accelerated filer must comply with section 404(a) and (b) requirements, the SEC noted. Those filers are still required to include both a report by management and an attestation report by the issuer's accounting firm on internal control over financial reporting in their Form 20-F or Form 40-F filed for a fiscal year ending on or after July 15, 2006.

With respect to smaller public companies, the Commission proposed to extend the date by which smaller companies that are non-accelerated filers must provide a report on management's assessment of internal controls. The initial compliance date would be moved from fiscal years ending on or after July 15, 2007 to fiscal years ending on or after December 15, 2007.

The SEC also proposed to move the date by which non-accelerated filers must begin to comply with the requirement to provide an auditor's attestation report on internal control over financial reporting in their annual reports to the first annual report for a fiscal year ending on or after Dec. 15, 2008. This extension would result in all non-accelerated filers being required to complete only the management's portion of the internal control requirements in their first year of compliance with the requirements.

The proposed extensions will give issuers and their auditors an additional year to consider, and adapt to intended changes in Auditing Standard No. 2, according to the Commission. The comment period on the proposals relating to smaller public companies will be open for 30 days from publication in the Federal Register.

The SEC also issued proposed section 404 relief for newly public companies yesterday. The Commission proposed a transition period so that a company would not be required to provide either a management assessment or an auditor attestation report until it has previously filed one annual report. The relief would apply to any company that has become public through an IPO or a registered exchange offer, or that otherwise becomes subject to the 1934 Act reporting requirements. It would include a foreign private issuer that is listing on a U.S. exchange for the first time.

The SEC said that this proposal recognizes that preparation of a newly public company's first annual report can be a time and resource intensive process that may quickly follow an IPO or initial listing. By not requiring the section 404 reports until a newly public company files its second annual report, the Commission said that it hopes to increase the efficiency and effectiveness with which those companies eventually meet their section 404 compliance obligations.

John Filar Atwood