(The news featured below is a selection from the news covered in Federal Securities Law Reporter, which is distributed to subscribers of Federal Securities Law Reporter.)

Forum on Small Business Provides Recommendations to Advisory Committee

The SEC Forum on Small Business Capital Formation presented its recommendations to the Advisory Committee on Smaller Public Companies for consideration when it presents its report to the SEC. The forum's top priorities are a new definition for smaller public companies for determining those eligible for regulatory relief and a simplified registration process for private placement broker-dealers who act as finders or consultants to small companies seeking to raise capital. These unlicensed brokers fill a critical need, but their registration would help screen out those who are not honest and ethical.

Advisory committee co-chair James Thyen noted that the fact-finding portion of the committee's work is coming to a close. The committee now must move on to a convergence of ideas and final recommendations. He urged committee members to remember the overarching goals when they bring their recommendations to the October 2005 meeting of the full committee. The recommendations must be based on deductive reasoning, he said, not anecdotal information. If the committee's recommendations are to be meaningful to the SEC, they must be reasonable within the context of the SEC's mission, he noted. Mr. Thyen also urged members to call on the Office of Economic Analysis for assistance, as needed.

SEC Forum Recommendations

Securities lawyer Lance Jon Kimmel recommended a three-tier system for defining small companies eligible for regulatory relief. The forum supports the use of market capitalization as the initial criteria, he said, but called for further measures. Microcap companies should be eligible for the most relief and should be defined as public companies with $100 million or less in total market capitalization, or $25 million in annual revenues, or with public float criteria yet to be established. Kimmel said that microcap companies would qualify for significant relief from the Section 404 requirements, while smaller public companies would receive scaled regulatory relief. Smaller public companies would be those that fall between the definitions of microcap companies and well-known seasoned issuers, as defined in the SEC's securities offering reform rules. The forum also supports relief for creeping public companies or inadvertent public companies.

Brian Borders of the Borders Law Group urged the committee to support the recommendations of the American Bar Association's Task Force on Private Placement Broker-Dealers, which was discussed at yesterday's meeting by Gerald Niesar, a partner with Niesar Curls Bartling LLP. Mr. Borders also suggested that microcap companies with fewer than 1,000 shareholders that became subject to the Sarbanes-Oxley Act should be given the opportunity to opt out of the requirements by a simplified method of exiting the reporting system.

Ralph De Martino, a member of Cozen O'Connor, recommended relief from the independence criteria for predecessor auditors of small companies as long as they were independent under the definition at the time of the audit. He added that the Public Company Accounting Oversight Board's statement in May 2004 on guidance to audit clients provided some clarification, but the accounting profession is still concerned about crossing the line on independence. Mr. De Martino urged the PCAOB to issue additional guidance to make clear where the lines are drawn so that auditors are not so defensive about providing guidance, especially with respect to new accounting pronouncements. He also recommended that small companies be given an additional year to implement new accounting pronouncements.

COSO Update

Larry Rittenberg, chairman of the Committee of Sponsoring Organizations of the Treadway Commission, provided an update on COSO's project for developing guidance to assist small businesses in implementing the COSO framework. The project began in February 2005 after discussions with SEC Chief Accountant Donald Nicolaisen, Mr. Rittenberg explained. He has met with the SEC, the PCAOB and with preparers and users, he said. The project will not be "COSO light," he advised. The Treadway Commission in 1997 did not conclude that small companies should be exempted from issuing public reports on internal controls.

COSO hopes to have an exposure draft ready by mid-October, followed by a 60-day comment period. The final document is expected in the first quarter of next year. COSO does not plan to hold public hearings, unless the comment letters convince it of the need to do so. The task is to apply the COSO framework to small businesses, not to develop a new framework, he said. All companies need effective internal controls. COSO does not believe that its framework was developed just for large companies and will provide guidance to show smaller companies how to implement the guidance.

The Government Accountability Office is conducting a study on the Sarbanes-Oxley Act at the request of the Senate, which will include a review of Section 404. The GAO has interviewed a number of the members of the advisory committee in connection with its study. The GAO report and the advisory committee's report should be coming out at about the same time.