(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.)

Compliance with Internal Control Rules for Non-Accelerated Filers Deferred

The SEC, by a unanimous vote of the commissioners, extended the compliance date with the internal control over financial reporting requirements for non-accelerated filers, including those that are foreign private issuers. The new compliance date goes into effect for the first fiscal year ending on or after July 15, 2007. Foreign private issuers that are accelerated filers and file annual reports on Forms 20-F or 40-F must still comply with the requirements in the annual reports for the first fiscal year ending on or after July 15, 2006. The extension was recommended by the SEC's Advisory Committee on Smaller Public Companies. The SEC is also seeking comments on additional questions about the internal control reporting requirements.

The delay in compliance with the internal control provisions was the third time the SEC has provided additional time to implement the requirements. The latest delay will allow time for the Treadway Commission's Committee of Sponsoring Organizations to develop its guidance for smaller public companies and will give the SEC's advisory committee time to continue to study the issues. Alan Beller, the director of the Division of Corporation Finance, noted that the deferral in compliance in no way affects other existing requirements, such as the controls under the Foreign Corrupt Practices Act. The staff has seen examples of early disclosure, he added, and continues to encourage companies to provide information that would be useful to investors.

Christopher Cox, chairing his first open meeting at the SEC, asked if the costs would be unduly burdensome if the SEC chose not to extend the compliance dates. Mr. Beller replied that the costs were not unique to smaller companies. The costs in the first year of compliance for larger companies were significant, and perhaps greater than they should have been. Mr. Beller explained that the COSO framework on internal controls places a great deal of emphasis on systems, but smaller companies have fewer systems and rely more on individuals. Those differences are the kinds of things the staff and the advisory committee are trying to address to reduce the burdens for smaller companies.

Chief Accountant Donald Nicolaisen added that the costs of compliance were found to have been disproportionate for smaller companies, largely due to the lack of documentation. Mr. Nicolaisen strongly believes that it is critical that a control framework be developed for small companies before they are subjected to the internal control reporting requirements.

Commissioner Cynthia Glassman said the purpose of Section 404 is a good one, but she continues to have concerns with the Public Company Accounting Oversight Board's Auditing Standard No. 2, which she believes shifted the focus on financial reporting from managers to auditors. She said the process may not be changing in the second year as anticipated and audit fees remain high due to the extensive testing of controls. The SEC must continue to monitor the second year of compliance, she said.

Commissioner Paul Atkins also pointed to the greatly underestimated costs of complying with the internal control requirements. The internal control rules and Auditing Standard No. 2 are being applied in an overly prescriptive manner, in his view. He too has heard that cost reductions may not be near what everyone was hoping for in the second year and said there are questions as to whether the standard is workable. Almost everyone would agree the right balance has not been achieved in implementing Section 404, he said. Mr. Atkins said the SEC needs to make the hard decisions on what to do with respect to Section 404 and smaller public companies. He does not believe the case has been made that the benefits outweigh the costs for smaller public companies. The comment period on the questions posed in the release will be open for 30 days.

Filing Deadline for Periodic Reports

The SEC will seek comments for 30 days on a proposal to create a new category of large accelerated filers, those with a public float of $700 million or more that meet the other conditions for an accelerated filer, that will become subject to the 60-day Form 10-K reporting deadline and 40-day Form 10-Q reporting deadline next year and in subsequent years. The newly defined accelerated filers, those with a public float of between $75 million and $700 million, would remain at the current 75-day reporting deadline for their Form 10-K and 40-day deadline for their Form 10-Q next year and in subsequent years.

The proposed amendments would also make it easier to exit the accelerated filer status by permitting accelerated filers whose public float drops below $25 million to file an annual report on a non-accelerated basis for the same fiscal year in which the determination about the public float is made. A large accelerated filer could adhere to the accelerated filer deadline if its public float dropped below $75 million.

The proposed modifications are consistent with the recommendation of the Advisory Committee on Smaller Public Companies that smaller companies not be subject to further acceleration of their periodic report filing deadlines. The staff also noted that even larger companies have had trouble complying with the Form 10-Q acceleration schedule, so the proposal would retain the 40-day filing deadline rather than to further accelerate the deadline to 35 days. Smaller public companies with a public float of less than $75 million would continue to file their Forms 10-K 90 days after the end of their fiscal years and their Forms 10-Qs 45 days after each quarter. Mr. Beller asked commenters not to simply submit two-page letters stating that the filing deadlines are too short, but to explain why and give details about their processes in complying with the reporting deadlines.