On October 14, the SEC recently issued a release requesting public comment in connection with a study relating to ways in which the SEC could reduce the burden of complying with Section 404(b) of the Sarbanes-Oxley Act of 2002 for companies whose public float is between $75 million and $250 million. The study is called for by Section 989G(b) of the Dodd-Frank Act and must be completed within nine months of the Act’s passage.
Public companies and their independent auditors are each required to report on the effectiveness of internal control over financial reporting pursuant to Section 404 of SOX. While Section 404(a) requires an assessment by company management, Section 404(b) requires the independent auditors to report on management’s assessment. Title IX of the Dodd-Frank Act amends SOX by providing an exemption from the Section 404(b) requirement for companies with a float of less than $75 million. The study mandated by Section 989(G) of the Dodd-Frank Act is intended to examine whether further relief from the Section 404(b) compliance burden for companies with public floats of between $75 million and $250 million would encourage companies to list their initial public offerings on exchanges in the U.S. rather than elsewhere.
The release contains a list of 23 items on which the SEC is specifically requesting comment. Highlights include:
1. The impact of costs of complying with the auditor attestation requirement of Section 404(b) on company decisions to list on exchanges in the United States versus foreign exchanges in initial public offerings for subject issuers after the offering.
2. The potential effect of a complete exemption from Section 404(b) for subject issuers on matters such as: raising capital; engaging in mergers, acquisitions and similar corporate transactions; and attracting and retaining qualified independent directors.
3. Quantitative and qualitative information about whether and how compliance with Section 404(b) has benefited investors and other users of financial statements of subject issuers.
4. Whether and to what extent auditor attestation reports on internal control over financial reporting enhances confidence in management’s assessment of the effectiveness of its internal control over financial reporting, improves the reliability of financial reporting and improves the prevention and detection of fraud and other misconduct for subject issuers.