On Friday, April 22, 2011, the SEC released its study and recommendations regarding how the Commission could reduce the burden of complying with Section 404(b) of the Sarbanes-Oxley Act for companies whose market capitalization is between $75 and $250 million, while maintaining investor protections for such companies. The SEC recommended leaving the Section 404 requirements in place, but stated that further guidance regarding compliance should be provided. The 113-page Study, which was mandated by Section 989G(b) of the Dodd-Frank Act, was prepared by the Staff of the Office of the Chief Accountant of the SEC. A copy of it is available here.

Sarbanes-Oxley Act § 404 provided that the Commission prescribe rules requiring that a company's annual report include a report of management's assessment of the effectiveness of the issuer's internal control over financial reporting ("ICFR") and an independent auditor's attestation to the effectiveness of those controls. Section 989 of the Dodd-Frank Act directed the SEC to consider whether reducing the compliance burden under Section 404 would encourage companies to list on exchanges in the U.S.

The SEC concluded that:

  • the costs of Section 404(b) have declined since the Commission first implemented the requirements of Section 404, particularly in response to reforms in 2007;
  • investors generally view the auditor‘s attestation on ICFR as beneficial;
  • financial reporting is more reliable when the auditor is involved with ICFR assessments; and
  • there is not conclusive evidence linking the requirements of Section 404(b) to listing decisions of the studied range of issuers.

The Commission also made two recommendations. First, it recommended that Congress maintain existing investor protections of Section 404(b) for accelerated filers, which have been in place since 2004 for domestic issuers and 2007 for foreign private issuers. Second, the Commission recommended encouraging activities designed to improve the effectiveness and efficiency of the implementation of Section 404, such as having PCAOB publish observations and guidance based on inspection results, and having the SEC Staff observe the efforts of the Committee of Sponsoring Organization of the Treadway Commission ("COSO") to update its internal control network.