The SEC has noticed an open meeting for next week. Among the matters on the agenda:
- whether to adopt amendments to the definition of “smaller reporting company” and other rules and forms in light of the new definition; and
- whether to adopt amendments requiring the use of the Inline XBRL (eXtensible Business Reporting Language) for the submission of financial statement information.
That “whether” tends to be a “yes” (or the matter would probably not be on the agenda). There will also be a proposal to make amendments to the rules regarding the SEC’s whistleblower program.
The SEC proposed changes to the definition of a “smaller reporting company” way back in 2016. The proposal would raise the cap from “less than $75 million” in public float to “less than $250 million,” allowing more companies to take advantage of the scaled disclosures permitted for companies that meet the definition.
Notably, the SEC did not propose to raise the $75 million threshold in the “accelerated filer” definition, which means that, even though they might qualify as smaller reporting companies, companies with $75 million or more of public float would remain subject to the “accelerated filer” requirements, including the accelerated timing of filing of periodic reports and the requirement to provide a SOX 404(b) auditor’s internal control attestation. The SEC declined to propose that change notwithstanding the recommendation of the SEC’s Advisory Committee on Small and Emerging Companies in 2015. (See this PubCo post.) The Committee had recommended that the SEC attempt to harmonize the jumble of rules applicable to the various categories of small companies and, specifically, that the SEC increase the threshold for “accelerated filers” to include companies with a public float of $250 million or more, but less than $700 million, with the result that the requirement to provide an auditor attestation report under SOX 404(b) would no longer apply to those companies. (See this PubCo post.)
In the proposal, however, the SEC expressly rejected that Committee recommendation on the basis of a 2011 staff study, which found
“no specific evidence that any potential savings from exempting registrants with public floats between $75 million and $250 million from the auditor attestation provisions of Section 404(b) would justify the loss of investor protections and benefits to registrants from such an exemption. Rather, the staff found that accelerated filers (including those with a public float between $75 million and $250 million) that were subject to the Section 404(b) auditor attestation requirements generally had a lower restatement rate than registrants that were not subject to the requirements. Moreover, the staff found that the population of registrants with public floats between $75 million and $250 million did not have sufficiently unique characteristics that would justify differentiating this population of registrants from other accelerated filers with respect to the Section 404 auditor attestation requirements.”
The proposing release also observed that subsequent academic research on this topic was mixed. As a result, the SEC did not propose to raise the accelerated filer public float threshold or to modify the SOX 404(b) requirements. The SEC did, however, request comment on the issue, and since the proposal was issued, there has been a torrent of criticism of the application of SOX 404(b) to smaller companies. (Apparently, in the eyes of some, the prospect of a SOX 404(b) auditor attestation has been a major factor in driving companies from the IPO market.) What’s more, in its final report in 2017, the Committee reiterated its recommendation. (See this PubCo post and this PubCo post.) So the big question on the table is whether, given the change in composition of the SEC, including its Chair, and the sturm und drang in the last two years over the application of SOX 404(b) to smaller companies, will the SEC reach a different conclusion on the accelerated filer definition this time out? But don’t get too excited just yet—the agenda does not expressly refer to accelerated filers, only to the definition of smaller reporting companies and “other rules and forms in light of the new definition.”
If SOX 404(b) were not enough to drive companies away from the IPO market, Inline XBRL just might be. (Just kidding of course…. I’m sure all companies love XBRL in every form.) The SEC originally proposed the mandatory use of Inline XBRL for operating companies’ financial statement information in March 2017, following a voluntary program that began in 2016. (Note that the proposal also required the use of XBRL for mutual funds.) Currently, companies are required to provide the financial statements and schedules accompanying their Exchange Act reports and Securities Act registration statements in “structured,” i.e., machine-readable, format using XBRL, but they provide this XBRL data as an exhibit to their filings and are required to keep it posted on their websites for at least 12 months. Inline XBRL allows data tagging to be embedded directly in the text of an HTML document, eliminating the need for separate exhibits for the XBRL data and, the SEC believed, reducing the likelihood of inconsistencies. The proposed amendments would require filers “to embed a part of the Interactive Data File within an HTML document using Inline XBRL and to include the rest in an exhibit to that document. The portion filed as an exhibit to the form would contain contextual information about the XBRL tags embedded in the filing.” The proposal would also eliminate the requirement for filers to post Interactive Data File exhibits on their websites. The Commissioners (all two of them) were wildly enthusiastic about Inline XBRL when they voted to issue the proposal, so clear your calendars XBRL devotees.