May 9, 2019, the Securities and Exchange Commission (SEC), by a vote of 3-1, proposed amendments to the definitions of "accelerated filer" and "large accelerated filer" in Exchange Act Rule 12b-2. The proposed amendments are summarized below and set forth in detail in Appendix A. The key effect of the amendments would be to exempt a greater number of smaller issuers from the requirement to provide an auditor's attestation of management's assessment of internal control over financial reporting (ICFR) under Section 404(b) of the Sarbanes-Oxley Act (SOX 404(b)). The SEC's stated goal is to promote capital formation by reducing compliance costs (which may disproportionately burden smaller issuers) while maintaining appropriate investor protections.
Background on the Proposal
Under the current definitions of accelerated filer and large accelerated filer, an issuer must have had a public float of $75 million or more but less than $700 million to be an accelerated filer, or $700 million or more to be a large accelerated filer, in each case as of the last business day of the issuer's most recently completed second fiscal quarter. Accelerated filers and large accelerated filers are subject to accelerated reporting deadlines and the SOX 404(b) auditor attestation requirement.
In June 2018, the SEC adopted amendments to the definition of "smaller reporting company" (SRC) in Rule 12b-2 to expand the number of issuers eligible to qualify as an SRC and take advantage of the related scaled disclosure requirements. At the time, the SEC did not increase the threshold for accelerated filer status, which created overlap among the filer categories. Some issuers qualified as both SRCs and accelerated or large accelerated filers, meaning they enjoyed relief in the form of scaled disclosure but remained subject to the SOX 404(b) auditor attestation requirement. Acknowledging the complexity caused by the SRC amendments, SEC Chair Jay Clayton directed the Staff of the SEC's Division of Corporation Finance to formulate recommendations for potential rule amendments to reduce the number of issuers that would qualify as accelerated filers.
The proposed amendments would exclude from the accelerated filer and large accelerated filer definitions an issuer that is eligible to be a SRC and had annual revenues of less than $100 million in the most recently completed fiscal year. Therefore, SRCs with less than $100 million in revenues would be exempt from the accelerated reporting deadlines and SOX 404(b) auditor attestation requirement. They would still be required to comply with other SOX mandates, including audit committee independence requirements, CEO and CFO certifications, and the requirement to establish and maintain ICFR and have management assess its effectiveness. Appendix B includes tables excerpted from the proposing release that outline the current and proposed relationships among the filer categories.
The SEC also proposed to amend the transition thresholds for exiting accelerated or large accelerated filer status. Currently, an issuer will remain a large accelerated filer until its public float falls below $500 million, at which time it will become an accelerated filer. The proposed amendments would adjust the transition threshold for exiting large accelerated filer status to $560 million to align with the SRC transition threshold. Under the current rules, an issuer that is an accelerated or large accelerated filer will become a non-accelerated filer if its public float falls below $50 million. The proposed amendments would adjust the transition threshold for becoming a nonaccelerated filer to $60 million. Appendix C includes tables excerpted from the proposing release that outline the proposed amendments to the public float transition thresholds. Finally, the proposed amendments would add the
revenue test of the SRC definition as another prong when determining whether an issuer is eligible to exit accelerated or large accelerated filer status.
The SEC Commissioners who supported the proposal believe it would enable smaller issuers to redirect the resources they would have spent on a SOX 404(b) auditor attestation toward investments in research and development, human capital and other growth initiatives. One SEC Commissioner, Robert Jackson, voted against the proposal, arguing that it was based on outdated evidence. He contends that current market data proves that the reduction in compliance costs does not justify the loss of investor protections.
The SEC will accept public comments on the proposal for 60 days following its publication in the Federal Register, with comments likely due in late July.