A key provision of the Dodd-Frank Wall Street Reform and Consumer Protection Act ("Dodd-Frank Act") exempts non-accelerated filers from the auditor attestation requirements of Section 404(b) of the Sarbanes-Oxley Act of 2002 ("Sarbanes-Oxley").

Section 404 has been one of the most contentious aspects of Sarbanes-Oxley, in part because of the high compliance costs to companies, especially smaller companies. Section 404(a) requires management to report, as part of each annual Exchange Act report, on the adequacy of the company's internal control over financial reporting. Section 404(b) requires the company's public accountants to file an attestation for management's assessment of internal controls. In part because of the potentially disproportionately high cost to smaller companies, the Securities and Exchange Commission ("SEC") allowed smaller reporting companies to defer their compliance with Section 404(b), through multiple extensions, until filing an annual report for a fiscal year ending on or after June 15, 2010.

The Dodd-Frank Act permanently exempts all non-accelerated filers from Section 404(b). Therefore, only accelerated and large accelerated filers will be required to comply with the auditor attestation requirements of Section 404(b). Under Rule 12b-2 of the Exchange Act, in order to fall into the category of an accelerated filer or a large accelerated filer, a company must:

  • have an aggregate worldwide market value of voting and non-voting common equity held by non-affiliates of $75 million or more, as of the last day of the most recently contemplated second fiscal quarter;
  • be subject to the reporting requirements of 13(a) or 15(d) of the Exchange Act for a period of at least 12 calendar months, and have filed at least one annual report pursuant to 13(a) or 15(d); and
  • not be eligible to use the requirements for smaller reporting companies for its annual and quarterly reports.

The category of non-accelerated filers who are exempted from Section 404(b) includes, but is not limited to, "smaller reporting companies" as defined in Rule 12b-2 of the Exchange Act. Any company whose equity securities do not have a public trading market will not fall under the definition of accelerated filer or large accelerated filer and will be exempt from the auditor attestation requirements of Section 404(b) of Sarbanes-Oxley. Such exempt companies will include private companies with publicly traded debt, whether the company is required to file annual reports under 13(a) or 15(d) of the Exchange Act or is a voluntary filer pursuant to an indenture requirement or otherwise. All non-accelerated filers are still subject to Section 404(a), which requires disclosure of management's report on the adequacy of the company's internal control over financial reporting.

In addition, the Dodd-Frank Act contemplates further reductions in compliance costs by requiring the SEC to study and report to Congress by the spring of 2011 how the cost of compliance with Section 404(b) of Sarbanes-Oxley for companies with a market capitalization between $75 million and $250 million could be reduced.

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