United States: SEC Plans to Delay Implementation of Sarbanes-Oxley § 404(b) Rules for Small Companies Until 2009

On December 12, 2007, Christopher Cox, Chairman of the Securities and Exchange Commission (the "SEC"), testified before the House Small Business Committee. Mr. Cox proposed an additional one-year delay in implementing the requirement for non-accelerated issuers (small public companies generally consisting of those with market capitalizations of less than $75 million) to provide an auditors report on the state of their internal financial controls under Section 404(b) of the Sarbanes-Oxley Act ("Section 404(b)"). The additional delay would mean that non-accelerated issuers would have to implement the reporting requirements of Section 404(b) for fiscal years ending on or after December 15, 2009.

In his testimony, Mr. Cox indicated that the decision on whether to require compliance with the requirements of Section 404(b) would be based at least in part on an economic study of the new auditing standard and management guidance developed by the SEC and the Public Company Accounting Oversight Board ("PCAOB") in Auditing Standard Number 5. The study is expected to be completed by the SEC no later than June 2008. The full Commission must still approve the delay in Section 404(b) implementation. Absent Commission approval, non-accelerated issuers would be required to implement the reporting requirements of Section 404(b) for fiscal years ending after December 15, 2008. This delay does not affect the timing of the requirement for management to comply with the requirements of Section 404(a) of the Sarbanes-Oxley Act to deliver an internal control report which states the responsibility of management to maintain an adequate internal control structure and procedures for financial reporting, and an assessment of the effectiveness of the internal control structure and procedures for financial reporting for fiscal years ending on or after December 15, 2007.

Mr. Cox's testimony indicates that the delay in implementing Section 404 compliance is one of several steps the SEC has recently taken to mitigate the economic impact of government regulation on small business as part of a focus to "ensure that the benefits of regulation for smaller companies under the federal securities laws outweigh the costs." The SEC intends to lower regulatory compliance costs for companies of all sizes, but "disproportionately for small business because the new SEC guidance...will allow each small business to exercise significant judgment in designing an evaluation [of its internal controls] that is tailored to its individual circumstances."

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