United States: SEC Proposes Rule Amendments To Reduce Costs On Smaller Issuers

The SEC proposed amendments to the definitions of "accelerated filer" and "large accelerated filer" under Exchange Act Rule 12b-2. The amendments would revise the "accelerated filer" and "large accelerated filer" definitions reducing costs for certain lower-revenue companies.

Under the amended rules, smaller reporting companies with less than $100 million in revenue would no longer be required to obtain an attestation of their internal controls over financial reporting ("ICFR") from an independent auditor. In addition, the proposal would increase the transition thresholds for becoming a non-accelerated filer and create a revenue test for existing accelerated and large accelerated filer status. The SEC noted that the proposal would not change "key protections from the Sarbanes-Oxley Act," such as the independent audit committee requirements, CEO and CFO certifications of financial reports, or the requirement that a company establish, maintain and assess the effectiveness of its ICFR.

SEC Commissioner Robert J. Jackson, Jr. dissented, criticizing the use of outdated analysis in the proposal and for failing to seriously evaluate the benefits of attestation. Mr. Jackson also criticized the theory that reducing these requirements will lead to more initial public offerings, which is one of the driving motivations behind the proposed changes. Mr. Jackson added that smaller companies may also be high-growth companies and may, therefore, present a high risk of fraud. Rolling back requirements for smaller companies, he said, could allow for systemic fraud.

Commentary / Steven Lofchie

Chair Jay Clayton's SEC has not generally acted to reduce regulatory burdens (though Commissioner Peirce has certainly been a strong advocate for questioning the benefit of those burdens). The major exception to the SEC's caution has been as to costs imposed on SEC-registered issuers. This is the second rule proposal in a week put forward by the SEC to reduce the costs of issuer disclosure. See SEC Proposes Improvements to Merger Disclosures (May 3, 2019). Notably, Commissioner Jackson dissented as to the issuance of both proposals, and in both cases argued that the SEC's data analysis was insufficient.

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