Status Of 404 Relief for Smaller Public Companies

On April 12, 2006, the SEC’s Advisory Committee on Smaller Public Companies maintained the recommendations included in its draft final report to provide Sarbanes-Oxley Act Section 404 relief to smaller public companies. A copy of the draft report is available at http://www.sec.gov/info/smallbus/acspc/acspc-finalreport_discdraft.pdf. Specifically, the Committee’s draft report recommends that:

• the SEC provide exemptive relief from Section 404 requirements to "microcap" companies with less than $125 million in annual revenue and to "smallcap" companies with less than $10 million in annual revenue; and

• the SEC provide exemptive relief from external auditor involvement in the Section 404 process for "microcap" and "smallcap" companies with less than $250 million in annual revenue.

Each of these recommendations provide exemptions "unless and until a framework for assessing internal control over financial reporting for such companies is developed that recognizes their characteristics and needs."

The Advisory Committee has also retained the following proposed definitions for smaller public companies:

The Advisory Committee also addressed recent comments from SEC Chairman Christopher Cox, the other SEC commissioners and elected officials. While some of these comments and recent news articles have highlighted potential disagreements with the Advisory Committee’s recommendations, all commissioners have said that they will keep an open mind in considering the forthcoming recommendations.

The comments of Chairman Cox and the other commissioners highlight the advisory nature of the Committee. Given the nature of the ongoing discussions, the proposed Section 404 reforms may not be adopted in their entirety, if at all. The Advisory Committee was formed to provide "outside the box" suggestions to improve the current regulatory system for smaller public companies, and we believe the current draft of the Committee’s recommendations achieves this goal.

The Committee’s next, and final, meeting is scheduled for 10:00 a.m. on April 20, 2006. Proceedings will be available by webcast at http://www.sec.gov. The principal purpose of the meeting will be to adopt the final report of the Committee. Thereafter, attention will turn to the SEC, and possibly Congress, to determine which recommendations, if any, are adopted and implemented.

We will continue to monitor this initiative and will provide updates on material developments. If you would like to discuss further, please contact any member of the Financial Institutions group at Powell Goldstein LLP.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.