Securities Law Prof Blog

Editor: Eric C. Chaffee
Univ. of Toledo College of Law

Monday, April 25, 2011

SEC Releases Study on Section 404(b) Required by Dodd-Frank

On April 22 the SEC posted on its website the staff's Study and Recommendations on Section 404(b) of the Sarbanes-Oxley Act of 2002 For Issuers With Public Float Between $75 and $250 Million, as Required by Section 989G(b) of of the Dodd-Frank Act.   That section required the SECto conduct a study to determine how the Commission could reduce the burden of complying with Section 404(b) of the Sarbanes-Oxley Act for companies whose market capitalization is between $75 and $250 million, while maintaining investor protections for such companies. Section 989G(b) also provides that the study must consider whether any methods of reducing the compliance burden or a complete exemption for such companies from Section 404(b) compliance would encourage companies to list on exchanges in the United States in their initial public offerings.

This study addresses the auditor attestation requirement with respect to an issuer‘s internal control over financial reporting and does not address management‘s responsibility for reporting on the effectiveness of ICFR pursuant to Section 404(a).  The research discussed in this study primarily focuses on findings related to accelerated filers. According to the Executive Summar:

[I]n conducting this study, the SEC Staff‘s research and analysis considered certain existing information about Section 404 compliance beyond the specific areas of the study requirements as provided in the Dodd-Frank Act. This approach was used to develop findings and recommendations regarding Section 404(b) through the analysis of existing research, even though the purpose of the existing research may have been broader than the requirements of the current study.

*    *    *

The information compiled for the study provided the Staff with an understanding that:

    The costs of Section 404(b) have declined since the Commission first implemented the requirements of Section 404, particularly in response to the 2007 reforms;

    Investors generally view the auditor‘s attestation on ICFR as beneficial;

    Financial reporting is more reliable when the auditor is involved with ICFR assessments; and

    There is not conclusive evidence linking the requirements of Section 404(b) to listing decisions of the studied range of issuers.

The Study sets forth two principal recommendations:

1. Maintain existing investor protections of Section 404(b) for accelerated filers, which have been in place since 2004 for domestic issuers and 2007 for foreign private issuers

2. Encourage activities that have potential to further improve both effectiveness and efficiency of Section 404(b) implementation

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