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SEC Adopts Rule on SOX 404(c) Exemption for Small Issuers

By Jim Hamilton

The Securities and Exchange Commission has adopted a final rule to implement Section 989G of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Release No. 33-9142 http://www.sec.gov/rules/final/2010/33-9142.pdf). Section 989G affords small issuers an exemption from the internal controls auditor attestation requirement of Section 404(b) of the Sarbanes-Oxley Act of 2002. SOX Section 404(b) requires registered public accounting firms that prepare or issue audit reports for an issuer to attest to, and report on, the assessment made by the issuer's management of the company's internal controls. Previous SEC rules required a non-accelerated filer to include an attestation report in its annual report for years ending on or after June 15, 2010.

Section 989G of the Dodd-Frank Act added SOX Section 404(c) to exempt from the attestation requirement smaller issuers that are neither accelerated filers nor large accelerated filers under Rule 12b-2. Under Rule 12b-2, subject to periodic and annual reporting criteria, an "accelerated filer" is an issuer with market value of $75 million, but less than $700 million; a "large accelerated filer" is an issuer with market value of $700 million or greater. As a result, the exemption effectively applies to companies with less than $75 million in market capitalization. The release notes that the rule refers to these issuers as "non-accelerated filers," a term that is not defined in the securities regulations, but which the SEC deems to mean firms that are not accelerated or large accelerated filers.

Release No. 33-9142 removes from the applicable rules, the requirement that a non-accelerated filer include an attestation report from a registered public accounting firm in its annual report. The release amends Section 210.2-02(f) of Regulation S-X to provide that an auditor of a non-accelerated filer need not include an assessment of the issuer's internal control over financial reporting in its audit report. Item 308 of Regulation S-K is amended to provide that the requirement that management disclose an attestation report in its annual report only applies if an attestation report is included. The final rule also makes conforming amendments to Forms 20-F and 40-F. The rule is effective upon being published in the Federal Register.

In addition, the release reminds issuers that all companies (including non-accelerated filers) must still comply with SOX Section 404(a). Accelerated filers and large accelerated filers must similarly continue to comply with SOX Section 404(b).

This blog was provided by Mark S. Nelson, CCH Federal Securities Writer Analyst, Wolters Kluwer Incorporated

Full post as published by Jim Hamilton's World of Securities Regulation on September 15, 2010 (boomark / email).