[Federal Register: December 21, 2006 (Volume 71, Number 245)]
[Rules and Regulations]
[Page 76580-76599]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr21de06-5]
=======================================================================
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
17 CFR PARTS 210, 228, 229, 240 and 249
[RELEASE NOS. 33-8760; 34-54942; File No. S7-06-03]
RIN 3235-AJ64
Internal Control Over Financial Reporting in Exchange Act
Periodic Reports of Non-Accelerated Filers and Newly Public Companies
AGENCY: Securities and Exchange Commission.
ACTION: Final rule; extension of compliance dates; request for comment
on Paperwork Reduction Act burden estimates.
-----------------------------------------------------------------------
SUMMARY: We are extending further for smaller public companies the
dates that were published on September 29, 2005, in Release No. 33-8618
[70 FR 56825], for their compliance with the internal control reporting
requirements mandated by Section 404 of the Sarbanes-Oxley Act of 2002.
Under the extension, a non-accelerated filer is not required to provide
management's report on internal control over financial reporting until
it files an annual report for its first fiscal year ending on or after
December 15, 2007. If we have not issued additional guidance for
management on how to complete its
[[Page 76581]]
assessment of internal control over financial reporting in time to be
of sufficient assistance in connection with annual reports filed for
fiscal years ending on or after December 15, 2007, we will consider
whether we should further postpone this date. A non-accelerated filer
is not required to file the auditor's attestation report on internal
control over financial reporting until it files an annual report for
its first fiscal year ending on or after December 15, 2008. We will
consider further postponing this date after we consider the anticipated
revisions to Auditing Standard No. 2. Management's report included in a
non-accelerated filer's annual report during the filer's first year of
compliance with the Section 404(a) requirements will be deemed
``furnished'' rather than filed. Management's report for foreign
private issuers filing on Form 20-F or 40-F that are accelerated filers
(but not large accelerated filers) also will be deemed furnished rather
than filed for the year that such issuers are only required to provide
management's report. Companies that only provide management's report
during their first year of compliance in accordance with our rules must
state in the annual report that the report does not include the
auditor's attestation report and that the company's registered public
accounting firm has not attested to management's report on the
company's internal control over financial reporting.
We also are adopting amendments that provide for a transition
period for a newly public company before it becomes subject to the
internal control over financial reporting requirements. Under the new
amendments, a company will not become subject to these requirements
until it either had been required to file an annual report for the
prior fiscal year with the Commission or had filed an annual report
with the Commission for the prior fiscal year. A newly public company
is required to include a statement in its first annual report that the
annual report does not include either management's assessment on the
company's internal control over financial reporting or the auditor's
attestation report.
DATES: Effective Date: The effective date published on June 18, 2003,
in Release No. 33-8238 [68 FR 36636], remains August 14, 2003. The
effective date of this document is February 20, 2007 except Temporary
Sec. 210.2-02T(c), Temporary Sec. 228.308T, Temporary Sec. 229.308T,
Temporary Item 15T of Form 20-F (Sec. 249.220f), Temporary Instruction
3T of General Instruction B(6) of Form 40-F (Sec. 249.240f), Temporary
Item 4T of Form 10-Q (Sec. 249.308a), Temporary Item 3A(T) of Form 10-
QSB (Sec. 249.308b), Temporary Item 9A(T) of Form 10-K (Sec.
249.310), and Temporary Item 8A(T) of Form 10-KSB (Sec. 249.310b) are
effective from February 20, 2007 to June 30, 2009. Temporary Sec.
210.2-02T(a) remains effective from September 14, 2006 to December 31,
2007.
Compliance Dates: The compliance dates are extended as follows: A
company that does not meet the definition of either an ``accelerated
filer'' or a ``large accelerated filer,'' as these terms are defined in
Rule 12b-2 under the Securities Exchange Act of 1934, is not required
to comply with the requirement to provide management's report on
internal control over financial reporting until it files an annual
report for its first fiscal year ending on or after December 15, 2007.
Non-accelerated filers must begin to comply with the provisions of
Exchange Act Rule 13a-15(d) or 15d-15(d), whichever applies, requiring
an evaluation of changes to internal control over financial reporting
requirements with respect to the company's first periodic report due
after the first annual report that must include management's report on
internal control over financial reporting. The extended compliance also
applies to the amendments of Exchange Act Rule 13a-15(a) or 15d-15(a)
relating to the maintenance of internal control over financial
reporting. We also are extending the compliance date to permit a non-
accelerated filer to omit the portion of the introductory language in
paragraph 4 as well as language in paragraph 4(b) of the certification
required by Exchange Act Rules 13a-14(a) and 15d-14(a) that refers to
the certifying officers' responsibility for designing, establishing and
maintaining internal control over financial reporting for the company,
until it files an annual report that includes a report by management on
the effectiveness of the company's internal control over financial
reporting.
A company that does not meet the definition of either an
accelerated filer or a large accelerated filer is not required to
comply with the requirement to provide the auditor's attestation report
on internal control over financial reporting until it files an annual
report for its first fiscal year ending on or after December 15, 2008.
Furthermore, until this type of company becomes subject to the auditor
attestation report requirement, the registered public accounting firm
retained by the company need not comply with the obligation in Rule 2-
02(f) of Regulation S-X. Rule 2-02(f) requires every registered public
accounting firm that issues or prepares an accountant's report that is
included in an annual report filed by an Exchange Act reporting company
(other than a registered investment company) containing an assessment
by management of the effectiveness of the company's internal control
over financial reporting to attest to, and report on, such assessment.
Comment Date: Comments regarding the collection of information
requirements within the meaning of the Paperwork Reduction Act of 1995
should be received on or before January 22, 2007.
ADDRESSES: Comments may be submitted by any of the following
methods:
Electronic Comments
Use the Commission's Internet comment form (http://www.sec.gov/rules/final.shtml.
); Send an e-mail to rule-comments@sec.gov. Please include
File Number S7-06-03 on the subject line; or
Use the Federal Rulemaking Portal (http://www.regulations.gov
). Follow the instructions for submitting comments.
Paper Comments
Send paper comments in triplicate to Nancy M. Morris,
Secretary, Securities and Exchange Commission, 100 F Street, NE.,
Washington, DC 20549-1090.
All submissions should refer to File Number S7-06-03. This file
number should be included on the subject line if e-mail is used. To
help us process and review your comments more efficiently, please use
only one method. The Commission will post all comments on the
Commission's Internet Web site (http://www.sec.gov/rules/final.shtml).
Comments are also available for public inspection and copying in the
Commission's Public Reference Room, 100 F Street, NE., Washington, DC
20549. All comments received will be posted without change; we do not
edit personal identifying information from submissions. You should
submit only information that you wish to make available publicly.
FOR FURTHER INFORMATION CONTACT: Sean Harrison, Steven G. Hearne, or
Katherine Hsu, Special Counsels, Office of Rulemaking, Division of
Corporation Finance, at (202) 551-3430, U.S. Securities and Exchange
Commission, 100 F Street, NE., Washington, DC 20549-3628.
SUPPLEMENTARY INFORMATION: We are amending certain internal control
over financial reporting requirements in
[[Page 76582]]
Rules 13a-14,\1\ 13a-15,\2\ 15d-14,\3\ and 15d-15 \4\ under the
Securities Exchange Act of 1934,\5\ Item 308 of Regulations S-K \6\ and
S-B,\7\ Item 15 of Form 20-F,\8\ General Instruction B(6) of Form 40-
F,\9\ and Rule 2-02(f) \10\ of Regulation S-X.\11\ We also are adding
the following temporary provisions: Rule 2-02T of Regulation S-X, Item
308T of Regulations S-K and S-B, Item 3A(T) of Form 10-QSB, Item 4T of
Form 10-Q, Item 8A(T) of Form 10-KSB, Item 9A(T) of Form 10-K, Item 15T
of Form 20-F, and Instruction 3T of General Instruction B(6) of Form
40-F.
---------------------------------------------------------------------------
\1\ 17 CFR 240.13a-14.
\2\ 17 CFR 240.13a-15.
\3\ 17 CFR 240.15d-14.
\4\ 17 CFR 240.15d-15.
\5\ 15 U.S.C. 78a et seq.
\6\ 17 CFR 229.10 et seq.
\7\ 17 CFR 228.10 et seq.
\8\ 17 CFR 249.220f.
\9\ 17 CFR 249.240f.
\10\ 17 CFR 210.2-02(f).
\11\ 17 CFR 210.1-01 et seq.
---------------------------------------------------------------------------
I. Background
On June 5, 2003,\12\ the Commission adopted several amendments to
its rules and forms implementing Section 404 of the Sarbanes-Oxley Act
of 2002.\13\ Among other things, these amendments require companies,
other than registered investment companies, to include in their annual
reports filed with us a report of management, and an accompanying
auditor's attestation report, on the effectiveness of the company's
internal control over financial reporting, and to evaluate, as of the
end of each fiscal quarter, or year in the case of a foreign private
issuer filing its annual report on Form 20-F or Form 40-F, any change
in the company's internal control over financial reporting that
occurred during the period that has materially affected, or is
reasonably likely to materially affect, the company's internal control
over financial reporting.
---------------------------------------------------------------------------
\12\ See Release No. 33-8238 (June 5, 2003) [68 FR 36636].
\13\ 15 U.S.C. 7262.
---------------------------------------------------------------------------
Under the compliance dates that we originally established,
companies meeting the definition of an ``accelerated filer'' in
Exchange Act Rule 12b-2 \14\ would have become subject to the internal
control reporting requirements with respect to the first annual report
that they filed for a fiscal year ending on or after June 15, 2004.
Non-accelerated filers \15\ would not have become subject to the
requirements until they filed an annual report for a fiscal year ending
on or after April 15, 2005. The Commission provided a lengthy
compliance period for these requirements in light of the substantial
time and resources needed by companies to implement the rules
properly.\16\ In addition, we believed that a corresponding benefit to
investors would result from an extended transition period that allowed
companies to implement the new requirements carefully, and noted that
an extended period would provide additional time for the Public Company
Accounting Oversight Board (the PCAOB) to consider relevant factors in
determining and implementing new attestation standards for registered
public accounting firms.\17\
---------------------------------------------------------------------------
\14\ 17 CFR 240.12b-2.
\15\ Although the term ``non-accelerated filer'' is not defined
in our rules, we use it throughout this release to refer to an
Exchange Act reporting company that does not meet the Exchange Act
Rule 12b-2 definitions of either an ``accelerated filer'' or a
``large accelerated filer.''
\16\ See Release No. 33-8238.
\17\ Under the Sarbanes-Oxley Act, the PCAOB was granted
authority to set auditing and attestation standards for registered
public accounting firms.
---------------------------------------------------------------------------
In February 2004, we extended the compliance dates for accelerated
filers to fiscal years ending on or after November 15, 2004, and for
non-accelerated filers and for foreign private issuers to fiscal years
ending on or after July 15, 2005.\18\ The primary purpose of this
extension was to provide additional time for companies' auditors to
implement Auditing Standard No. 2, which the PCAOB had issued in final
form in June 2004.\19\
---------------------------------------------------------------------------
\18\ See Release No. 33-8392 (Feb. 24, 2004) [69 FR 9722].
\19\ See Release No. 34-49884 File No. PCAOB 2004-03 (June 17,
2004) [69 FR 35083]. Auditing Standard No. 2, An Audit of Internal
Control Over Financial Reporting Performed in Connection with an
Audit of Financial Statements, provides the professional standards
and related performance guidance for independent auditors to attest
to, and report on, management's assessment of the effectiveness of
companies' internal control over financial reporting.
---------------------------------------------------------------------------
In March 2005, we approved a further one-year extension of the
compliance dates for non-accelerated filers and for all foreign private
issuers filing annual reports on Form 20-F or 40-F in view of the
efforts by the Committee of Sponsoring Organizations of the Treadway
Commission (``COSO'') to provide more guidance on how the COSO
framework on internal control can be applied to smaller public
companies.\20\ We also acknowledged the significant efforts being
expended by many foreign private issuers to apply the International
Financial Reporting Standards.
---------------------------------------------------------------------------
\20\ Release No. 33-8545 (Mar. 2, 2005) [70 FR 11528].
---------------------------------------------------------------------------
Most recently, in September 2005, we again extended the compliance
dates for the internal control over financial reporting requirements
applicable to companies that are non-accelerated filers.\21\ Based on
the September 2005 extension, domestic and foreign non-accelerated
filers were scheduled to comply with the internal control over
financial reporting requirements beginning with annual reports filed
for their first fiscal year ending on or after July 15, 2007. This
extension was based primarily on our desire to have the additional
guidance in place that COSO had begun to develop to assist smaller
companies in applying the COSO framework. In addition, the extension
was consistent with a recommendation made by the SEC Advisory Committee
on Smaller Public Companies.
---------------------------------------------------------------------------
\21\ See Release No. 33-8618 (Sept. 22, 2005) [70 FR 56825].
---------------------------------------------------------------------------
Since we granted that extension last year, a number of events
related to internal control over financial reporting assessments have
occurred. Most recently, on July 11, 2006, COSO and its Advisory Task
Force issued Guidance for Smaller Public Companies Reporting on
Internal Control over Financial Reporting.\22\ The guidance is intended
to assist the management of smaller companies in understanding and
applying the COSO framework. It outlines 20 fundamental principles
associated with the five key components of internal control described
in the COSO framework, defines each principle, describes a variety of
approaches that smaller companies can use to apply the principles to
financial reporting, and includes examples of how smaller companies
have applied the principles.
---------------------------------------------------------------------------
\22\ See SEC Press Release No. 2006-114 (July 11, 2006) at
http://www.sec.gov/news/press/2006/2006-114.htm.
---------------------------------------------------------------------------
In addition, on April 23, 2006, the SEC Advisory Committee on
Smaller Public Companies submitted its final report to the
Commission.\23\ The final report includes recommendations designed to
address the potential impact of the internal control reporting
requirements on smaller public companies. Specifically, the Advisory
Committee recommended that certain smaller public companies be provided
exemptive relief from the management report requirement and from
external auditor involvement in the Section 404 process under certain
conditions unless and until a framework for assessing internal control
over financial reporting is developed that recognizes the
[[Page 76583]]
characteristics and needs of these companies.
---------------------------------------------------------------------------
\23\ See Final Report of the Advisory Committee on Smaller
Public Companies to the United States Securities and Exchange
Commission (Apr. 23, 2006), available at http://www.sec.gov/info/smallbus/acspc.shtml
.
---------------------------------------------------------------------------
In April 2006, the U.S. Government Accountability Office (GAO)
issued a report entitled Sarbanes-Oxley Act, Consideration of Key
Principles Needed in Addressing Implementation for Smaller Public
Companies.\24\ This report recommended that the Commission consider
whether the currently available guidance, particularly the guidance on
management's assessment, is sufficient or whether additional action is
needed to help companies comply with the internal control over
financial reporting requirements. The report indicates that
management's implementation and assessment efforts were largely driven
by Auditing Standard No. 2 because guidance at a similar level of
detail was not available for management's implementation and assessment
process. Furthermore, the report recommended that the Commission
coordinate its efforts with the PCAOB so that the Section 404-related
audit standards and guidance are consistent with any additional
guidance applicable to management's assessment of internal control over
financial reporting.\25\
---------------------------------------------------------------------------
\24\ U.S. Govt. Accountability Office, Report to the Committee
on Small Business and Entrepreneurship, U.S. Senate: Sarbanes-Oxley
Act: Consideration of Key Principles Needed in Addressing
Implementation for Smaller Public Companies (April 2006).
\25\ See GAO Report at 52-53, 58.
---------------------------------------------------------------------------
Finally, on May 10, 2006, the Commission and the PCAOB sponsored a
roundtable to elicit feedback from companies, their auditors, board
members, investors, and others regarding their experiences during the
accelerated filers' second year of compliance with the internal control
over financial reporting requirements.\26\ Several of the comments
provided at, and in connection with, the roundtable suggested that
additional management guidance would be useful, particularly for
smaller public companies, and also expressed support for revisions to
the PCAOB's Auditing Standard No. 2.\27\
---------------------------------------------------------------------------
\26\ Materials related to the roundtable, including an archived
broadcast and a transcript of the roundtable, are available on-line
at http://www.sec.gov/spotlight/soxcomp.htm.
\27\ See, for example, letters from the Biotech Industry
Association, American Electronics Association, Emerson Electric
Institute, U.S. Chamber of Commerce and Joseph A. Grundfest. These
letters are available in File No. 4-511, at http://www.sec.gov/news/press/4-511.shtml
.
---------------------------------------------------------------------------
II. Extension of Internal Control Reporting Compliance Dates for Non-
Accelerated Filers
On May 17, 2006, the Commission and the PCAOB each announced a
series of actions that they intended to take to improve the
implementation of the Section 404 internal control over financial
reporting requirements.\28\ These actions included:
---------------------------------------------------------------------------
\28\ See SEC Press Release 2006-75 (May 17, 2006), ``SEC
Announces Next Steps for Sarbanes-Oxley Implementation'' and PCAOB
Press Release (May 17, 2006), ``Board Announces Four-Point Plan to
Improve Implementation of Internal Control Reporting Requirements.''
---------------------------------------------------------------------------
Issuance of a concept release \29\ soliciting comment on a
variety of issues that might be included in future Commission guidance
for management to assist in its performance of a top-down, risk-based
assessment of internal control over financial reporting;
---------------------------------------------------------------------------
\29\ Release No. 34-54122 (July 11, 2006) [71 FR 40866].
---------------------------------------------------------------------------
Consideration of additional guidance from COSO;
Revisions to Auditing Standard No. 2;
Reinforcement of auditor efficiency through PCAOB
inspections and Commission oversight of the PCAOB's audit firm
inspection program;
Development, or facilitation of development, of
implementation guidance for auditors of smaller public companies;
Continuation of PCAOB forums on auditing in the small
business environment; and
Provision of an additional extension of the compliance
dates of the internal control reporting requirements for non-
accelerated filers.
Consistent with this announcement, on August 9, 2006, we proposed
to extend further the date for complying with the internal control over
financial reporting requirements for domestic and foreign non-
accelerated filers.\30\ Approximately 44% of domestic companies filing
periodic reports are non-accelerated filers, and an estimated 38% of
the foreign private issuers subject to Exchange Act reporting are non-
accelerated filers.\31\ Prior to today's actions, non-accelerated
filers were scheduled to begin complying with the management report
requirement in Item 308(a) of Regulations S-K and S-B and the auditor
attestation requirement in Item 308(b) of Regulations S-K and S-B for
their fiscal years ending on or after July 15, 2007. We proposed to
postpone for five months (from fiscal years ending on or after July 15,
2007 to fiscal years ending on or after December 15, 2007) the date by
which non-accelerated filers must begin to include management's report.
We also proposed to extend the compliance date for a non-accelerated
filer regarding the auditor attestation report requirement for 17
months--until it files an annual report for a fiscal year ending on or
after December 15, 2008.\32\
---------------------------------------------------------------------------
\30\ Release No. 33-8731 (Aug. 9, 2006) [71 FR 47060].
\31\ The percentage of domestic filing companies, excluding
Investment Company Act of 1940 filers, that is categorized as non-
accelerated filers is based on public float where available (or
market capitalization, otherwise) from Datastream as of December 31,
2005. The estimated percentage of foreign private issuers that are
non-accelerated filers is based on market capitalization data from
Datastream as of December 31, 2005.
\32\ We also proposed and are extending the compliance dates for
the auditor attestation report requirement appearing in Item 15(c)
of Form 20-F and General Instruction B(6) of Form 40-F with respect
to foreign private issuers that are non-accelerated filers.
---------------------------------------------------------------------------
Furthermore, in a separate release also issued on August 9, 2006,
we adopted an extension of the date for complying with the auditor
attestation requirement for foreign private issuers that meet the
Exchange Act definition of an accelerated filer, but not a large
accelerated filer, and that file their annual reports on Form 20-F or
40-F, so that such issuers would not be subject to the auditor
attestation requirement until a year after they first begin complying
with the management report requirement.\33\
---------------------------------------------------------------------------
\33\ Release No. 33-8730A (Aug. 9, 2006) [71 FR 47056].
---------------------------------------------------------------------------
We received letters from a total of 36 commenters on the proposed
extension of the internal control over financial reporting compliance
dates for non-accelerated filers.\34\ Thirty-five of these commenters
generally supported the proposed extension.\35\ Many of these
commenters believed that the extension would reduce compliance costs
for smaller companies and provide them
[[Page 76584]]
with additional time to develop best practices for compliance and
greater efficiencies in preparing management reports.\36\ Some
commenters suggested that the Commission extend the compliance date
associated with the management report requirement for an even longer
period of time than proposed.\37\ The commenter that did not express
support for the proposed extension opposed, in particular, the 17-month
extension of the auditor attestation compliance date.\38\
---------------------------------------------------------------------------
\34\ The public comments we received are available for
inspection in the Commission's Public Reference Room at 100 F
Street, NE., Washington DC 20549 in File No. S7-06-03. They are also
available on-line at http://www.sec.gov/rules/proposed/s70603.shtml.
\35\ See letters from American Bar Association (ABA), American
Bankers Association, America's Community Bankers (ACB), American
Institute of Certified Public Accountants (AICPA), BDO Seidman, LLP
(BDO), Biotechnology Industry Organization and eight other
commenters (BIO), Callidus Software Inc. (Callidus), Calix Networks,
Inc. (Calix), Core-Mark International, Inc. (Core-Mark), Cravath,
Swaine & Moore LLP (Cravath), Davis Polk & Wardwell (Davis Polk),
Deloitte Touche LLP (Deloitte), Ernst & Young (E&Y), Financial
Executives International (FEI), James Finn (J. Finn), Grant Thornton
LLP (Grant Thorton), Graybar Electric (Graybar), Hermes Equity
Ownership Services Ltd. (Hermes), Independent Community Bankers of
America (ICBA), Idaho Independent Bank (IIB), IncrediMail Ltd.,
Institute of Public Auditors of Germany (IDW), Key Technology (Key),
KPMG LLP (KPMG), LaCrosse Footwear, Inc. (LaCrosse), Congressman
Stephen F. Lynch (Congressman Lynch), George Merkl (G. Merkl),
MOCON, Inc. (MOCON), National Venture Capital Association (NVCA),
PricewaterhouseCoopers LLP (PwC), Priority Fulfillment Services,
Inc. (PFS), The Office of Advocacy of the Small Business
Administration (SBA), Telecommunications Industry Association (TIA),
Village Super Market, Inc. (Village) and Washington Legal
Foundation.
\36\ See, for example, letters from Core-Mark, FEI, J. Finn,
Graybar, and Village.
\37\ See, for example, letters from ABA, ACB, Davis Polk, ICBA,
and MOCON.
\38\ See letter from Council of Institutional Investors (CII).
This commenter indicated that it would not oppose one additional
modest extension of the compliance date for the internal control
over financial reporting requirements for non-accelerated filers.
---------------------------------------------------------------------------
We are adopting the extension of the compliance dates substantially
as proposed. In response to public comment, we are adding a requirement
that a non-accelerated filer clearly disclose in management's report
that management's assessment of internal control has not been attested
to by the auditor, if it is providing only management's report during
its first year of compliance with the Section 404 requirements.\39\
---------------------------------------------------------------------------
\39\ See paragraph 4 of Item 308T of Regulations S-K and S-B,
paragraph 4 of Item 15T of Form 20-F, and Instruction 3T of General
Instruction B(6) of Form 40-F.
---------------------------------------------------------------------------
Some commenters suggested that the Commission broaden the scope of
relief so that the extended compliance dates would still cover
companies that currently are non-accelerated filers even if they become
accelerated filers or large accelerated filers before December 15,
2008.\40\ We are not adopting this relief as proposed. Consistent with
the Exchange Act Rule 12b-2 definition of an accelerated filer and of a
large accelerated filer, companies should determine their accelerated
filing status at the end of the fiscal year in order to determine
whether the extension is applicable to them.
---------------------------------------------------------------------------
\40\ See letters from Callidus, Core-Mark, IIB, PFS, and
Village.
---------------------------------------------------------------------------
Pursuant to the extension, a non-accelerated filer must begin to
provide management's report on internal control over financial
reporting in an annual report it files for its first fiscal year ending
on or after December 15, 2007.\41\ Non-accelerated filers must begin to
comply with the provisions of Exchange Act Rule 13a-15(d) or 15d-
15(d),\42\ whichever applies, requiring an evaluation of changes to
internal control over financial reporting requirements with respect to
the company's first periodic report due after the first annual report
that must include management's report on internal control over
financial reporting. The extended compliance date also applies to the
amendments of Exchange Act Rule 13a-15(a) or 15d-15(a) \43\ relating to
the maintenance of internal control over financial reporting. Under the
extension, a non-accelerated filer must begin to provide the auditor
attestation report in the annual report it files for its first fiscal
year ending on or after December 15, 2008. We believe that these
changes will make the internal control reporting process more efficient
and effective, while preserving the intended benefits of the internal
control over financial reporting provisions to investors.
---------------------------------------------------------------------------
\41\ While the definition of an accelerated filer in Exchange
Act Rule 12b-2 previously has had applicability only for a foreign
private issuer that files its Exchange Act periodic reports on Forms
10-K and 10-Q, the definition by its terms does not exclude foreign
private issuers. A foreign private issuer that is a large
accelerated filer under the Exchange Act Rule 12b-2 definition, and
that files its annual reports on Form 20-F or Form 40-F, must begin
to comply with the internal control over financial reporting and
related requirements in the annual report for its first fiscal year
ending on or after July 15, 2006. A foreign private issuer that is
an accelerated filer, but not a large accelerated filer, under the
definition in Rule 12b-2 of the Exchange Act, and that files its
annual report on Form 20-F or Form 40-F, must begin to comply with
the requirement to provide the auditor's attestation report on
internal control over financial reporting in the annual report filed
for its first fiscal year ending on or after July 15, 2007. A
foreign private issuer that is not an accelerated filer under the
Exchange Act Rule 12b-2 definition is required, under this
extension, to begin to comply with the management report requirement
in its annual report for its first fiscal year ending on or after
December 15, 2007.
\42\ 17 CFR 240.13a-15(d) and 17 CFR 240.15d-15(d).
\43\ 17 CFR 240.13a-15(a) and 17 CFR 240.15d-15(a).
---------------------------------------------------------------------------
We estimate that fewer than 15% of all non-accelerated filers will
have a fiscal year ending between July 15, 2007 and December 15,
2007.\44\ Therefore, the extension of the compliance date of the
management report requirement to December 15, 2007 will not impact the
majority of non-accelerated filers in 2007, including those with a
calendar year-end. Our intention is to provide all non-accelerated
filers, none of which is yet required to comply with the Section 404
requirements, with the benefit of the management guidance that the
Commission plans to issue and the recently issued COSO guidance on
understanding and applying the COSO framework, before planning and
conducting their internal control assessments. We expect that extending
the implementation of the management report requirement for another
five months will provide sufficient time for the Commission to issue
final guidance to assist in management's performance of a top-down,
risk-based and scalable assessment of controls over financial
reporting.\45\ If such guidance is not finalized in time to be of
assistance to management of non-accelerated filers in connection with
their assessments as of the end of the fiscal year for the annual
reports filed for fiscal years ending on or after December 15, 2007, we
will consider further postponing this compliance date.
---------------------------------------------------------------------------
\44\ The percent of all non-accelerated filers is categorized
using float where available (or market capitalization, otherwise)
using Datastream as of December 31, 2005 and excludes 1940 Act
filers. Fiscal year ends are also from Datastream.
\45\ We anticipate issuing the proposed guidance for management
by mid-December 2006. See SEC Press Release No. 2006-172 (Oct. 11,
2006) at http://www.sec.gov/news/press/2006/2006-172.htm.
---------------------------------------------------------------------------
The extension of the date for complying with the management report
requirement permits non-accelerated filers to complete only
management's report on internal control over financial reporting in the
first year of compliance. As noted in the Proposing Release, we have
several reasons for deferring the implementation of the auditor
attestation report requirement for an additional year after the
implementation of the management report requirement. First, we believe
that the deferred implementation affords non-accelerated filers and
their auditors the benefit of anticipated changes by the PCAOB to
Auditing Standard No. 2, subject to Commission approval, as well as any
implementation guidance that the PCAOB plans to issue for auditors of
smaller public companies. We will consider further postponing this date
after we consider the anticipated revisions to Auditing Standard No. 2.
Second, we believe that the deferred implementation of the auditor
attestation requirement should save non-accelerated filers the full
potential costs associated with the initial auditor's attestation to,
and report on, management's assessment of internal control over
financial reporting during the period that changes to Auditing Standard
No. 2 are being considered and implemented, and the PCAOB is
formulating guidance that will be specifically directed to auditors of
smaller companies. Public commenters previously have asserted that the
internal control reporting compliance costs are likely to be
disproportionately higher for smaller public companies than larger
ones, and that the auditor's fee represents a large percentage of those
costs. Furthermore, we have learned from public comments, including our
roundtables on implementation of the internal control
[[Page 76585]]
reporting provisions,\46\ that while companies incur increased internal
costs in the first year of compliance as well due to ``deferred
maintenance'' items (e.g., documentation, remediation, etc.), these
costs may decrease in the second year. Therefore, postponing the costs
that result from the auditor's attestation report until the second year
may help non-accelerated filers to smooth the significant cost spike
that many accelerated filers experienced in their first year of
compliance with the Section 404 requirements.
---------------------------------------------------------------------------
\46\ Materials related to the Commission's 2005 Roundtable
Discussion on Implementation of Internal Control Reporting
Provisions and 2006 Roundtable on Second-year Experiences with
Internal Control Reporting and Auditing Provisions, including the
archived roundtable broadcasts, are available at http://www.sec.gov/spotlight/soxcomp.htm
.
---------------------------------------------------------------------------
One commenter that opposed the 17-month extension of the compliance
date for the auditor attestation requirement noted that there is
anecdotal evidence that smaller companies have not taken advantage of
the previous extensions for non-accelerated filers.\47\ Unlike the
previous extensions, however, which provided for an extension for both
the management report requirement and the auditor attestation
requirement, the extension that we are adopting now requires management
of non-accelerated filers to examine their companies' internal control
over financial report reporting (and to permit investors to see and
evaluate the results of management's first compliance efforts) while
enabling management to more gradually prepare for full compliance with
the Section 404 requirements and to gain some efficiencies in the
process of reviewing and evaluating the effectiveness of internal
control over financial reporting before becoming subject to the auditor
attestation requirement. Finally, deferred implementation should
provide the Commission and the PCAOB with additional time to consider
the public comments we received in response to the questions we raised
in the Concept Release \48\ on management guidance related to the
appropriate role of the auditor in evaluating management's internal
control assessment process.\49\
---------------------------------------------------------------------------
\47\ See letter from CII.
\48\ Release No. 34-54122. The comment period for the Concept
Release closed on September 18, 2006, and the letters that we
received on the Concept Release are available in File No. S7-11-06,
at http://www.sec.gov/comments/s7-11-06/s71106.shtml.
\49\ Six commenters agreed that an extension will provide the
Commission with additional time to consider the comments to the
questions raised in the Concept Release. See letters from FEI,
Hermes, ICBA, G. Merkl, NVCA, and ICBA.
---------------------------------------------------------------------------
Several commenters supported the sequential implementation of the
management assessment and auditor attestation requirements, which we
are adopting.\50\ Some agreed that the deferred implementation of the
auditor report requirement would help smaller companies reduce the
overall cost of compliance with the internal control over financial
reporting requirements.\51\ Some commenters opposed the deferred
implementation of the auditor attestation requirement,\52\ while some
other commenters expressed concerns over the proposal without expressly
opposing it.\53\ For example, commenters questioned whether during the
year in which management's report is not attested to by the auditor,
there will be a greater risk that management will fail to report
material weaknesses,\54\ or whether there will be a lack of meaningful
disclosure provided by management's assessment of internal control over
financial reporting.\55\ We acknowledge that investors will not receive
the full assurance that a management assessment that has been attested
to by an auditor would provide. Nevertheless, we believe that the
graduated introduction of the 404 requirements will provide more
meaningful benefit to investors more quickly than either the immediate
introduction of both requirements or further delays in implementing the
management report requirement.\56\ This graduated approach will allow
management to gain efficiencies in reporting without the full cost of
an attestation and allow investors to review important information that
would be otherwise unavailable.
---------------------------------------------------------------------------
\50\ See letters from ACB, Cravath, FEI, J. Finn, Hermes, ICBA,
LaCrosse, G. Merkl, MOCON, and SBA.
\51\ See, for example, letters from FEI, Hermes, and SBA.
\52\ See, for example, letters from ABA, CII, IDW, and PwC.
\53\ See, for example, letters from AICPA, BDO, Davis Polk,
Deloitte, and E&Y.
\54\ See, for example, letters from AICPA, Grant Thorton, IDW,
PwC, and Deloitte. The letter from CII, which also opposed the
deferred implementation of the auditor attestation requirement,
stated, in general, that smaller companies are prone to more
misstatements and restatements of financial information, and make up
the bulk of accounting fraud cases.
\55\ See, for example, letters from IDW.
\56\ See also letter from KPMG.
---------------------------------------------------------------------------
We received some comments noting that the different schedules for
implementing the two requirements on internal control over financial
reporting might cause confusion to investors and the capital
markets.\57\ Also, several commenters, in response to a specific
request for comment, expressed support for a requirement that non-
accelerated filers disclose in its annual report that management's
assessment has not been attested to by the auditor during the year that
the auditor's attestation is not required.\58\ In response to these
comments that we received, we are adopting an additional disclosure
requirement to Item 308 of Regulations S-K and S-B, Item 15 of Form 20-
F, and General Instruction B(6) of Form 40-F.\59\ Non-accelerated
filers will be now required to include a statement in management's
report on internal control over financial reporting in substantially
the following form:
---------------------------------------------------------------------------
\57\ See, for example, letters from CII and PwC.
\58\ See letters from AICPA, BDO, Deloitte, E&Y, Grant Thorton,
and KPMG.
\59\ See paragraph 4 of Item 308T of Regulations S-K and S-B,
paragraph 4 of Item 15T of Form 20-F, and Instruction 3T of General
Instruction B(6) of Form 40-F.
This annual report does not include an attestation report of the
company's registered public accounting firm regarding internal
control over financial reporting. Management's report was not
subject to attestation by the company's registered public accounting
firm pursuant to temporary rules of the Securities and Exchange
Commission that permit the company to provide only management's
---------------------------------------------------------------------------
report in this annual report.
In the Proposing Release, we indicated that we had issued a
separate release to extend the date by which a foreign private issuer
that is an accelerated filer (but not a large accelerated filer) and
that files its annual report on Form 20-F or 40-F must begin to comply
with the auditor attestation report portion of the Section 404
requirements. We requested comment on whether we should consider taking
additional actions specifically with respect to foreign private
issuers. Like non-accelerated filers, these foreign private issuers
will provide only management's report during their first year of
compliance with the internal control over financial reporting
requirements.\60\ Some commenters expressed support for the delayed
audit report compliance date for these issuers and thought it was
appropriate for us to take similar action with respect to both non-
accelerated filers and the foreign private issuers.\61\ To maintain
consistency among the revised requirements, we are adopting the same
type of disclosure requirement for foreign private issuers that are
accelerated filers that we are adopting for the non-accelerated filers.
---------------------------------------------------------------------------
\60\ Release No. 33-8730A.
\61\ See, for example, letters from E&Y and FEI.
---------------------------------------------------------------------------
One commenter noted that disagreements over whether management
failed to report a material
[[Page 76586]]
weakness could create conflict between management and the auditor,\62\
and two other commenters noted that disagreements could also arise if
the auditor does not agree with management's approach or methodology
for testing internal control over financial reporting.\63\ As noted in
the Proposing Release, during the year that non-accelerated filers are
only required to provide management's report, we encourage frequent and
frank dialogue among management, auditors and audit committees to
improve internal controls and the financial reports upon which
investors rely. We believe that management should not fear that a
discussion of internal controls with, or a request for assistance or
clarification from, the company's auditor will itself be deemed a
deficiency in internal control or constitute a violation of our
independence rules as long as management determines the accounting to
be used and does not rely on the auditor to design or implement its
controls.\64\ We believe that open dialogue between management and
auditors may help to ameliorate some of the concerns of commenters
regarding disagreements between these parties in the second year of
compliance with the internal control reporting provisions.
---------------------------------------------------------------------------
\62\ See letter from IDW.
\63\ See, for example, letters from Davis Polk and G. Merkl.
\64\ See Commission Statement on Implementation of Internal
Control Requirements, Press Release No. 2005-74 (May 16, 2005),
available at http://www.sec.gov/news/press/2005-74.htm.
---------------------------------------------------------------------------
Nevertheless, as noted in the Proposing Release, we acknowledge
that a company that files only a management report during its first
year of compliance with the Section 404 requirements may become subject
to more second-guessing as a result of separating the management and
auditor reports than under the current requirements. For example,
management may conclude that the company's internal control over
financial reporting is effective when only management's report is filed
in the first year of compliance, but the auditor may come to a contrary
conclusion in its report filed in the subsequent year, and as a result,
the company's previous assessment may be called into question. To
further address this, we proposed a temporary amendment whereby the
management report included in the non-accelerated filer's annual report
during the first year of compliance would be deemed ``furnished''
rather than ``filed.'' \65\
---------------------------------------------------------------------------
\65\ Management's report is not be deemed to be filed for
purposes of Section 18 of the Exchange Act [15 U.S.C. 78r] or
otherwise subject to the liabilities of that section, unless the
issuer specifically states that the report is to be considered
``filed'' under the Exchange Act or incorporates it by reference
into a filing under the Securities Act or the Exchange Act.
---------------------------------------------------------------------------
Almost all of the commenters remarking on this aspect of the
proposal supported it.\66\ We are adopting this provision as proposed.
Commenters also supported our corresponding proposal \67\ to afford
similar relief to foreign private issuers that are accelerated filers
(but not large accelerated filers), that like non-accelerated filers,
will only provide management's report during their first year of
compliance with the internal control over financial reporting
requirements. We are adopting that provision as well.\68\
---------------------------------------------------------------------------
\66\ Eight commenters supported the proposed revision to deem
the management's report on internal control over financial reporting
to be ``furnished'' rather than ``filed'' during the first year that
non-accelerated filers are required to complete only management's
report on internal control over financial reporting. See letters
from ACB, Cravath, Deloitte, E&Y, FEI, Hermes, LaCrosse, and G.
Merkl. But see letter from IDW.
\67\ See, for example, letters from E&Y, FEI, Hermes, and G.
Merkl.
\68\ See paragraph (b) of Item 15T of Form 20-F and Instruction
3T to General Instruction B(6) of Form 40-F.
---------------------------------------------------------------------------
We also are extending the compliance date to permit a non-
accelerated filer to omit the portion of the introductory language in
paragraph 4 as well as language in paragraph 4(b) of the certification
required by Exchange Act Rules 13a-14(a) and 15d-14(a) \69\ that refers
to the certifying officers' responsibility for designing, establishing
and maintaining internal control over financial reporting for the
company, until it files an annual report that includes a report by
management on the effectiveness of the company's internal control over
financial reporting. This language is required to be provided in the
first annual report required to contain management's internal control
report and in all periodic reports filed thereafter.
---------------------------------------------------------------------------
\69\ 17 CFR 240.13a-14(a) and 240.15d-14(a).
---------------------------------------------------------------------------
Finally, we are clarifying that, until a non-accelerated filer
becomes subject to the auditor attestation report requirement, the
registered public accounting firm retained by the non-accelerated filer
need not comply with the obligation in Rule 2-02(f) of Regulation S-X.
Rule 2-02(f) requires every registered public accounting firm that
issues or prepares an accountant's report that is included in an annual
report filed by an Exchange Act reporting company (other than a
registered investment company) containing an assessment by management
of the effectiveness of the company's internal control over financial
reporting to attest to, and report on, such assessment.
The extended compliance periods do not, in any way, alter
requirements regarding internal control that already are in effect with
respect to non-accelerated filers, including, without limitation,
Section 13(b)(2) of the Exchange Act \70\ and the rules thereunder.
---------------------------------------------------------------------------
\70\ 15 U.S.C. 78m(b)(2).
---------------------------------------------------------------------------
III. Transition Period for Compliance With the Internal Control Over
Financial Reporting Requirements by Newly Public Companies
A. Proposed Amendment and Public Comments
In the Proposing Release, we also proposed to add a transition
period for newly public companies before they become subject to
compliance with the internal control over financial reporting
requirements. Under the rules existing prior to the amendments, after
all Exchange Act reporting companies have been phased-in and are
required to comply fully with the internal control reporting
provisions, any company undertaking an initial public offering or
registering a class of securities under the Exchange Act for the first
time would have been required to comply with those provisions as of the
end of the fiscal year in which it became a public company.
For many companies, preparation of the first annual report on Form
10-K, 10-KSB, 20-F or 40-F is a comprehensive process involving the
audit of financial statements, compilation of information that is
responsive to many new public disclosure requirements and review of the
report by the company's executive officers, board of directors and
legal counsel. Requiring a newly public company and its auditor to
complete the management report and auditor attestation report on the
effectiveness of the company's internal control over financial
reporting within the same timeframe imposes an additional burden on
newly public companies.
The Proposing Release also specifically recognized the burden that
preparing the reports imposed on companies, including foreign
companies, that become subject to Section 15(d) after filing a
registration statement under the Securities Act of 1933 \71\ but may be
eligible to terminate their periodic filing obligations after filing
just one annual report.\72\ In light
[[Page 76587]]
of the compliance burden of these requirements, we proposed to provide
a transition period for newly public companies.
---------------------------------------------------------------------------
\71\ 15 U.S.C. 77a et seq.
\72\ A transition period also would provide relief for foreign
companies that become subject to the Exchange Act reporting
requirements by virtue of Exchange Act Rule 12g-3 [17 CFR 240.12g-3]
in connection with a transaction which is not registered under the
Securities Act that constitutes an exchange offer for the securities
of, or business combination with, a company that has reporting
obligations under the Exchange Act. The relief, as adopted, would
thus apply to an unregistered foreign company that succeeds to the
reporting obligations of a registered foreign company under Rule
12g-3 in connection with an acquisition transaction effected under,
for example, Securities Act Section 3(a)(10) [15 U.S.C. 77c(a)(10)]
or Securities Act Rule 802 [17 CFR 230.802].
---------------------------------------------------------------------------
Specifically, we proposed that a newly public company would not
need to comply with our internal control over financial reporting
requirements in the first annual report that it files with the
Commission.\73\ Rather, the company would begin to comply with these
requirements in the second annual report that it is required to file
with the Commission. We stated our belief in the Proposing Release that
providing additional time for a newly public company to conduct its
first assessment of internal control over financial reporting would
benefit investors by making implementation of the internal control
reporting requirements more effective and efficient and reducing the
costs that a company faces in its first year as a public company. We
also expressed a belief that the proposed transition period would limit
any interference by our rules with a company's business decision
regarding the timing and use of resources relating to its initial U.S.
listing or public offering.
---------------------------------------------------------------------------
\73\ See Release No. 33-8731 (Aug. 9, 2006) [71 FR 47060].
---------------------------------------------------------------------------
We received 22 comment letters addressing our proposal on newly
public companies.\74\ Most of these commenters supported our efforts to
reduce the burden of compliance with our internal control over
financial reporting requirements by providing a transition period for
those companies.\75\
---------------------------------------------------------------------------
\74\ See letters from ABA, ACB, AICPA, BDO, BIO, Calix, CII,
Core Mark, Cleary, Cravath, Davis Polk, Deloitte, E&Y, Grant
Thornton, Graybar, Hermes, G. Merkl, NVCA, PFS, PwC, SBA and TIA.
\75\ See, for example, letters from ABA, ACB, AICPA, BDO, BIO,
Calix, Cravath, Cleary, Davis Polk, Grant Thornton, Graybar, Hermes,
NVCA, PFS, SBA, and TIA.
---------------------------------------------------------------------------
B. Discussion of Final Amendment
After consideration of the public comments that were received, we
are adopting the newly public company amendments substantially as
proposed. We are therefore amending the rules to provide that a newly
public company does not need to comply with our internal control over
financial reporting requirements in the first annual report that it
files with the Commission.\76\ As noted, there was broad support from
commenters for a transition period postponing compliance with these
requirements until the second annual report filed with the
Commission.\77\ One commenter suggested that the transition period was
of ``critical importance'' for effective and meaningful compliance with
Section 404 requirements by newly public companies.\78\
---------------------------------------------------------------------------
\76\ Instruction 1 to Item 308 of Regulations S-B and S-K, Item
15 of Form 20-F, and General Instruction B(6) of Form 40-F, and
Exchange Act Rules 13a-15(a), (c) and (d) and 15d-15(a), (c) and
(d). The definition of an accelerated filer was based, in part, on
the requirements for registration of primary offerings for cash on
Form S-3. See Section II.B.3 in Release No. 33-8128 (Sept. 5, 2002)
[67 FR 58480] and Section I in Release No. 33-8644 (Dec. 21, 2005)
[70 FR 76626]. In some situations, a newly formed public company may
seek to use another entity's reporting history for purposes of using
Form S-3. For example, a spun-off entity may attempt to use its
parent's reporting history or a newly formed holding company may
seek to use its predecessor's reporting history. Because of the
inter-relationship between Form S-3 eligibility and accelerated
filer status, we believe that, to the extent a newly formed public
company seeks to use and is deemed eligible to use Form S-3 on the
basis of another entity's reporting history, that company would also
be an accelerated filer and therefore required to comply with Items
308(a) and 308(b) of Regulation S-K in the first annual report that
it files.
\77\ See n. 75 above.
\78\ See letter from Cleary.
---------------------------------------------------------------------------
Two commenters objected to the proposed relief, noting the
importance of the internal control over financial reporting
requirements to the Sarbanes-Oxley Act reforms.\79\ We believe that the
one-year transition period strikes an appropriate balance by requiring
newly public companies to develop and implement effective internal
controls and procedures, while allowing management some time to more
cost-effectively conduct their entry into the public markets and gain
efficiencies in preparation for compliance with our internal control
over financial reporting requirements. As noted below, we are also
requiring clear disclosure by newly public companies that they are not
required to include either a report by management or an auditor's
attestation report on internal control over financial reporting in
their first annual report so that investors can consider that
information when making their investing decisions.
---------------------------------------------------------------------------
\79\ See, for example, letters from CII and Deloitte.
---------------------------------------------------------------------------
One commenter sought clarification on the transition period,\80\
and others suggested expanding the transition period for newly public
companies to allow them more time to comply with the requirements.\81\
We are adopting amendments to provide that a registrant need not comply
with the internal control over financial reporting requirements ``until
it either had been required to file an annual report pursuant to
section 13(a) or 15(d) of the Act for the prior fiscal year or had
filed an annual report with the Commission for the prior fiscal year.''
\82\ The amendments require a newly public company to fully comply with
the internal control over financial reporting requirements when filing
its second annual report with the Commission, allowing a company at
least one annual reporting period from the time it becomes a public
company to prepare for compliance. A newly public company also need not
comply with the provisions of Exchange Act Rule 13a-15(d) or 15d-15(d),
requiring an evaluation of changes to internal control over financial
reporting requirements, or comply with the provisions of Exchange Act
Rule 13a-15(a) or 15d-15(a) relating to the maintenance of internal
control over financial reporting until the first periodic report due
after the first annual report that must include management's report on
internal control over financial reporting.\83\
---------------------------------------------------------------------------
\80\ See letter from BDO. BDO sought clarification in the
commentary regarding the application of the transition rules to a
company that becomes an Exchange Act registrant after its year-end
but before it is required to file financial statements for the year
that just ended.
\81\ See, for example, letters from ACB, Core-Mark and Davis
Polk. Davis Polk suggested slightly expanding the deferral to
require compliance after the filing of an annual report other than
for a fiscal year ending before the company went public. ACB more
broadly suggested extending the transition period to correspond to
the timeframe for non-accelerated filers, not requiring compliance
until the second annual report beginning with fiscal years ending on
or after December 31, 2008. Core-Mark suggested expanding the
deferral to apply to the first two annual reports filed.
\82\ See n. 76 above. This transition period applies to
companies conducting an initial public offering (equity or debt) or
a registered exchange offer or that otherwise become subject to the
Exchange Act reporting requirements. For these purposes, a newly
public company that has filed a special financial report under
Exchange Act Rule 15d-2 [17 CFR 240.15d-2] or that has filed a
transition report on Form 10-K, 10-KSB, 20-F, or 40-F under Exchange
Act Rule 13a-10 [17 CFR 240.13a-10] or Rule 15d-10 [17 CFR 240.15d-
10] will have filed an annual report. As a result, a newly public
company that files a special financial report or a transition report
will be required to fully comply with the internal control over
financial reporting requirements when filing an annual report for
its next fiscal year.
\83\ SEC staff provided its views on the disclosure of changes
or improvements to controls made as a result of preparing for the
registrant's first management report on internal control over
financial reporting. See Question 9 in Management's Report on
Internal Control Over Financial Reporting and Certification of
Disclosure in Exchange Act Periodic Reports Frequently Asked
Questions (revised October 6, 2004), at http://www.sec.gov/info/accountants/controlfaq1004.htm
.
---------------------------------------------------------------------------
The amendments also permit a newly public company, during the
transition period, to omit the portion of the
[[Page 76588]]
introductory language in paragraph 4 as well as language in paragraph
4(b) of the certification required by Exchange Act Rules 13a-14(a) and
15d-14(a) that refers to the certifying officers' responsibility for
designing, establishing and maintaining internal control over financial
reporting for the company, until it files an annual report that
includes a report by management on the effectiveness of the company's
internal control over financial reporting. This language is required to
be provided in the first annual report required to contain management's
internal control report and in all periodic reports filed thereafter.
One commenter suggested that if the Commission decides to provide
for a transition period, prominent disclosure by the company and the
auditor should be required indicating that the company is not yet
required to comply with and there has been no management assessment or
audit of the company's internal control over financial reporting.\84\
We agree that newly public companies should include a statement in
their annual report alerting investors about the company's obligations
with respect to the internal control over financial reporting
provisions. Therefore, we are adding a requirement that newly public
companies that are relying on the transition rules must include a
statement in the first annual report that they file that the report
does not include management's assessment report or the auditor's
attestation report.\85\ This disclosure is consistent with the
disclosure that non-accelerated filers and foreign private issuers will
have to include in their annual reports during the year that they are
not required to comply with the auditor attestation requirement.
---------------------------------------------------------------------------
\84\ See letter from Deloitte.
\85\ See Instruction 1 to Item 308 of Regulations S-B and S-K,
Item 15 of Form 20-F, and General Instruction B(6) of Form 40-F.
---------------------------------------------------------------------------
IV. Paperwork Reduction Act
As discussed in the Proposing Release, we submitted a request for
approval of the ``collection of information'' requirements contained in
the amendments to the Office of Management and Budget (``OMB'') in
accordance with the Paperwork Reduction Act of 1995 (``PRA'') \86\ in
connection with our original proposal and adoption of the rule and form
amendments implementing the Section 404 requirements.\87\ OMB approved
these requirements. The new disclosure amendments that we are adopting
today contain collection of information requirements within the meaning
of PRA.
---------------------------------------------------------------------------
\86\ 44 U.S.C. 3501 et seq. and 5 CFR 1320.11.
\87\ See Section IV. of Release No. 33-8238.
---------------------------------------------------------------------------
The titles for the collections of information are: \88\
---------------------------------------------------------------------------
\88\ The paperwork burden from Regulations S-K and S-B is
imposed through the forms that are subject to the requirements in
those Regulations and is reflected in the analysis of those forms.
To avoid a Paperwork Reduction Act inventory reflecting duplicative
burdens, for administrative convenience we estimate the burdens
imposed by each of Regulations S-K and S-B to be a total of one
hour.
---------------------------------------------------------------------------
(1) ``Regulation S-B'' (OMB Control No. 3235-0417);
(2) ``Regulation S-K'' (OMB Control No. 3235-0071);
(3) ``Form 10-K'' (OMB Control No. 3235-0063);
(4) ``Form 10-KSB'' (OMB Control No. 3235-0420);
(5) ``Form 20-F'' (OMB Control No. 3235-0288); and
(6) ``Form 40-F'' (OMB Control No. 3235-0381).
An agency may not conduct or sponsor, and a person is not required
to respond to, a collection of information such as Form 10-K or Form
20-F unless it displays a currently valid OMB control number.
The amendments to Regulation S-B, Regulation S-K, Form 10-K, Form
10-KSB, Form 20-F and Form 40-F adopted in this release require non-
accelerated filers and foreign private issuers that are accelerated
filers (but not large accelerated filers) to include a statement in
management's report on the company's internal control over financial
reporting in the annual report in which the company is not required to
include the auditor attestation requirement. The statement should
disclose that the annual report does not contain a report by the
company's registered public accounting firm on management's report of
the company's internal control over financial reporting, and
management's report was not subject to attestation by the accounting
firm pursuant to temporary rules of the Commission that permit the
company to provide only management's report in the annual report. The
amendments we are adopting also require newly public companies to
provide a similar statement in their first annual report to reflect the
transition schedule we are adopting for those companies. We are
requesting comment in this release with regard to the collections of
information requirements for these amendments.
The requirements are designed to avoid investor confusion regarding
application of the internal control over financial reporting
requirements to non-accelerated filers for their fiscal years ending on
or after December 15, 2007 but before December 15, 2008; to foreign
private issuers that are accelerated filers (but not large accelerated
filers) for their fiscal years ending on or after July 15, 2006 but
before July 15, 2007; and to newly public companies for the first
annual report that they are required to file. The requirements are
mandatory. The respondents to the collection of information requests
here will be: (1) Non-accelerated filers that do not file an auditor's
attestation report for a fiscal year ending on or after December 15,
2007 but before December 15, 2008; (2) foreign private issuers filing
on Form 20-F or Form 40-F that are accelerated filers (but not large
accelerated filers) that do not file an auditor's attestation report
for a fiscal year ending on or after July 15, 2006 but before July 15,
2007; and (3) newly public companies that do not comply with the
internal control over financial reporting requirements in the first
annual report filed with the Commission in accordance with the new
rules.
Form 10-K prescribes information that registrants must disclose
annually to the market about its business. Form 10-KSB prescribes
information that registrants that are ``small business issuers'' as
defined under our rules must disclose annually to the market about its
business. Form 20-F is used by foreign private issuers to either
register a class of securities under the Exchange Act or provide an
annual report required under the Exchange Act. Form 40-F is used by
foreign private issuers to file reports under the Exchange Act after
having registered securities under the Securities Act and by certain
Canadian registrants.
For the purposes of the Paperwork Reduction Act, we estimate that,
over a 3-year period, the annual incremental burden imposed by the
disclosure amendments will average 15 minutes per form. We have based
our estimates of the effects that these additional disclosure
requirements would have on the Forms 10-K, 10-KSB, 20-F and 40-F
primarily based on our review of the most recently completed PRA
submissions for those collections of information, and those
requirements in those Regulations and Forms.
Form 10-K
For purposes of the PRA, we estimate that the amendments affecting
the Form 10-K collection of information requirements will increase the
annual paperwork burden by approximately 1,289 hours of company
personnel time and a cost of approximately $171,294 for the services of
outside
[[Page 76589]]
professionals.\89\ Based on our research into the number of non-
accelerated filers in 2004 and 2005, we estimate that approximately
6,025 annual reports filed on Form 10-K would be filed by non-
accelerated filers that could be subject to the additional disclosure
requirement that we are adopting for non-accelerated filers. This
estimate is based on the assumption that the number of annual responses
on Form 10-K is 10,041.\90\ Based on our review of the number of newly
public companies in 2005, we estimate that approximately 853 companies
filing on Form 10-K would be subject to the additional disclosure
requirement that we are adopting for newly public companies. We
estimate that the incremental burden for the newly public company
amendments for Form 10-K is 213 hours.
---------------------------------------------------------------------------
\89\ This estimate is based on the assumed 75% and 25% split of
the burden hours between internal staff and external professionals,
and an hourly rate of $400 for external professionals. The hourly
cost estimate is based on consultations with several registrants and
law firms and other persons who regularly assist registrants in
preparing and filing periodic reports with the Commission.
\90\ This number is based on the number of responses made in the
period from October 1, 2005 through September 30, 2006.
---------------------------------------------------------------------------
Form 10-KSB
For purposes of the PRA, we estimate that the amendments affecting
the Form 10-KSB collection of information requirements will increase
the annual paperwork burden by approximately 980 hours of company
personnel time and a cost of approximately $130,709 for the services of
outside professionals. Based on our research into the number of non-
accelerated filers in 2004 and 2005, we estimate that all (4,819) of
the annual reports filed on Form 10-KSB would be filed by non-
accelerated filers that could be subject to the additional disclosure
requirement that we are adopting for non-accelerated filers. This
estimate is based on the assumption that the number of annual responses
on Form 10-KSB is 4,819.\91\ Based on our review into the number of
newly public companies in 2005, we estimate that approximately 409
companies filing on Form 10-KSB would be subject to the additional
disclosure requirement that we are adopting for newly public companies.
We estimate that the incremental burden for the newly public company
amendments for Form 10-KSB is 102 hours.
---------------------------------------------------------------------------
\91\ This number is based on the number of responses made in the
period from October 1, 2005 through September 30, 2006.
---------------------------------------------------------------------------
Form 20-F
For purposes of the PRA, we estimate that the amendments affecting
the Form 20-F collection of information requirements will increase the
annual paperwork burden by approximately 36 hours of company personnel
time and a cost of approximately $42,809 for the services of outside
professionals.\92\ Based on our review into the percentage of total
foreign private issuers that were non-accelerated filers in 2005, we
estimate that 40% (or 471) of the annual reports filed on Form 20-F
would be filed by non-accelerated filers that could be subject to the
additional disclosure requirement that we are adopting for non-
accelerated filers. Based on our review into the percentages of foreign
private issuers that were accelerated filers (but not large accelerated
filers) in 2005, we estimate that 21% (or 247) of the annual reports
filed on 20-F would be accelerated filers and not large accelerated
filers. These estimates are based on the assumption that the number of
annual responses on Form 20-F is 1177.\93\ Based on our review of the
number of newly public companies in 2005, we estimate that
approximately 100 companies filing on Form 20-F would be subject to the
additional disclosure requirement that we are adopting for newly public
companies. We estimate that the incremental burden for the newly public
company amendments for Form 20-F is 25 hours.
---------------------------------------------------------------------------
\92\ The burden allocation for Forms 20-F and 40-F, however, use
a 25% internal to 75% outside professional allocation to reflect the
fact that foreign private issuers rely more heavily on outside
professionals for the preparation of these forms.
\93\ This number is based on the number of responses made in the
period from October 1, 2005 through September 30, 2006.
---------------------------------------------------------------------------
Form 40-F
For purposes of the PRA, we estimate that the amendments affecting
the Form 40-F collection of information requirements will increase the
annual paperwork burden by approximately 27 hours of company personnel
time and a cost of approximately $8,002 for the services of outside
professionals. Based on recent research into the percentage of total
foreign private issuers that are non-accelerated filers, we estimate
that 40% (or 88) of the annual reports filed on Form 40-F would be
filed by non-accelerated filers that could be subject to the additional
disclosure requirement that we are adopting for non-accelerated filers.
Based on our review into the percentages of foreign private issuers
that were accelerated filers (but not large accelerated filers) in
2005, we estimate that 21% (or 46) of the annual reports filed on 40-F
would be accelerated filers and not large accelerated filers. These
estimates are based on the assumption that the number of annual
responses on Form 40-F is 220.\94\ Based on our review of the number of
newly public companies in 2005, we estimate that approximately 19
companies filing on Form 40-F would be subject to the additional
disclosure requirement that we are adopting for newly public companies.
We estimate that the incremental burden for the newly public company
amendments for Form 40-F is 5 hours.
---------------------------------------------------------------------------
\94\ This number is based on the number of responses made in the
period from October 1, 2005 through September 30, 2006.
---------------------------------------------------------------------------
Request for Comment
We solicit comment on the expected effects of the amendments on
Regulations S-B and S-K, Form 20-F and Form 40-F under the PRA. In
particular, we solicit comment on:
How accurate are our burden and cost estimates for Forms
10-K, 10-KSB, 20-F and 40-F;
Whether the amendments are necessary to avoid investor
confusion regarding the internal control over financial reporting
requirements for non-accelerated filers and newly public companies;
Whether there are ways to enhance the quality, utility,
and clarity of the information to be collected; and
Whether there are ways to minimize the burden of the
additional disclosure requirements on non-accelerated filers and newly
public companies.
Any member of the public may direct to us any comments concerning
these burden and cost estimates and any suggestions for reducing the
burdens and costs. Persons who desire to submit comments on the
collections of information requirements should direct their comments to
the OMB, Attention: Desk Officer for the Securities and Exchange
Commission, Office of Information and Regulatory Affairs, Washington,
DC 20503, or send an e-mail to David_Rostker@omb.eop.gov, and send a
copy of the comments to Nancy M. Morris, Secretary, Securities and
Exchange Commission, 100 F Street, NE., Washington, DC 20549-1090, with
reference to File No. S7-06-03. Requests for materials submitted to the
OMB by us with regard to these collections of information should be in
writing, refer to File No. S7-06-03, and be submitted to the Securities
and Exchange Commission, Records Management, Office of Filings and
Information Services, 100 F Street, NE., Washington, DC 20549. Because
the OMB is required to make a decision
[[Page 76590]]
concerning the collections of information between 30 and 60 days after
publication, your comments are best assured of having their full effect
if the OMB receives them within 30 days of publication.
V. Cost-Benefit Analysis
A. Benefits
The extension of the compliance dates is intended to make
implementation of the internal control reporting requirements more
efficient and cost-effective for non-accelerated filers. First, the
extension postpones for 5 months (from fiscal years ending on or after
July 15, 2007 until fiscal years ending on or after December 15, 2007)
the date by which non-accelerated filers must begin to include a report
by management assessing the effectiveness of the company's internal
control over financial reporting. Based on our estimates, we believe
that fewer than 15% of all non-accelerated filers have a fiscal year
ending between July 15, 2007 and December 15, 2007.\95\ In addition,
under the extension, a non-accelerated filer is not required to include
an auditor attestation report on management's assessment of internal
control over financial reporting until it files an annual report for
its first fiscal year ending on or after December 15, 2008. As a
result, all non-accelerated filers are required to complete only
management's assessment in their first year of compliance with the
Section 404 requirements.
---------------------------------------------------------------------------
\95\ See n. 44 above.
---------------------------------------------------------------------------
We believe that the following benefits will flow from an additional
postponement of the dates by which non-accelerated filers must comply
with the internal control reporting requirements:
Auditors of non-accelerated filers will have more time to
conform their initial attestation reports on management's assessment of
internal control over financial reporting to the changes to the
auditing attestation standard and other actions that the PCAOB
determines to take;
Non-accelerated filers will save opportunity costs
associated with their initial audit of internal control over financial
reporting while changes to the auditing standard are being considered
and implemented and the PCAOB is developing, or facilitating the
development of, additional guidance that will be specifically directed
to auditors of smaller public companies;
Management of non-accelerated filers are able to begin the
process of assessing the effectiveness of internal control over
financial reporting before their auditors attest to such assessment
(and investors can begin to see and evaluate the results of their
initial efforts); and
Non-accelerated filers with a fiscal year ending between
July 15, 2007 and December 15, 2007 have additional time to consider
the management guidance to be issued by the Commission and the recently
issued COSO guidance on understanding and applying the COSO framework,
before planning and conducting their first internal control assessment.
Many public commenters on the Proposing Release and on previous
occasions have asserted that the internal control reporting compliance
costs are likely to be disproportionately higher for smaller public
companies than larger ones, and that the audit fee represents a large
percentage of those costs.\96\ We acknowledge that some non-accelerated
filers may incur audit fee costs in the first year that they provide
management's report due to the fact that management may engage in a
dialogue with their auditors regarding their assessment of the
company's internal control over financial reporting. Nevertheless, we
believe that the potential cost savings derived from the year that the
non-accelerated filers are not required to include an auditor's
attestation report on management's assessment of the effectiveness of
their internal control over financial reporting will likely be
substantial. The cost that a non-accelerated filer will save as a
result of the extension of the auditor attestation report is likely to
vary significantly.\97\
---------------------------------------------------------------------------
\96\ See, for example, letters on the Proposing Release from FEI
and SBA.
\97\ Numerous cost surveys have been made public citing the high
cost of compliance with the Section 404 requirements. For a
sampling, see surveys from CRA International (Apr. 2006), FEI (Mar.
2006), Foley & Lardner LLP (June 2006), ICBA (Mar. 2005), NASDAQ and
American Electronics Association (Oct. 2005), and the Business
Roundtable (Mar. 2006). Note that many of these studies do not
isolate the cost of the auditor's attestation; some studies discuss
full audit costs or other fees. The Commission has not independently
verified the reliability or accuracy of the survey data.
---------------------------------------------------------------------------
Additionally, we have previously learned from public comments,
including our roundtables on implementation of the internal control
reporting provisions,\98\ that while companies incur increased internal
costs in the first year of compliance in part due to ``deferred
maintenance'' items (e.g., documentation, remediation, etc.), these
costs may decrease in the second year. Therefore, we believe that
postponing many of the auditor costs until the second year will help
non-accelerated filers smooth the significant cost spike that many
accelerated filers have experienced in their first year of compliance.
Many commenters agreed that the deferred implementation of the auditor
attestation requirement would relieve smaller companies from regulatory
costs.\99\ One commenter noted that the additional time will provide
time for smaller companies to not only learn from the guidance that the
Commission and PCAOB plan to issue but also the experiences of larger
public companies.\100\
---------------------------------------------------------------------------
\98\ Materials related to the Commission's 2005 Roundtable
Discussion on Implementation of Internal Control Reporting
Provisions and 2006 Roundtable on Second-year Experiences with
Internal Control Reporting and Auditing Provisions, including the
archived roundtable broadcasts, are available at http://www.sec.gov/spotlight/soxcomp.htm
.
\99\ See, for example, letters from Cravath, Hermes, LaCrosse,
and SBA.
\100\ See, for example, letter from FEI.
---------------------------------------------------------------------------
We also are adopting amendments that provide for a transition
period before a newly public company is required to comply with Section
404 requirements. We think that the benefits of the transition period
for newly public companies include the following:
Companies that are going public are able to concentrate on
their initial securities offering without the additional burden of
becoming subject to the Section 404 requirements soon after the
offering;
Newly public companies are able to prepare their first
annual report without the additional burden of having to comply with
the Section 404 requirements at the same time;
The quality of newly public companies' first compliance
efforts may improve due to the additional time that the companies have
to prepare to satisfy the Section 404 requirements; and
The transition period reduces the incentive that the
previous rules created for a company that plans to go public to time
its initial public offering to defer compliance with the Section 404
requirements for as long as possible after the offering.
The comments that we received generally supported the transition
period for newly public companies and our rationale for adopting the
amendments. Several commenters agreed that the Section 404 requirements
act as a barrier to becoming a public company and increase the cost of
going public.\101\ Because 404 compliance costs vary by size and
complexity of the company, it is difficult to quantify precisely the
cost-
[[Page 76591]]
savings that these amendments may afford to newly public
companies.\102\
---------------------------------------------------------------------------
\101\ See letters from ABA, Calix, Core-Mark, Cravath, Davis
Polk, E&Y, and SBA.
\102\ In its comment letter, the SBA cites various data
regarding Section 404 compliance costs.
---------------------------------------------------------------------------
One commenter offered a study on companies with internal control
deficiencies disclosures and their cost of capital, which we have
considered in our analysis.\103\ While we note that the potential costs
due to a lack of assurance, we believe the counterbalancing benefits
and clear disclosure to investor regarding the internal control
requirements justify our actions. Another venture capital association
did not anticipate a major change in the cost and effort of an initial
public offering to diminish until ``the overall 404 cost-benefit
ratio'' is brought into balance, as venture-backed companies would
still begin the process of obtaining a clean opinion from the auditor
long before the public offering.\104\ While we recognize that newly
public companies will still incur costs in preparation for the
implementation of the internal control requirements, we believe that
the savings from the transition period for these companies may still be
substantial, as the newly public companies will not be required to
include either management's report on the company's internal control
over financial reporting or the auditor's attestation on management's
report in their first annual report.
---------------------------------------------------------------------------
\103\ See letter from CII (citing Hollis Ashbaugh-Skaife et al.,
The Effect of Internal Control Deficiencies on Firm Risk and Cost of
Equity Capital (April 2006)). The study found that companies with
internal control deficiencies exhibit higher costs of capital and
those that subsequently receive an unqualified auditor attestation
report on the company's internal control over financial reporting
exhibit a decrease to their market-adjusted cost of capital. Another
study cited by the Hollis study found no evidence of an effect on
the cost of capital for internal control disclosures. See Ogneva,
Subramanyam, and Reaghunandan, Internal Control Weaknesses and Cost
of Equity: Evidence from SOX Section 404 Disclosures (2006).
\104\ See letter from NVCA.
---------------------------------------------------------------------------
We also are adopting a requirement that requires a newly public
company to disclose in the first annual report that it files that it
has not included either management's report on internal control or the
auditor's attestation report. Our intention is that this requirement
will provide clarity to investors and the capital markets regarding the
Section 404 requirements of a newly public company.
B. Costs
Under the extension, investors in companies that are non-
accelerated filers will have to wait longer to review an attestation
report by the companies' auditor on management's assessment of internal
control over financial reporting. The extension may create a risk that,
without the auditor's attestation to management's assessment process,
some issuers may conclude that the company's internal control over
financial reporting is effective without conducting an assessment that
is as thorough, careful and as appropriate to the issuers'
circumstances as they would conduct if the auditor were involved.
We received many comments on these potential costs. Several
commenters believed that management's assessment of internal control
would provide useful disclosure to investors even without the auditor's
attestation report; \105\ however, other commenters expressed concern
whether management's report, absent the auditor's attestation, would
provide meaningful disclosure \106\ or would fail to identify a
material weakness in the company's internal control over financial
reporting.\107\ One accounting firm noted that even though there is an
increased risk that a material weakness will go undetected, the benefit
that furnishing management's report provides to investors outweighs
that risk.\108\ One commenter also noted that if standards are revised
between the first and second year of compliance with the internal
control reporting requirements for non-accelerated filers, the deferred
implementation of the audit attestation requirement could result in
overlapping expenditures and misallocation of resources.\109\ On
balance, we believe that the graduated introduction of the 404
requirements will give investors more useful information at lower
overall costs.
---------------------------------------------------------------------------
\105\ See letters from Deloitte, E&Y, FEI, Hermes, KPMG and G.
Merkl.
\106\ See, for example, letter from IDW.
\107\ See letters from AICPA, Deloitte, Grant Thorton, IDW, and
PwC.
\108\ See letter from KPMG. This commenter noted that the
formality and discipline that will be introduced after non-
accelerated filers begin to comply with the requirement for
management's report will lead to more effective management
evaluations and more meaningful management disclosures.
\109\ See letter from ABA.
---------------------------------------------------------------------------
Some commenters questioned whether the sequential implementation of
the management report requirement and the auditor attestation
requirement would cause confusion to investors and the capital
markets.\110\ Several commenters, in response to the Commission's
request for public comment, supported a requirement that a non-
accelerated filer, during its first year of compliance with the
management report requirement, should clearly disclose that
management's report has not been attested to by the auditor.\111\ In
response to comment, we have adopted this disclosure requirement for
the year that non-accelerated filers and foreign private issuers that
are accelerated filers (but not large accelerated filers) are only
required to provide management's report.
---------------------------------------------------------------------------
\110\ See, for example, letters from ABA, CII, and PwC.
\111\ See letters from AICPA, BDO, Deloitte, E&Y, Grant Thorton,
and KPMG.
---------------------------------------------------------------------------
Another potential cost of the extension in the form of increased
litigation risk may be created by the phasing-in of the auditor's
attestation report on management's assessment if, in year one,
management concludes that the company's internal control over financial
reporting is effective, but the auditor comes to a contrary conclusion
the following year, thereby calling into question management's earlier
conclusion. We have mitigated the risk by adopting an amendment that
the management report be furnished to, rather than filed with, the
Commission in the first year of compliance.
A potential cost of the transition period for newly public
companies is that investors may be subject to uncertainty as to the
effectiveness of a newly public company's internal control over
financial reporting for a longer period of time than under previous
requirements. One commenter argued that the safeguard provided by the
Section 404 requirements could be of increased importance for newly
public companies and their investors, because those companies are often
less sophisticated and lack the market following that provide
safeguards.\112\ As we noted, we are also requiring clear disclosure by
newly public companies that they are not required to include either a
report by management or an auditor's attestation report on internal
control over financial reporting in their first annual report so that
investors can consider that information when making their investing
decisions.
---------------------------------------------------------------------------
\112\ See letter from Deloitte.
---------------------------------------------------------------------------
The additional disclosure requirements that we are adopting for
non-accelerated filers and foreign private issuers that are accelerated
filers (but not large accelerated filers) during the year that they are
only required to provide management's report on internal control and
for newly public companies during the transition period may increase
costs for companies, but we believe the increase should be minimal.
[[Page 76592]]
VI. Consideration of Impact on the Economy, Burden on Competition and
Promotion of Efficiency, Competition and Capital Formation
Section 23(a)(2) of the Exchange Act \113\ requires us, when
adopting rules under the Exchange Act, to consider the impact that any
new rule would have on competition. Section 23(a)(2) prohibits us from
adopting any rule that would impose a burden on competition not
necessary or appropriate in furtherance of the purposes of the Exchange
Act. In addition, Section 2(b) of the Securities Act \114\ and Section
3(f) of the Exchange Act \115\ require us, when engaging in rulemaking
where we are required to consider or determine whether an action is
necessary or appropriate in the public interest, to consider, in
addition to the protection of investors, whether the action will
promote efficiency, competition and capital formation.
---------------------------------------------------------------------------
\113\ 15 U.S.C. 78w(a)(2).
\114\ 15 U.S.C. 77b(b).
\115\ 15 U.S.C. 78c(f).
---------------------------------------------------------------------------
We expect that the extension of compliance dates will increase
efficiency and enhance capital formation, and thereby benefit
investors, by providing more time for non-accelerated filers to prepare
for compliance with the Section 404 requirements and by affording these
filers the opportunity to consider implementation guidance that is
specifically tailored to smaller public companies. We further expect a
more gradual phase-in of the management assessment and auditor
attestation report requirements over a two-year period, rather than
requiring non-accelerated filers to fully comply with both requirements
in their first compliance year, to make the implementation process more
efficient and less costly for non-accelerated filers. Some commenters
on the Proposing Release argued that the sequential implementation of
the management report requirement and auditor attestation requirement
could make the application of the revised Auditing Standard No. 2 less
efficient.\116\ We have encouraged management to confer with their
auditors to minimize any inefficiencies. Other commenters, however,
supported the extension and believed that it would reduce compliance
costs for smaller companies and provide them with additional time to
develop best practices for compliance and greater efficiencies in
preparing management reports.\117\
---------------------------------------------------------------------------
\116\ See, for example, letters from ABA, IDW, G. Merkl and PwC.
\117\ See, for example, letters from Core-Mark, FEI, J. Finn,
Graybar, Congressman Lynch, and Village.
---------------------------------------------------------------------------
It is possible that a competitive impact could result from the
differing treatment of non-accelerated filers and larger companies that
already have been complying with the Section 404 requirements, but we
do not expect that the extension will have any measurable effect on
competition. We did not receive any comments specifically addressing
the effect of the extension on competition.
The transition period for newly public companies should also
increase efficiency and enhance capital formation by enabling these
companies to concentrate on the initial securities offering process, if
they are becoming subject to the Exchange Act reporting requirements by
virtue of a public securities offering, and to prepare their first
annual reports without the additional burden of complying with the
Section 404 requirements. The provision of additional time for newly
public companies to prepare for compliance with the internal control
over financial reporting requirements may lead to increased quality of
the companies' initial compliance efforts.\118\ One commenter noted
that given that the commitment of resources and expenditures in
preparation for an initial public offering is enormous, the immediate
imposition of Section 404 requirements is overly burdensome and does
not provide sufficient time for careful establishment of internal
control over financial reporting.\119\ One commenter asserted that
deferral of the Section 404 requirements may diminish the U.S. market
premium based on an article that noted a study demonstrating that
companies listing on U.S. markets enjoyed a valuation premium but also
acknowledged that the benefits of Section 404 ``are difficult to
quantify.'' \120\ We believe that with the disclosure newly public
companies must include in their first annual reports explaining that
the management and auditor attestation reports on internal control over
financial reporting are not required in the company's annual report,
investors can better incorporate this information into their investing
decisions. Also, a company that wishes to comply with Section 404 in
their first year of reporting is not prevented from doing so under our
rules.
---------------------------------------------------------------------------
\118\ See also letters from ABA and Calix.
\119\ See letter from ABA.
\120\ See letter from CII (citing article in CFO magazine).
---------------------------------------------------------------------------
In addition, the previous requirements would have provided an
incentive for private companies to time their public offerings so as to
maximize the length of time that they would have after going public
before having to comply with the Section 404 requirements. The
amendments we are adopting today that allow newly public companies to
defer compliance with these requirements until they file their second
annual report with the Commission reduce this incentive. As a result,
capital formation should be enhanced by allowing companies to time
their offerings to raise capital rather than to avoid a compliance
requirement. In reducing regulatory burdens for newly public companies,
we may also increase the attractiveness of the U.S. markets to foreign
companies.\121\
---------------------------------------------------------------------------
\121\ See also letters from ACB, Cravath and Davis Polk.
---------------------------------------------------------------------------
VII. Final Regulatory Flexibility Analysis
This Final Regulatory Flexibility Analysis has been prepared in
accordance with the Regulatory Flexibility Act \122\ for amendments to
rules and forms under the Securities Act and the Exchange Act that: (1)
extend the compliance dates applicable to non-accelerated filers for
certain internal control over financial reporting requirements and (2)
provide a transition period for newly public companies before they
become subject to compliance with the internal control over financial
reporting requirements. Non-accelerated filers previously were
scheduled to begin to comply with the management's assessment and
auditor attestation report requirements on the company's internal
control over financial reporting for their annual report filed for the
first fiscal year ending on or after July 15, 2007. We are extending
this compliance date with respect to the management's assessment
portion so that a non-accelerated filer is required to begin including
management's assessment in an annual report for its first fiscal year
ending on or after December 15, 2007. We are extending the compliance
date with respect to the auditor attestation report so that a non-
accelerated filer is required to begin including an auditor's
attestation report on management's assessment in the annual report that
it files for its first fiscal year ending on or after December 15,
2008. In addition, we are also adopting amendments for newly public
companies so that a newly public company need not comply with our
internal control over financial reporting requirements until after it
either had been required to file an annual report pursuant to the
requirements of Section
[[Page 76593]]
13(a) or 15(d) of the Exchange Act for the prior fiscal year or had
filed an annual report with the Commission for the prior fiscal year.
---------------------------------------------------------------------------
\122\ 5 U.S.C. 603.
---------------------------------------------------------------------------
A. Reasons for and Objectives of the Amendments
The Commission and the PCAOB plan a series of actions that will
result in the issuance of new guidance to aid companies and auditors in
performing their evaluations of internal control over financial
reporting. These amendments are designed to provide additional time for
non-accelerated filers and newly public companies to comply with the
internal control over financial reporting requirements as modified. We
believe that the additional time will enhance the quality of public
company disclosure concerning internal control over financial
reporting.
For non-accelerated filers, we expect that extending the
implementation of the management report requirement for five months
will provide sufficient time for the Commission to issue final guidance
to assist in management's performance of a top-down, risk-based and
scalable assessment of controls over financial reporting. We are
deferring the implementation of the auditor attestation report
requirement for an additional year after the implementation of the
management report requirement for the following reasons:
To afford non-accelerated filers and their auditors the
benefit of any changes or additional guidance regarding application of
the COSO Framework;
To both save and postpone costs associated with the
auditor's attestation during the period that changes to Auditing
Standard No. 2 are being considered and implemented;
To enable management more time to prepare and gain
efficiencies in the review and evaluation of the effectiveness of
internal control over financial reporting; and
To provide the Commission with additional time to consider
public comment on the questions we raised on management guidance
related to the appropriate role of the auditor in evaluating
management's internal control assessment process.\123\
---------------------------------------------------------------------------
\123\ Release No. 34-54122. The comment period closed on
September 18, 2006, and the letters that we received on the Concept
Release are available in File No. S7-11-06, at http://www.sec.gov/comments/s7-11-06/s71106.shtml
.
---------------------------------------------------------------------------
For newly public companies, we expect that the transition period
which eliminates the requirement to provide management's report and the
auditor's attestation report in the first annual report filed with the
Commission will alleviate some of the burdens of going public. The
implementation of the transition period will:
Provide additional time and defer costs for a newly public
company, allowing it to focus on its assessment of internal control
over financial reporting without the additional focus of the initial
public offering; and
Allow companies, including foreign issuers, that become
subject to Section 15(d) after filing a Securities Act registration
statement but who may then be eligible to terminate their periodic
filing obligations after filing just one annual report, to avoid the
cost of preparing internal control reports.
B. Significant Issues Raised by Public Comment
In the Proposing Release, we requested comment on the number of
small entity issuers that may be affected, the existence or nature of
the potential impact and how to quantify the impact of the amendments.
One commenter provided some data on general costs of compliance related
to the Section 404 requirements.\124\ For example, this commenter noted
one survey included in the GAO report issued in April 2006 that
surveyed 128 companies and found that fees paid by smaller companies to
``external consultants'' ranged from $3,000 to $1.4 million. These
external consultants provided various forms of assistance, including
assistance with developing methodologies to comply with Section 404,
documenting and testing internal controls, and helping management
assess the effectiveness of internal controls and remediate identified
internal control weaknesses. This commenter also noted that surveys of
actual Section 404 costs indicate that annual small company compliance
costs approach $1,000,000 and then cited a survey from Financial
Executives International showing that non-accelerated filers would each
spend approximately $935,000 to comply with Section 404 requirements.
Some companies provided estimates for their own compliance costs for
the Section 404 requirements.\125\
---------------------------------------------------------------------------
\124\ See letter from SBA.
\125\ See, for example, letters from Core-Mark and LaCrosse.
---------------------------------------------------------------------------
C. Small Entities Subject to the Final Amendments
Exchange Act Rule 0-10(a) \126\ defines an issuer, other than an
investment company, to be a ``small business'' or ``small
organization'' if it had total assets of $5 million or less on the last
day of its most recent fiscal year. The amendments affect most issuers
that are small entities. We estimate that there are approximately 2,500
issuers, other than registered investment companies, that may be
considered small entities. The extension for non-accelerated filers and
the transition period for newly public companies apply to any small
entity that is subject to Exchange Act reporting requirements.
---------------------------------------------------------------------------
\126\ 17 CFR 240.0-10(a).
---------------------------------------------------------------------------
D. Reporting, Recordkeeping, and Other Compliance Requirements
Our amendments are designed to alleviate reporting and compliance
burdens. The compliance date extension for non-accelerated filers
postpones the date by which non-accelerated filers with a fiscal year
end between July 15, 2007 and December 15, 2007 must begin to comply
with the internal control over financial reporting requirements. In
addition, for non-accelerated filers, the amendments eliminate the
requirement to include an auditor's report on internal control over
financial reporting in the annual report during the initial year of
compliance with the internal control over financial reporting
requirements. During this year, however, non-accelerated filers are
required to provide a statement in their annual reports, explaining
that the annual report does not include the auditor's attestation
report.
The transition for newly public companies also alleviates reporting
and compliance burdens by relieving a newly public company from
compliance with our internal control over financial reporting
requirements in the first annual report that it files with the
Commission. This amendment provides all newly public companies with at
least one annual reporting period before they are required to conduct
the first assessment of internal control over financial reporting and
allows companies that are not required to file a second annual report
to exit the system without filing management or auditor reports
regarding internal control over financial reporting. During the
transition period, however, newly public companies are required to
provide a statement in their annual reports explaining that the annual
report does not include either management's report on internal control
or the auditor's attestation report.
E. Agency Action To Minimize Effect on Small Entities
The Regulatory Flexibility Act directs us to consider significant
alternatives that would accomplish our stated objectives, while
minimizing any significant adverse impact on small entities. In
connection with the
[[Page 76594]]
amendments, we considered the following alternatives:
Establishing different compliance or reporting
requirements or timetables that take into account the resources
available to small entities;
Clarifying, consolidating or simplifying compliance and
reporting requirements under the rules for small entities;
Using performance rather than design standards; and
Exempting small entities from all or part of the
requirements.
We have considered a variety of reforms to achieve our regulatory
objectives and, where possible, have taken steps to minimize the
effects of the rules and amendments on small entities without proposing
a complete and permanent exemption for small entities from coverage of
the Section 404 requirements. The amendments establish a different
compliance and reporting timetable for non-accelerated filers and
provide additional time for newly public companies to prepare to comply
with the internal control over financial reporting requirements.
We received some comments suggesting alternatives to the amendments
that we are adopting. For example, one commenter recommended that the
Commission explore ways to provide further flexibility to smaller
companies.\127\ This commenter recommended that the Commission, as an
alternative, exempt smaller companies from outside audit requirements.
Some commenters suggested that the Commission extend the compliance
date associated with the management report requirement for an even
longer period of time than proposed.\128\ As discussed above, the
amendments are designed to provide companies that are non-accelerated
filers with time to consider any guidance issued by us and other
entities, such as COSO, before planning and conducting their internal
control assessments, and to consider the anticipated revisions to
Auditing Standard No. 2 that the PCAOB and Commission are considering.
The amendments, our forthcoming management guidance, and the revisions
to Auditing Standard No. 2 should make implementation of the internal
control reporting requirements more effective and efficient for non-
accelerated filers and newly public companies. As we implement these
changes, we will consider the available information to determine
whether additional flexibility is warranted, consistent with investor
protection.
---------------------------------------------------------------------------
\127\ See, for example, letter from SBA.
\128\ See, for example, letters from ABA, ACB, Davis Polk, ICBA,
and MOCON.
---------------------------------------------------------------------------
VIII. Statutory Authority and Text of the Amendments
The amendments described in this release are being adopted under
the authority set forth in Sections 12, 13, 15 and 23 of the Exchange
Act.
List of Subjects
17 CFR Part 210
Accountants, Accounting, Reporting and recordkeeping requirements,
Securities.
17 CFR Part 228
Reporting and recordkeeping requirements, Securities, Small
businesses.
17 CFR Parts 229, 240 and 249
Reporting and recordkeeping requirements, Securities.
0
For the reasons set out in the preamble, the Commission amends title
17, chapter II, of the Code of Federal Regulations as follows:
PART 210--FORM AND CONTENT OF AND REQUIREMENTS FOR FINANCIAL
STATEMENTS, SECURITIES ACT OF 1933, SECURITIES EXCHANGE ACT OF
1934, PUBLIC UTILITY HOLDING COMPANY ACT OF 1935, INVESTMENT
COMPANY ACT OF 1940, INVESTMENT ADVISERS ACT OF 1940, AND ENERGY
POLICY AND CONSERVATION ACT OF 1975
0
1. The authority citation for Part 210 is revised to read as follows:
Authority: 15 U.S.C. 77f, 77g, 77h, 77j, 77s, 77z-2, 77z-3,
77aa(25), 77aa(26), 78c, 78j-1, 78l, 78m, 78n, 78o(d), 78q, 78u-5,
78w(a), 78ll, 78mm, 80a-8, 80a-20, 80a-29, 80a-30, 80a-31, 80a-
37(a), 80b-3, 80b-11, 7202 and 7262, unless otherwise noted.
0
2. Section 210.2-02T is amended by:
0
a. Adding the phrase ``(but not a large accelerated filer)'' after the
phrase ``that is an accelerated filer'' in paragraph (a);
0
b. Revising paragraph (b); and
0
c. Adding paragraphs (c) and (d).
The additions and revision read as follows:
Sec. 210.2-02T Accountants' reports and attestation reports on
management's assessment of internal control over financial reporting.
* * * * *
(b) Paragraph (a) of this temporary section will expire on December
31, 2007.
(c) The requirements of Sec. 210.2-02(f) shall not apply to a
registered public accounting firm that issues or prepares an
accountant's report that is included in an annual report filed by a
registrant that is neither a ``large accelerated filer'' nor an
``accelerated filer,'' as those terms are defined in Sec. 240.12b-2 of
this chapter, for a fiscal year ending on or after December 15, 2007
but before December 15, 2008.
(d) Paragraph (c) of this temporary section will expire on June 30,
2009.
PART 228--INTEGRATED DISCLOSURE SYSTEM FOR SMALL BUSINESS ISSUERS
0
3. The authority citation for Part 228 continues to read, in part, as
follows:
Authority: 15 U.S.C. 77e, 77f, 77g, 77h, 77j, 77k, 77s, 77z-2,
77z-3, 77aa(25), 77aa(26), 77ddd, 77eee, 77ggg, 77hhh, 77jjj, 77nnn,
77sss, 78l, 78m, 78n, 78o, 78u-5, 78w, 78ll, 78mm, 80a-8, 80a-29,
80a-30, 80a-37, 80b-11, and 7201 et seq., and 18 U.S.C. 1350.
* * * * *
0
4. Section 228.308 is amended by:
0
a. adding an ``s'' to the word ``instruction'' in the descriptive
heading at the end of the section;
0
b. redesignating the existing instruction to Item 308 as Instruction 2;
and
0
c. adding new Instruction 1.
The addition reads as follows:
Sec. 228.308 (Item 308) Internal control over financial reporting.
* * * * *
1. A small business issuer need not comply with paragraphs (a) and
(b) of this Item until it either had been required to file an annual
report pursuant to section 13(a) or 15(d) of the Exchange Act (15
U.S.C. 78m or 78o(d)) for the prior fiscal year or had filed an annual
report with the Commission for the prior fiscal year. A small business
issuer that does not comply shall include a statement in the first
annual report that it files in substantially the following form: ``This
annual report does not include a report of management's assessment
regarding internal control over financial reporting or an attestation
report of the company's registered public accounting firm due to a
transition period established by rules of the Securities and Exchange
Commission for newly public companies.''
* * * * *
0
5. Section 228.308T is added to read as follows:
Sec. 228.308T (Item 308T) Internal control over financial reporting.
Note to Item 308T: This is a special temporary section that
applies only to an annual report filed by the small business issuer
for a fiscal year ending on or after December 15, 2007 but before
December 15, 2008.
[[Page 76595]]
(a) Management's annual report on internal control over financial
reporting. Provide a report of management on the small business
issuer's internal control over financial reporting (as defined in Sec.
240.13a-15(f) or Sec. 240.15d-15(f) of this chapter). This report
shall not be deemed to be filed for purposes of Section 18 of the
Exchange Act or otherwise subject to the liabilities of that section,
unless the small business issuer specifically states that the report is
to be considered ``filed'' under the Exchange Act or incorporates it by
reference into a filing under the Securities Act or the Exchange Act.
The report must contain:
(1) A statement of management's responsibility for establishing and
maintaining adequate internal control over financial reporting for the
small business issuer;
(2) A statement identifying the framework used by management to
evaluate the effectiveness of the small business issuer's internal
control over financial reporting as required by paragraph (c) of Sec.
240.13a-15 or Sec. 240.15d-15 of this chapter; and
(3) Management's assessment of the effectiveness of the small
business issuer's internal control over financial reporting as of the
end of the small business issuer's most recent fiscal year, including a
statement as to whether or not internal control over financial
reporting is effective. This discussion must include disclosure of any
material weakness in the small business issuer's internal control over
financial reporting identified by management. Management is not
permitted to conclude that the small business issuer's internal control
over financial reporting is effective if there are one or more material
weaknesses in the small business issuer's internal control over
financial reporting.
(4) A statement in substantially the following form: ``This annual
report does not include an attestation report of the company's
registered public accounting firm regarding internal control over
financial reporting. Management's report was not subject to attestation
by the company's registered public accounting firm pursuant to
temporary rules of the Securities and Exchange Commission that permit
the company to provide only management's report in this annual
report.''
(b) Changes in internal control over financial reporting. Disclose
any change in the small business issuer's internal control over
financial reporting identified in connection with the evaluation
required by paragraph (d) of Sec. 240.13a-15 or Sec. 240.15d-15 of
this chapter that occurred during the small business issuer's last
fiscal quarter (the small business issuer's fourth fiscal quarter in
the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the small business issuer's
internal control over financial reporting.
Instructions to paragraphs (a) and (b) of Item 308T.
1. A small business issuer need not comply with paragraph (a) of
this Item until it either had been required to file an annual report
pursuant to section 13(a) or 15(d) of the Exchange Act (15 U.S.C. 78m
or 78o(d)) for the prior fiscal year or had filed an annual report with
the Commission for the prior fiscal year. A small business issuer that
does not comply shall include a statement in the first annual report
that it files in substantially the following form: ``This annual report
does not include a report of management's assessment regarding internal
control over financial reporting or an attestation report of the
company's registered public accounting firm due to a transition period
established by rules of the Securities and Exchange Commission for
newly public companies.''
2. The small business issuer must maintain evidential matter,
including documentation, to provide reasonable support for management's
assessment of the effectiveness of the small business issuer's internal
control over financial reporting.
(c) This temporary Item 308T, and accompanying note and
instructions, will expire on June 30, 2009.
PART 229--STANDARD INSTRUCTIONS FOR FILING FORMS UNDER SECURITIES
ACT OF 1933, SECURITIES EXCHANGE ACT OF 1934 AND ENERGY POLICY AND
CONSERVATION ACT OF 1975--REGULATION S-K
0
6. The general authority citation for Part 229 is revised to read as
follows:
Authority: 15 U.S.C. 77e, 77f, 77g, 77h, 77j, 77k, 77s, 77z-2,
77z-3, 77aa(25), 77aa(26), 77ddd, 77eee, 77ggg, 77hhh, 77iii, 77jjj,
77nnn, 77sss, 78c, 78i, 78j, 78l, 78m, 78n, 78o, 78u-5, 78w, 78ll,
78mm, 80a-8, 80a-9, 80a-20, 80a-29, 80a-30, 80a-31(c), 80a-37, 80a-
38(a), 80a-39, 80b-11, and 7201 et seq.; and 18 U.S.C. 1350, unless
otherwise noted.
* * * * *
0
7. Section 229.308 is amended by:
0
a. Adding an ``s'' to the word ``instruction'' in the descriptive
heading at the end of the section;
0
b. Redesignating the existing instruction to Item 308 as Instruction 2;
and
0
c. Adding new Instruction 1.
The addition reads as follows:
Sec. 229.308 (Item 308) Internal control over financial reporting.
* * * * *
1. A registrant need not comply with paragraphs (a) and (b) of this
Item until it either had been required to file an annual report
pursuant to section 13(a) or 15(d) of the Exchange Act (15 U.S.C. 78m
or 78o(d)) for the prior fiscal year or had filed an annual report with
the Commission for the prior fiscal year. A registrant that does not
comply shall include a statement in the first annual report that it
files in substantially the following form: ``This annual report does
not include a report of management's assessment regarding internal
control over financial reporting or an attestation report of the
company's registered public accounting firm due to a transition period
established by rules of the Securities and Exchange Commission for
newly public companies.''
* * * * *
0
8. Section 229.308T is added to read as follows:
Sec. 229.308T (Item 308T) Internal control over financial reporting.
Note to Item 308T: This is a special temporary section that
applies only to a registrant that is neither a ``large accelerated
filer'' nor an ``accelerated filer'' as those terms are defined in
Sec. 240.12b-2 of this chapter and only with respect to an annual
report filed by the registrant for a fiscal year ending on or after
December 15, 2007 but before December 15, 2008.
(a) Management's annual report on internal control over financial
reporting. Provide a report of management on the registrant's internal
control over financial reporting (as defined in Sec. 240.13a-15(f) or
Sec. 240.15d-15(f) of this chapter). This report shall not be deemed
to be filed for purposes of Section 18 of the Exchange Act or otherwise
subject to the liabilities of that section, unless the registrant
specifically states that the report is to be considered ``filed'' under
the Exchange Act or incorporates it by reference into a filing under
the Securities Act or the Exchange Act. The report must contain:
(1) A statement of management's responsibility for establishing and
maintaining adequate internal control over financial reporting for the
registrant;
(2) A statement identifying the framework used by management to
evaluate the effectiveness of the registrant's internal control over
financial reporting as required by paragraph (c) of Sec. 240.13a-15 or
Sec. 240.15d-15 of this chapter; and
(3) Management's assessment of the effectiveness of the
registrant's internal
[[Page 76596]]
control over financial reporting as of the end of the registrant's most
recent fiscal year, including a statement as to whether or not internal
control over financial reporting is effective. This discussion must
include disclosure of any material weakness in the registrant's
internal control over financial reporting identified by management.
Management is not permitted to conclude that the registrant's internal
control over financial reporting is effective if there are one or more
material weaknesses in the registrant's internal control over financial
reporting.
(4) A statement in substantially the following form: ``This annual
report does not include an attestation report of the company's
registered public accounting firm regarding internal control over
financial reporting. Management's report was not subject to attestation
by the company's registered public accounting firm pursuant to
temporary rules of the Securities and Exchange Commission that permit
the company to provide only management's report in this annual
report.''
(b) Changes in internal control over financial reporting. Disclose
any change in the registrant's internal control over financial
reporting identified in connection with the evaluation required by
paragraph (d) of Sec. 240.13a-15 or Sec. 240.15d-15 of this chapter
that occurred during the registrant's last fiscal quarter (the
registrant's fourth fiscal quarter in the case of an annual report)
that has materially affected, or is reasonably likely to materially
affect, the registrant's internal control over financial reporting.
Instructions to paragraphs (a) and (b) of Item 308T.
1. A registrant need not comply with paragraph (a) of this Item
until it either had been required to file an annual report pursuant to
section 13(a) or 15(d) of the Exchange Act (15 U.S.C. 78m or 78o(d))
for the prior fiscal year or previously had filed an annual report with
the Commission for the prior fiscal year. A registrant that does not
comply shall include a statement in the first annual report that it
files in substantially the following form: ``This annual report does
not include a report of management's assessment regarding internal
control over financial reporting or an attestation report of the
company's registered public accounting firm due to a transition period
established by rules of the Securities and Exchange Commission for
newly public companies.''
2. The registrant must maintain evidential matter, including
documentation, to provide reasonable support for management's
assessment of the effectiveness of the registrant's internal control
over financial reporting.
(c) This temporary Item 308T, and accompanying note and
instructions, will expire on June 30, 2009.
PART 240--GENERAL RULES AND REGULATIONS, SECURITIES EXCHANGE ACT OF
1934
0
9. The general authority citation for Part 240 is revised to read as
follows:
Authority: 15 U.S.C. 77c, 77d, 77g, 77j, 77s, 77z-2, 77z-3,
77eee, 77ggg, 77nnn, 77sss, 77ttt, 78c, 78d, 78e, 78f, 78g, 78i,
78j, 78j-1, 78k, 78k-1, 78l, 78m, 78n, 78o, 78p, 78q, 78s, 78u-5,
78w, 78x, 78ll, 78mm, 80a-20, 80a-23, 80a-29, 80a-37, 80b-3, 80b-4,
80b-11, and 7201 et seq.; and 18 U.S.C. 1350, unless otherwise
noted.
* * * * *
0
10. Section 240.13a-14 is amended by adding a sentence at the end of
paragraph (a) to read as follows:
Sec. 240.13a-14 Certification of disclosure in annual and quarterly
reports.
(a) * * * The principal executive and principal financial officers
of an issuer may omit the portion of the introductory language in
paragraph 4 as well as language in paragraph 4(b) of the certification
that refers to the certifying officers' responsibility for designing,
establishing and maintaining internal control over financial reporting
for the issuer until the issuer becomes subject to the internal control
over financial reporting requirements in Sec. 240.13a-15 or 240.15d-
15.
* * * * *
0
11. Section 240.13a-15 is amended by:
0
a. Revising paragraph (a); and
0
b. Revising the first sentences in paragraphs (c) and (d).
The revisions read as follows:
Sec. 240.13a-15 Controls and procedures.
(a) Every issuer that has a class of securities registered pursuant
to section 12 of the Act (15 U.S.C. 781), other than an Asset-Backed
Issuer (as defined in Sec. 229.1101 of this chapter), a small business
investment company registered on Form N-5 (Sec. Sec. 239.24 and 274.5
of this chapter), or a unit investment trust as defined in section 4(2)
of the Investment Company Act of 1940 (15 U.S.C. 80a-4(2)), must
maintain disclosure controls and procedures (as defined in paragraph
(e) of this section) and, if the issuer either had been required to
file an annual report pursuant to section 13(a) or 15(d) of the Act (15
U.S.C. 78m(a) or 78o(d)) for the prior fiscal year or had filed an
annual report with the Commission for the prior fiscal year, internal
control over financial reporting (as defined in paragraph (f) of this
section).
* * * * *
(c) The management of each such issuer that either had been
required to file an annual report pursuant to section 13(a) or 15(d) of
the Act (15 U.S.C. 78m(a) or 78o(d)) for the prior fiscal year or
previously had filed an annual report with the Commission for the prior
fiscal year, other than an investment company registered under section
8 of the Investment Company Act of 1940 (15 U.S.C. 80a-8), must
evaluate, with the participation of the issuer's principal executive
and principal financial officers, or persons performing similar
functions, the effectiveness, as of the end of each fiscal year, of the
issuer's internal control over financial reporting. * * *
(d) The management of each such issuer that either had been
required to file an annual report pursuant to section 13(a) or 15(d) of
the Act (15 U.S.C. 78m(a) or 78o(d) for the prior fiscal year or had
filed an annual report with the Commission for the prior fiscal year,
other than an investment company registered under section 8 of the
Investment Company Act of 1940 (15 U.S.C. 80a-8), must evaluate, with
the participation of the issuer's principal executive and principal
financial officers, or persons performing similar functions, any change
in the issuer's internal control over financial reporting, that
occurred during each of the issuer's fiscal quarters, or fiscal year in
the case of a foreign private issuer, that has materially affected, or
is reasonably likely to materially affect, the issuer's internal
control over financial reporting. * * *
* * * * *
0
12. Section 240.15d-14 is amended by adding a sentence at the end of
paragraph (a) to read as follows:
Sec. 240.15d-14 Certification of disclosure in annual and quarterly
reports.
(a) * * * The principal executive and principal financial officers
of an issuer may omit the portion of the introductory language in
paragraph 4 as well as language in paragraph 4(b) of the certification
that refers to the certifying officers' responsibility for designing,
establishing and maintaining internal control over financial reporting
for the issuer until the issuer becomes subject to the internal control
over financial reporting requirements in Sec. 240.13a-15 or 240.15d-15
of this chapter.
* * * * *
0
13. Section 240.15d-15 is amended by:
0
a. Revising paragraph (a); and
[[Page 76597]]
0
b. Revising the first sentences of paragraphs (c) and (d).
The revisions read as follows:
Sec. 240.15d-15 Controls and procedures.
(a) Every issuer that files reports under section 15(d) of the Act
(15 U.S.C. 78o(d)), other than an Asset Backed Issuer (as defined in
Sec. 229.1101 of this chapter), a small business investment company
registered on Form N-5 (Sec. Sec. 239.24 and 274.5 of this chapter),
or a unit investment trust as defined in section 4(2) of the Investment
Company Act of 1940 (15 U.S.C. 80a-4(2)), must maintain disclosure
controls and procedures (as defined in paragraph (e) of this section)
and, if the issuer either had been required to file an annual report
pursuant to section 13(a) or 15(d) of the Act (15 U.S.C. 78m(a) or
78o(d)) for the prior fiscal year or had filed an annual report with
the Commission for the prior fiscal year, internal control over
financial reporting (as defined in paragraph (f) of this section).
* * * * *
(c) The management of each such issuer that either had been
required to file an annual report pursuant to section 13(a) or 15(d) of
the Act (15 U.S.C. 78m(a) or 78o(d)) for the prior fiscal year or had
filed an annual report with the Commission for the prior fiscal year,
other than an investment company registered under section 8 of the
Investment Company Act of 1940 (15 U.S.C. 80a-8), must evaluate, with
the participation of the issuer's principal executive and principal
financial officers, or persons performing similar functions, the
effectiveness, as of the end of each fiscal year, of the issuer's
internal control over financial reporting. * * *
(d) The management of each such issuer that previously either had
been required to file an annual report pursuant to section 13(a) or
15(d) of the Act (15 U.S.C. 78m(a) or 78o(d)) for the prior fiscal year
or previously had filed an annual report with the Commission for the
prior fiscal year, other than an investment company registered under
section 8 of the Investment Company Act of 1940 (15 U.S.C. 80a-8), must
evaluate, with the participation of the issuer's principal executive
and principal financial officers, or persons performing similar
functions, any change in the issuer's internal control over financial
reporting, that occurred during each of the issuer's fiscal quarters,
or fiscal year in the case of a foreign private issuer, that has
materially affected, or is reasonably likely to materially affect, the
issuer's internal control over financial reporting. * * *
* * * * *
PART 249--FORMS, SECURITIES EXCHANGE ACT OF 1934
0
14. The authority citation for Part 249 continues to read, in part, as
follows:
Authority: 15 U.S.C. 78a et seq. and 7201 et seq.; and 18 U.S.C.
1350, unless otherwise noted.
0
15. Form 20-F (referenced in Sec. 249.220f), Part II, is amended by:
0
a. Adding an ``s'' to the word ``Instruction'' in the descriptive
heading at the end of Item 15;
0
b. Redesignating the existing Instruction to Item 15 as Instruction 2;
0
c. Adding new Instruction 1 to Item 15; and
0
d. revising Item 15T.
The additions and revision read as follows.
Note: The text of Form 20-F does not, and this amendment will
not, appear in the Code of Federal Regulations.
Form 20-F
* * * * *
Part II
* * * * *
Item 15. Controls and Procedures
* * * * *
Instructions to Item 15
1. An issuer need not comply with paragraphs (b) and (c) of this
Item until it either had been required to file an annual report
pursuant to Section 13(a) or 15(d) of the Exchange Act (15 U.S.C.
78m(a) or 78o(d)) for the prior fiscal year or had filed an annual
report with the Commission for the prior fiscal year. An issuer that
does not comply shall include a statement in the first annual report
that it files in substantially the following form: ``This annual report
does not include a report of management's assessment regarding internal
control over financial reporting or an attestation report of the
company's registered public accounting firm due to a transition period
established by rules of the Securities and Exchange Commission for
newly public companies.''
* * * * *
Item 15T. Controls and Procedures
Note to Item 15T: This is a special temporary section that
applies instead of Item 15 only to: (1) an issuer that is an
``accelerated filer,'' but not a ``large accelerated filer,'' as
those terms are defined in Sec. 240.12b-2 of this chapter and only
with respect to an annual report that the issuer is required to file
for a fiscal year ending on or after July 15, 2006 but before July
15, 2007; or
(2) an issuer that is neither a ``large accelerated filer'' nor
an ``accelerated filer'' as those terms are defined in Sec.
240.12b-2 of this chapter and only with respect to an annual report
that the issuer is required to file for a fiscal year ending on or
after December 15, 2007 but before December 15, 2008.
(a) Disclosure Controls and Procedures. Where the Form is being
used as an annual report filed under section 13(a) or 15(d) of the
Exchange Act, disclose the conclusions of the issuer's principal
executive and principal financial officers, or persons performing
similar functions, regarding the effectiveness of the issuer's
disclosure controls and procedures (as defined in 17 CFR 240.13a-15(e)
or 240.15d-15(e)) as of the end of the period covered by the report,
based on the evaluation of these controls and procedures required by
paragraph (b) of 17 CFR 240.13a-15 or 240.15d-15.
(b) Management's annual report on internal control over financial
reporting. Where the Form is being used as an annual report filed under
section 13(a) or 15(d) of the Exchange Act, provide a report of
management on the issuer's internal control over financial reporting
(as defined in Sec. 240.13a-15(f) or 240.15d-15(f) of this chapter).
The report shall not be deemed to be filed for purposes of section 18
of the Exchange Act or otherwise subject to the liabilities of that
section, unless the issuer specifically states that the report is to be
considered ``filed'' under the Exchange Act or incorporates it by
reference into a filing under the Securities Act or the Exchange Act.
The report must contain:
(1) A statement of management's responsibility for establishing and
maintaining adequate internal control over financial reporting for the
issuer;
(2) A statement identifying the framework used by management to
evaluate the effectiveness of the issuer's internal control over
financial reporting as required by paragraph (c) of Sec. 240.13a-15 or
240.15d-15 of this chapter;
(3) Management's assessment of the effectiveness of the issuer's
internal control over financial reporting as of the end of the issuer's
most recent fiscal year, including a statement as to whether or not
internal control over financial reporting is effective. This discussion
must include disclosure of any material weakness in the issuer's
internal control over financial reporting identified by management.
Management
[[Page 76598]]
is not permitted to conclude that the issuer's internal control over
financial reporting is effective if there are one or more material
weaknesses in the issuer's internal control over financial reporting;
and
(4) A statement in substantially the following form: ``This annual
report does not include an attestation report of the company's
registered public accounting firm regarding internal control over
financial reporting. Management's report was not subject to attestation
by the company's registered public accounting firm pursuant to
temporary rules of the Securities and Exchange Commission that permit
the company to provide only management's report in this annual
report.''
(c) Changes in internal control over financial reporting. Disclose
any change in the issuer's internal control over financial reporting
identified in connection with the evaluation required by paragraph (d)
of Sec. 240.13a-15 or 240.15d-15 of this chapter that occurred during
the period covered by the annual report that has materially affected,
or is reasonably likely to materially affect, the issuer's internal
control over financial reporting.
(d) This temporary Item 15T, and accompanying note and
instructions, will expire on June 30, 2009.
Instructions to Item 15T
1. An issuer need only comply with paragraph (b) of this Item until
it either had been required to file an annual report pursuant to
section 13(a) or 15(d) of the Exchange Act (15 U.S.C. 78m(a) or 78o(d))
for the prior fiscal year or had filed an annual report with the
Commission for the prior fiscal year. An issuer that does not comply
shall include a statement in the first annual report that it files in
substantially the following form: ``This annual report does not include
a report of management's assessment regarding internal control over
financial reporting or an attestation report of the company's
registered public accounting firm due to a transition period
established by rules of the Securities and Exchange Commission for
newly public companies.''
2. The registrant must maintain evidential matter, including
documentation, to provide reasonable support for management's
assessment of the effectiveness of the issuer's internal control over
financial reporting.
* * * * *
0
16. Form 40-F (referenced in Sec. 249.240f) is amended by revising the
``Instructions to paragraphs (b), (c), (d) and (e) of General
Instruction B.(6).'' as follows:
0
a. Redesignating existing Instruction 1 as Instruction 2;
0
b. Adding new Instruction 1; and
0
c. Redesignating existing Instruction 2T as Instruction 3T;
0
d. Revising newly redesignated Instruction 3T.
The addition and revision read as follows:
Note: The text of Form 40-F does not, and this amendment will
not, appear in the Code of Federal Regulations.
Form 40-F
* * * * *
General Instructions
* * * * *
B. Information To Be Filed on This Form
* * * * *
(6) * * *
Instructions to Paragraphs (b), (c), (d) and (e) of General Instruction
B.(6)
1. An issuer need not comply with paragraphs (c) and (d) of this
Instruction until it either had been required to file an annual report
pursuant to the requirements of section 13(a) or 15(d) of the Exchange
Act (15 U.S.C. 78m(a) or 78o(d)) for the prior fiscal year or had filed
an annual report with the Commission for the prior fiscal year. An
issuer that does not comply shall include a statement in the first
annual report that it files in substantially the following form: ``This
annual report does not include a report of management's assessment
regarding internal control over financial reporting or an attestation
report of the company's registered public accounting firm due to a
transition period established by rules of the Securities and Exchange
Commission for newly public companies.''
* * * * *
3T. Paragraphs (c)(4) and (d) of this General Instruction B.6 do
not apply to: (1) an issuer that is an ``accelerated filer,'' but not a
``large accelerated filer,'' as those terms are defined in Sec.
240.12b-2 of this chapter and only with respect to an annual report
that the issuer is required to file for a fiscal year ending on or
after July 15, 2006 but before July 15, 2007; or (2) an issuer that is
neither a ``large accelerated filer'' nor an ``accelerated filer,'' as
those terms are defined in Sec. 240.12b-2 of this chapter, with
respect to an annual report that the issuer is required to file for a
fiscal year ending on or after December 15, 2007 but before December
15, 2008. Management's report on internal control over financial
reporting that is included in an annual report filed by the type of
issuer and within the period set forth in (1) or (2) above in this
Instruction 3T shall not be deemed to be filed for purposes of Section
18 of the Exchange Act or otherwise subject to the liabilities of that
section, unless the issuer specifically states that the report is to be
considered ``filed'' under the Exchange Act or incorporates it by
reference into a filing under the Securities Act or the Exchange Act.
An issuer to which this instruction applies should provide a statement
in substantially the following form: ``This annual report does not
include an attestation report of the company's registered public
accounting firm regarding internal control over financial reporting.
Management's report was not subject to attestation by the company's
registered public accounting firm pursuant to temporary rules of the
Securities and Exchange Commission that permit the company to provide
only management's report in this annual report.''
This temporary Instruction 3T will expire on June 30, 2009.
* * * * *
0
17. Form 10-Q (referenced in Sec. 249.308a) is amended by adding
temporary Item 4T to Part I following Item 4.
The addition reads as follows:
Note: The text of Form 10-Q does not, and this amendment will
not, appear in the Code of Federal Regulations.
Form 10-Q
* * * * *
Part I--Financial Information
* * * * *
Item 4T. Controls and Procedures.
(a) If the registrant is neither a large accelerated filer nor an
accelerated filer as those terms are defined in Sec. 240.12b-2 of this
chapter, furnish the information required by Items 307 and 308T of
Regulation S-K (17 CFR 229.307 and 229.308T) with respect to a
quarterly report that the registrant is required to file for a fiscal
year ending on or after December 15, 2007 but before December 15, 2008.
(b) This temporary Item 4T will expire on June 30, 2009.
* * * * *
0
18. Form 10-QSB (referenced in Sec. 249.308b) is amended by adding
temporary Item 3A(T) to Part I after Item 3A.
The addition reads as follows:
Note: The text of Form 10-QSB does not, and this amendment will
not, appear in the Code of Federal Regulations.
[[Page 76599]]
Form 10-QSB
* * * * *
Part I--Financial Information
Item 3A(T). Controls and Procedures
(a) Furnish the information required by Items 307 and 308T of
Regulation S-B (17 CFR 228.307 and 228.308T) with respect to a
quarterly report that the small business issuer is required to file for
a fiscal year ending on or after December 15, 2007 but before December
15, 2008.
(b) This temporary Item 3A(T) will expire on June 30, 2009.
* * * * *
0
19. Form 10-K (referenced in Sec. 249.310) is amended by adding
temporary Item 9A(T) to Part II following Item 9A.
The addition reads as follows:
Note: The text of Form 10-K does not, and this amendment will
not, appear in the Code of Federal Regulations.
Form 10-K
* * * * *
Part II
* * * * *
Item 9A(T). Controls and Procedures
(a) If the registrant is neither a large accelerated filer nor an
accelerated filer as those terms are defined in Sec. 240.12b-2 of this
chapter, furnish the information required by Items 307 and 308T of
Regulation S-K (17 CFR 229.307 and 229.308T) with respect to an annual
report that the registrant is required to file for a fiscal year ending
on or after December 15, 2007 but before December 15, 2008.
(b) This temporary Item 9A(T) will expire on June 30, 2009.
* * * * *
0
20. Form 10-KSB (referenced in Sec. 249.310b) is amended by adding
temporary Item 8A(T) to Part II after Item 8A.
The addition reads as follows:
Note: The text of Form 10-KSB does not, and this amendment will
not, appear in the Code of Federal Regulations.
Form 10-KSB
* * * * *
Part II
* * * * *
Item 8A(T). Controls and Procedures
(a) Furnish the information required by Items 307 and 308T of
Regulation S-B (17 CFR 228.307 and 228.308T) with respect to an annual
report that the small business issuer is required to file for a fiscal
year ending on or after December 15, 2007 but before December 15, 2008.
(b) This temporary Item 8A(T) will expire on June 30, 2009.
* * * * *
Dated: December 15, 2006.
By the Commission.
Nancy M. Morris,
Secretary.
[FR Doc. E6-21781 Filed 12-20-06; 8:45 am]
BILLING CODE 8011-01-P