Alerts and Updates
SEC Proposes Further Extension of Section 404 Compliance Dates
August 29, 2006
The Securities and Exchange Commission (SEC) recently proposed further extensions of the deadlines for non-accelerated filers, certain foreign private issuers and first-time registrants to file management reports and auditor attestations of their internal control over financial reporting, as required by Section 404 of the Sarbanes-Oxley Act (SOX).
Under Section 404 of SOX and the SEC's rules, a public company is required to include in its annual report a report of management's assessment of the company's internal control over financial reporting, and an attestation of management's assessment by the company's independent auditors. While domestic companies that are accelerated filers and large accelerated filers are already subject to the requirements for such management reports and auditor attestations, the SEC had previously extended the deadlines for compliance for domestic non-accelerated filers and for all foreign private issuers. The SEC is now proposing to further extend those deadlines for many such companies. The extensions stem from a number of recent reports and recommendations designed to address the potential adverse financial and manpower effects of internal control reporting on smaller public companies, including reports of an advisory task force of the Committee of Sponsoring Organizations (COSO), an SEC Advisory Committee on Smaller Public Companies, and the U.S. Government Accountability Office. In response, in May 2006, the SEC announced a series of actions it intends to take to improve the implementation of Section 404 of SOX. In the releases proposing the present deadline extensions, the SEC further stated that if it does not make sufficient progress in its proposed actions, the deadlines for compliance with Section 404 of SOX could be further postponed.
The revised Section 404 deadlines would be as follows:
Non-accelerated filers (domestic or foreign private issuers). The SEC proposes that non-accelerated filers (generally, companies with public floats of less than $75 million) include the management report in annual reports for fiscal years ending on or after December 15, 2007 (instead of July 15, 2007, the current requirement). An auditor attestation would not be required to accompany the first management report, but would be required to accompany the management report in annual reports for fiscal years ending on or after December 15, 2008.
Foreign private issuers that are accelerated filers. The SEC is retaining the current deadline for management reports for foreign private issuers that are accelerated filers (generally, companies with public floats of between $75 million and $700 million), but is extending the deadline for including an auditor attestation by one year. Accordingly, such companies must include a management report in annual reports for fiscal years ending on or after July 15, 2006. Auditor attestations would not be required to accompany the first management report, but would be required to accompany management reports in annual reports for fiscal years ending on or after July 15, 2007.
Foreign private issuers that are large accelerated filers. The SEC is retaining the current deadline for management reports and auditor attestations for foreign private issuers that are large accelerated filers (generally, companies with public floats of greater than $700 million). Accordingly, such companies must include a management report and an auditor attestation in annual reports for fiscal years ending on or after July 15, 2006.
Newly public companies (domestic or foreign private issuers). The SEC proposes a transition period before newly public companies will first be required to include management reports and auditor attestations in their annual reports. In lieu of being required to include a management report and an auditor attestation in its first annual report after becoming public, a newly public company would instead be required to include the management report and auditor attestation in its second annual report after becoming public, or, if the compliance date described above is even later, then in the next annual report following that later compliance date.
Where the SEC proposes to require a management report without requiring an accompanying auditor attestation, the SEC also proposes that such management report would be considered "furnished" and not "filed" for purposes of liability under the Securities Exchange Act of 1934. However, annual reports that include a management report without an accompanying auditor attestation would be required to also include language in the officers' certifications referring to the certifying officer's responsibility for designing, establishing and maintaining internal control over financial reporting for the company.
The SEC is requesting comments on the proposed changes to the deadlines for non-accelerated filers and newly public companies by September 14, 2006. It seems likely that the SEC will act on the proposals promptly after the comment period ends. The extension of the deadline for foreign private issuers that are accelerated filers to include an auditor attestation in their annual reports is effective immediately. Even if these revised deadlines are adopted as proposed, we are aware that many companies are complying in advance of those deadlines.
For Further Information
If you have any questions regarding the new rules and proposals, including how they may affect your company, please contact one of the members of the Securities Law Practice Group or the lawyer in the firm with whom you are regularly in contact.
Disclaimer: This Alert has been prepared and published for informational purposes only and is not offered, nor should be construed, as legal advice. For more information, please see the firm's full disclaimer.
