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Insights & Alerts
July 02, 2010

Small Company 404(b) Exemption Included in Financial Reform Bill
By Beth Jantzen, Senior Manager - Assurance Services

As it appears now, the temporary exemption that smaller reporting companies have received three times in the past may become permanent. The congressional conference committee reconciling the House and Senate versions of the federal financial reform bill agreed to include a permanent exemption on compliance with the Sarbanes-Oxley Act of 2002, Section 404(b).

The exemption is for smaller reporting companies having less than $75 million in market capitalization. Section 404(b) requires public companies to provide an attestation report from its external auditors on management’s assessment of internal controls over financial reporting. On October 13, 2009 the Securities and Exchange Commission (“SEC”) issued a final rule which extended the date for non-accelerated filers to comply with the requirements of Section 404(b). This rule required non-accelerated filers to file the auditor’s attestation report on management’s assessment of internal controls over financial reporting when it files its annual report for a fiscal year ending on or after June 15, 2010. The exemption in the currently reconciled House-Senate bill, if enacted would negate the SEC’s rule and would provide a permanent exemption from the requirements of Section 404(b) for smaller reporting companies.

The financial reform bill provides for a transformation of the regulation of U.S. financial markets and services, including the exemption of Section 404(b) for non-accelerated filers. The conference committee also agreed to have the SEC research how to reduce the cost of complying with the requirements of Section 404(b) for companies with a market capitalization between $75 million and $250 million.

On June 30, 2010 the House approved the financial reform bill and it is expected to be considered in the Senate most likely immediately following the Fourth of July recess. The bill must also be signed by the President before this exemption would be effective. It should be noted that even if the exemption is granted, smaller reporting companies would still be required to comply with the requirements of Section 404(a), which is management’s assessment and attestation on its assessment of internal controls over financial reporting.

A special thanks to article contributor Michael Naparstek

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