Document ID: SEC-2010-1608-0001
Agency: sec
Document Type: Notice
Title: Studies Required by Section 989G(b) of Dodd-Frank Act: Compliance with Section 404(b) of Sarbanes-Oxley Act
Posted Date: 2010-10-20T04:00Z

[Federal Register: October 20, 2010 (Volume 75, Number 202)]
[Notices]               
[Page 64773-64775]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr20oc10-111]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-63108; File No. S7-29-10]

 
Study Required by Section 989G(b) of the Dodd-Frank Act Regarding 
Compliance With Section 404(b) of the Sarbanes-Oxley Act

AGENCY: Securities and Exchange Commission.

ACTION: Request for comment.

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SUMMARY: The Securities and Exchange Commission is requesting public 
comment related to a study of how the Commission could reduce the 
burden of complying with Section 404(b) of the Sarbanes-Oxley Act of 
2002 for companies whose public float is between $75 million and $250 
million, while maintaining investor protections for such companies, and 
whether any methods of reducing the compliance burden or a complete 
exemption for such companies from the auditor attestation requirement 
in Section 404(b) would encourage companies to list on exchanges in the 
United States in their initial public offerings. This study is required 
by the Dodd-Frank Wall Street Reform and Consumer Protection Act.

DATES: Comments should be received on or before December 6, 2010.

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/other.shtml); or
     Send an e-mail to rule-comments@sec.gov. Please include 
File Number S7-29-10 on the subject line.

Paper Comments

     Send paper comments in triplicate to Elizabeth M. Murphy, 
Secretary, U.S. Securities and Exchange Commission, 100 F Street, NE., 
Washington, DC 20549-1090.

All submissions should refer to File Number S7-29-10. 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). Comments are also available for 
Web site viewing and printing in the Commission's Public Reference 
Room, 100 F Street, NE., Washington, DC 20549, on official business 
days between the hours of 10 a.m. and 3 p.m. All comments received will 
be posted without change; we do not edit personal identifying

[[Page 64774]]

information from submissions. You should submit only information that 
you wish to make available publicly.

FOR FURTHER INFORMATION CONTACT: John Offenbacher, Senior Associate 
Chief Accountant, or Jason Plourde, Professional Accounting Fellow, 
Office of the Chief Accountant, at (202) 551-5300, Securities and 
Exchange Commission, 100 F Street, NE., Washington, DC 20549.

Discussion

    Under Section 989G(b) of the Dodd-Frank Wall Street Reform and 
Consumer Protection Act (the Dodd-Frank Act),\1\ the Commission is 
required to conduct a study to determine how the Commission could 
reduce the burden of complying with Section 404(b) of the Sarbanes-
Oxley Act of 2002 (Section 404(b)) \2\ for companies whose market 
capitalization is between $75 million and $250 million, while 
maintaining investor protections for such companies. Section 989G(b) of 
the Dodd-Frank Act also provides that the study must consider whether 
any methods of reducing the compliance burden or a complete exemption 
for such companies from Section 404(b) compliance would encourage 
companies to list on exchanges in the United States in their initial 
public offerings.
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    \1\ Public Law 111-203 (July 21, 2010).
    \2\ 15 U.S.C. 7201 et seq.
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    The Dodd-Frank Act does not define ``market capitalization'' and it 
is not defined in Commission rules. For purposes of the study, we 
believe that public float is an appropriate measure of market 
capitalization. Public float, which is the aggregate worldwide market 
value of an issuer's voting and non-voting common equity held by its 
non-affiliates, is the measure used in Commission rules for determining 
``accelerated filer'' and ``large accelerated filer'' status.\3\ The 
Commission has used public float historically in its actions to phase 
issuers into Section 404 compliance,\4\ and Section 404(c) of the 
Sarbanes-Oxley Act of 2002, as amended by Section 989G(a) of the Dodd-
Frank Act, provides that Section 404(b) shall not apply with respect to 
issuers that are neither an ``accelerated filer'' nor a ``large 
accelerated filer'' pursuant to Commission rules, which are generally 
issuers with a public float below $75 million. We therefore believe it 
would be consistent to use public float between $75 million and $250 
million to describe the group of issuers that are the subject of the 
study. For the remainder of the release, we generally will refer to 
issuers with a public float between $75 million and $250 million as the 
``subject issuers.''
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    \3\ See Exchange Act Rule 12b-2 [17 CFR 240.12b-2].
    \4\ See, e.g., Release No. 33-9072 (Oct. 13, 2009) [74 FR 
53628]; and Release 33-8934 (June 26, 2008) [73 FR 38094].
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    In addition, Section 404(b) only addresses the auditor attestation 
requirement with respect to a company's internal control over financial 
reporting. The required study will not evaluate the compliance burden 
of Section 404(a) of the Sarbanes-Oxley Act of 2002, which addresses 
management's responsibility for reporting on the effectiveness of 
internal control over financial reporting.
    The Commission is required to submit a report of this study to 
Congress no later than nine months after the date of enactment of the 
Dodd-Frank Act. All interested parties are invited to submit their 
views, in writing, on any of the following topics in which they are 
interested:
    (1) Quantitative and qualitative information about the trends of 
internal and external costs of having an external auditor attest to 
management's assessment under Section 404(b) for issuers with a public 
float between $75 million and $250 million from the first year of 
required compliance to the present;
    (2) Current cost of auditor attestation under Section 404(b) in 
relation to overall cost of compliance with all of Section 404 (i.e. 
including management's assessment required by Section 404(a)) and 
changes to this relative cost over time;
    (3) Characteristics of internal controls, management's evaluation 
process and corporate governance of subject issuers that distinguish 
them from other issuers;
    (4) Unique audit planning and performance characteristics, if any, 
associated with subject issuers;
    (5) Incremental effort for preparers and auditors to comply with 
the auditor attestation requirement of Section 404(b) for an integrated 
audit beyond the efforts that would already be incurred to comply with 
the requirements for a financial statement only audit, including the 
requirement to evaluate internal controls in connection with such an 
audit, for subject issuers;
    (6) Whether and how initiatives of the Commission, such as the 
Commission Guidance Regarding Management's Report on Internal Control 
Over Financial Reporting Under Section 13(a) or 15(d) of the Securities 
Exchange Act of 1934,\5\ have reduced the burden of complying with 
Section 404(b) for subject issuers;
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    \5\ See Release No. 33-8810 (June 20, 2007) [72 FR 35324].
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    (7) Whether and how any aspects of Public Company Accounting 
Oversight Board (PCAOB) Auditing Standard No. 5,\6\ such as its focus 
on risk and materiality, scalability, tailoring of testing to risk, and 
extent of permitted use of the work of others, have reduced costs of 
compliance with Section 404(b) versus PCAOB Auditing Standard No. 2 for 
subject issuers;
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    \6\ See Order Approving Proposed Auditing Standard No. 5, An 
Audit of Internal Control Over Financial Reporting that is 
Integrated with an Audit of Financial Statements, a Related 
Independence Rule, and Conforming Amendments, Release No. 34-56152 
(July 27, 2007) [72 FR 42141].
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    (8) Whether and how other initiatives of the PCAOB, such as its 
staff guidance for auditors of smaller public companies,\7\ have 
reduced the burden of complying with Section 404(b) for subject 
issuers;
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    \7\ See ``Staff Views--An Audit of Internal Control that is 
Integrated with an Audit of the Financial Statements: Guidance for 
Auditors of Smaller Public Companies'' (Jan. 23, 2009), available at 
http://www.pcaobus.org.
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    (9) Whether and how initiatives of the Committee of Sponsoring 
Organizations of the Treadway Commission (COSO), such as the June 2006 
guidance for smaller public companies on internal control over 
financial reporting,\8\ and the January 2009 Guidance on Monitoring 
Internal Control Systems,\9\ have reduced the burden of complying with 
Section 404(b) for subject issuers;
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    \8\ For further information, see http://www.coso.org/ICFR-
GuidanceforSPCs.htm.
    \9\ For further information, see http://www.coso.org/
GuidanceonMonitoring.htm.
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    (10) Whether and how initiatives of any other organization have 
reduced the burden of complying with Section 404(b) for subject 
issuers;
    (11) The possibility that guidance or rules issued by the 
Commission, PCAOB or others could further reduce the burden of 
complying with the auditor attestation requirement of Section 404(b), 
while maintaining investor protection, for subject issuers, and any 
specific recommendations concerning any such guidance or rules;
    (12) The impact on investor protection, investor confidence, and 
the cost of capital arising from the establishment and ongoing 
compliance with Section 404(b) by subject issuers, including in the 
context of initial public offerings;
    (13) The degree to which investor protection, investor confidence, 
and the cost of capital would increase or decrease, if any, as a 
function of each specific recommendation by which the Commission, the 
PCAOB, or others might reduce the burden of complying

[[Page 64775]]

with Section 404(b) for subject issuers, while maintaining investor 
protection;
    (14) The impact of costs of complying with the auditor attestation 
requirement of Section 404(b) on company decisions to list on exchanges 
in the United States versus foreign exchanges in initial public 
offerings for subject issuers after the offering;
    (15) The impact of costs of complying with Section 404(b) on 
company and investor decisions to engage in initial public offerings 
versus other financing alternatives for issuers whose public float is 
expected to be between $75 million and $250 million after the offering;
    (16) Potential effect on the number of companies listing initial 
public offerings in the United States of a complete exemption from the 
internal control audit requirements for subject issuers, and the 
potential effect on listings for each specific recommendation for 
reducing the compliance burden of such requirements on subject issuers;
    (17) Any qualitative differences between subject issuers that might 
list securities on a U.S. exchange in connection with their initial 
public offerings if the existing internal control audit requirement of 
Section 404(b) remains in effect and subject issuers that might list 
securities on a U.S. exchange in connection with their initial public 
offerings if subject issuers are completely exempt from the internal 
control audit requirements of Section 404(b), and any such qualitative 
differences that may arise from each specific recommendation for 
reducing the compliance burden of such requirements on subject issuers;
    (18) The potential effect of a complete exemption from Section 
404(b) for subject issuers on matters such as: Raising capital; 
engaging in mergers, acquisitions and similar corporate transactions; 
and attracting and retaining qualified independent directors;
    (19) Whether and how the use of the auditor's attestation report on 
internal control over financial reporting for subject issuers differs 
from the use of the auditor's attestation report on internal control 
over financial reporting for issuers whose public float is greater than 
$250 million and the reason(s) for those differences;
    (20) Quantitative and qualitative information about whether and how 
compliance with Section 404(b) has benefited investors and other users 
of financial statements of subject issuers;
    (21) Whether and to what extent auditor attestation reports on 
internal control over financial reporting enhances confidence in 
management's assessment of the effectiveness of its internal control 
over financial reporting, improves the reliability of financial 
reporting and improves the prevention and detection of fraud and other 
misconduct for subject issuers;
    (22) Any additional information for the Commission to consider to 
describe the study population and how the Commission could reduce the 
burden of complying with Section 404(b) on that population; and
    (23) Any other information commenters would like the Commission to 
consider in regards to the study.

    Dated: October 14, 2010.

    By the Commission.
Elizabeth M. Murphy,
Secretary.
[FR Doc. 2010-26349 Filed 10-19-10; 8:45 am]
BILLING CODE 8011-01-P