Document ID: SEC-2006-1046-0001
Agency: sec
Document Type: Proposed Rule
Title: Internal Control Over Financial Reporting in Exchange Act Periodic Reports of Non-Accelerated Filers and Newly Public Companies
Posted Date: 2006-08-15T04:00Z

[Federal Register: August 15, 2006 (Volume 71, Number 157)]
[Proposed Rules]               
[Page 47060-47071]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr15au06-17]                         

[[Page 47060]]

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SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 210, 228, 229, 240 and 249

[Release Nos. 33-8731; 34-54295; 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: Proposed extension of compliance dates.

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SUMMARY: We are proposing to further extend for smaller public 
companies the dates that were published in the Federal Register on 
September 29, 2005, in Release No. 33-8618 [70 FR 56825] for their 
compliance with the internal control requirements mandated by Section 
404 of the Sarbanes-Oxley Act of 2002. Pursuant to the proposal, a non-
accelerated filer would not be required to provide management's report 
on internal control over financial reporting until it files an annual 
report for a fiscal year ending on or after December 15, 2007. If we 
have not issued additional guidance for management on how to complete 
its assessment of internal control over financial reporting in time to 
be of assistance in connection with annual reports filed for fiscal 
years ending on or after December 15, 2007, this deadline could be 
further postponed. Under the proposal, the auditor's attestation report 
on internal control over financial reporting would not be required 
until a non-accelerated filer files an annual report for a fiscal year 
ending on or after December 15, 2008. If revisions to Auditing Standard 
No. 2 have not been finalized in time to be of assistance in connection 
with annual reports filed for fiscal years ending on or after December 
15, 2008, this deadline could also be further postponed.
    We also are proposing to provide a transition period for newly 
public companies before they become subject to compliance with the 
internal control over financial reporting requirements. Under the 
proposal, a company would not become subject to these requirements 
until it previously has been required to file one annual report with 
the Commission.

DATES: Comments should be received on or before September 14, 2006.

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/proposed.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/proposed.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, Special Counsel, 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 proposing to amend certain internal 
control over financial reporting requirements in Rules 13a-14,\1\ 15d-
14,\2\ 13a-15\3\ and 15d-15\4\ under the Securities Exchange Act of 
1934,\5\ Items 308(a) and (b) 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) of Regulation S-X.\10\ We also propose to add the following 
temporary provisions: Item 308T of Regulations S-K and S-B, Item 8A(T) 
of Form 10-KSB, Item 9A(T) of Form 10-K, and Item 15T of Form 20-F.
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    \1\ 17 CFR 240.13a-14.
    \2\ 17 CFR 240.15d-14.
    \3\ 17 CFR 240.13a-15.
    \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 249.20f.
    \9\ 17 CFR 249.40f.
    \10\ 17 CFR 210.2-02(f).
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I. Background

    On June 5, 2003,\11\ the Commission adopted several amendments to 
its rules and forms implementing Section 404 of the Sarbanes-Oxley Act 
of 2002.\12\ Among other things, these amendments require companies, 
other than registered investment companies, to include in their annual 
reports 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.
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    \11\ See Release No. 33-8238 (June 5, 2003) [68 FR 36636].
    \12\ 15 U.S.C. 7262.
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    Under the compliance dates that we originally established, 
companies meeting the definition of an ``accelerated filer'' in 
Exchange Act Rule 12b-2 \13\ 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 \14\ 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 amendments in light of both the substantial 
time and resources needed by companies to properly implement the 
rules.\15\ In addition, we believed that a corresponding benefit to 
investors would result from an extended transition period that allowed 
companies to carefully implement the new requirements, 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

[[Page 47061]]

attestation standards for registered public accounting firms.\16\
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    \13\ 17 CFR 240.12b-2.
    \14\ 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 Rule 12b-2 
definition of either an ``accelerated filer'' or a ``large 
accelerated filer.''
    \15\ See Release No. 33-8238.
    \16\ Under the Sarbanes-Oxley Act, the PCAOB was granted 
authority to set auditing and attestation standards for registered 
public accounting firms.
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    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.\17\ 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.\18\
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    \17\ See Release No. 33-8392 (February 24, 2004) [69 FR 9722].
    \18\ 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, the effectiveness of companies' internal control 
over financial reporting.
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    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 (``COSO'') to 
provide more guidance on how the COSO framework can be applied to 
smaller public companies. \19\ We also acknowledged the significant 
efforts being expended by many foreign private issuers to comply with 
International Financial Reporting Standards.
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    \19\ Release No. 33-8545 (March 2, 2005) [70 FR 11528].
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    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. Based on the 
September 2005 extension, domestic and foreign non-accelerated filers 
currently are 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.
    Since we granted that extension last year, a number of events 
related to internal control 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.\20\ 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, and includes examples of how 
smaller companies have applied the principles.
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    \20\ See SEC Press Release No. 2006-114 (July 11, 2006) at 
http://www.sec.gov/news/press/2006/2006-114.htm.

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    In addition, on April 23, 2006, the SEC Advisory Committee on 
Smaller Public Companies submitted its final report to the 
Commission.\21\ 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 recommends that certain smaller public companies be exempted 
from the management report requirement and from external auditor 
involvement in the Section 404 process under certain circumstances 
unless and until a framework for assessing internal control over 
financial reporting is developed that recognizes the characteristics 
and needs of these companies.
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    \21\ See Final Report of the Advisory Committee on Smaller 
Public Companies to the United States Securities and Exchange 
Commission (April 23, 2006), available at http://www.sec.gov/info/smallbus/acspc.shtml
.

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    In April 2006, the U.S. Government Accountability Office issued a 
report entitled Sarbanes-Oxley Act, Consideration of Key Principles 
Needed in Addressing Implementation for Smaller Public Companies.\22\ 
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.\23\
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    \22\ United States Government 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).
    \23\ See GAO Report at 52-53 and 58.
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    Finally, on May 10, 2006, the Commission and 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. 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.\24\
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    \24\ 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
.

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II. Proposed 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 intend to take to improve the 
implementation of the Section 404 internal control over financial 
reporting requirements of the Sarbanes-Oxley Act of 2002.\25\ These 
actions include:
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    \25\ 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.''
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     Issuance of a Concept Release 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;
     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;

[[Page 47062]]

     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.
    On July 11, 2006, we issued a Concept Release to seek public 
comment on issues that we should address in our guidance for management 
on how to assess internal control over financial reporting.\26\ In 
accordance with the last point in the above list, we are issuing this 
release to propose an additional extension of the dates for complying 
with our internal control over financial reporting requirements for 
domestic and foreign non-accelerated filers. As a companion to this 
release, we are separately issuing a release that extends for a one-
year period the date by which foreign private issuers that are 
accelerated filers (but not large accelerated filers), and that file 
their annual reports on Form 20-F or 40-F, must begin to comply with 
the auditor attestation report portion of the internal control over 
financial reporting requirements.\27 \
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    \26\ Release No. 34-54122 (July 11, 2006).
    \27\ Release No. 34-54294 (Aug. 9, 2006).
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    As we proceed in our efforts to make the internal control reporting 
process more efficient and effective, we believe that a further 
postponement of the compliance dates for non-accelerated filers is 
appropriate. The postponement is intended to provide these 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. Specifically, we propose to postpone for 
five 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 companies' internal control over 
financial reporting. Approximately 44% of the 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.\28\
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    \28\ The percentage of domestic companies, excluding 1940 Act 
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.
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    Pursuant to this proposed extension, a non-accelerated filer would 
begin to provide the management report required by Item 308(a) of 
Regulations S-K and S-B in the first annual report it files for a 
fiscal year ending on or after December 15, 2007.\29\ 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.\30\ Therefore, the 
majority of non-accelerated filers, including those with a calendar 
year-end, would begin to include management's report in their annual 
reports for 2007.
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    \29\ Similarly, a foreign private issuer that is a non-
accelerated filer would have to begin to provide the management 
report required by Item 15(b) of Form 20-F or General Instruction B 
of Form 40-F in the annual report filed for its first fiscal year 
ending on or after December 15, 2007. See proposed Item 308T of 
Regulations S-K and S-B, Item 15T of Form 20-F and proposed 
Instruction 3T to paragraphs (b), (c), (d) and (e) of General 
Instruction B.6 in Form 40-F.
    \30\ 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.
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    We also propose to extend the compliance date for all non-
accelerated filers regarding the auditor attestation report requirement 
in Item 308(b) of Regulations S-K and S-B for a longer period of 
time.\31\ Under the proposed extension, a non-accelerated filer would 
not have to file the auditor's attestation report on management's 
assessment of internal control over financial reporting until it files 
an annual report for a fiscal year ending on or after December 15, 
2008. Under current requirements, a non-accelerated filer would have to 
begin including the auditor's attestation report in the annual report 
filed for its first fiscal year ending on or after July 15, 2007, so we 
would be extending this deadline for 17 months. This proposed extension 
would result in all non-accelerated filers having to complete only 
management's portion of the internal control requirements in their 
first year of compliance with the requirements. The main purposes of 
the proposed extension of the auditor attestation report requirement 
are:
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    \31\ We also propose to extend the compliance dates regarding 
the auditor attestation report requirement appearing in Item 15(c) 
of Form 20-F and General Instruction B of Form 40-F with respect to 
foreign private issuers that are non-accelerated filers.
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     To afford non-accelerated filers and their auditors the 
benefit of anticipated changes that the PCAOB makes to Auditing 
Standard No. 2, as approved by the Commission, as well as any 
implementation guidance that the PCAOB issues for auditors of smaller 
public companies;
     To save non-accelerated filers 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;
     To enable management of non-accelerated filers 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 requirement that the auditor 
attest to, and report on, management's assessment of internal control 
over financial reporting (and to permit investors to see and evaluate 
the results of management's first compliance efforts); and
     To provide the Commission with the flexibility to consider 
any comments it receives on the Concept Release and its subsequent 
proposed guidance for management in response to the questions related 
to the appropriate role of the auditor in evaluating management's 
internal control assessment process.
    We expect that the proposed extension of the management assessment 
requirement 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. If such guidance is not finalized in time to be of 
assistance to management of non-accelerated filers in connection with 
their annual reports filed for fiscal years ending on or after December 
15, 2007, we will consider further postponing non-accelerated filers' 
deadline for the management assessment requirement. In addition, we 
expect that the proposed extension of the auditor attestation report 
requirement will provide sufficient time for revisions to Auditing 
Standard No. 2 to be proposed and finalized (including clarification of 
the auditor's role in evaluating a company's process for assessing the 
effectiveness of its internal control over financial reporting). If 
Auditing Standard No. 2 has not been revised in time to be of 
assistance in connection with the auditor attestation reports on 
management assessments for years ending on or after December 15, 2008,

[[Page 47063]]

we will consider further postponing the auditor attestation report 
compliance dates.
    Many public commenters 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 reporting provisions,\32\ 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 would help non-
accelerated filers smooth the significant cost spike that has been 
experienced by many accelerated filers in their first year of 
compliance with the Section 404 requirements.
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    \32\ 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.
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    Although the proposed extensions would permit non-accelerated 
filers to omit the auditor's attestation report from their annual 
reports in their initial year of compliance with the Section 404 
requirements, we encourage frequent and frank dialogue among 
management, auditors and audit committees to improve internal controls 
and the financial reports upon which investors rely. In this regard, we 
repeat our assurance that management should not fear that a discussion 
of internal controls with, or a request for assistance or clarification 
from, the 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.\33\
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    \33\ See Commission Statement on Implementation of Internal 
Control Requirements, Press Release No. 2005-74 (May 16, 2005) at 
http://www. sec. gov/news/press/2005-74.htm.

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    We are concerned 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 the proposed 
separation of the reports than under the current requirements (e.g., 
management concludes 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 comes to a contrary 
conclusion in its report filed in the subsequent year, and as a result, 
the company's previous assessment is called into question). In an 
effort to address these concerns, we propose to deem the management 
report included in the non-accelerated filer's annual report during the 
first year of compliance to be ``furnished'' rather than ``filed.'' 
\34\ If we adopt this proposal, we intend to afford similar relief to 
the foreign private issuers that are accelerated filers (but not large 
accelerated filers), and that file their annual reports on Form 20-F or 
40-F that similarly will file only management's report during their 
first year of compliance with the Section 404 requirements.\35\
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    \34\ As proposed, management's report would 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.
    \35\ See Release No. 34-54294 (Aug. 9, 2006).
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    We also propose that, 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 non-accelerated filer could 
continue 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) \36\ that refers to the 
certifying officers' responsibility for designing, establishing and 
maintaining internal control over financial reporting for the company. 
This language, however, would have to be provided in the first annual 
report required to contain management's internal control report and in 
all periodic reports filed thereafter. The extended compliance dates 
also would apply to the provisions in Exchange Act Rules 13a-15(a) and 
(d) and 15d-15(a) and (d) \37\ relating to the maintenance of internal 
control over financial reporting.
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    \36\ 17 CFR 13a-14(a) and 15d-14(a).
    \37\ 17 CFR 13a-15(a) and (d) and 15d-15(a) and (d).
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    Finally, we propose to clarify 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 that are proposed in this release 
would 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 \38\ and the 
rules thereunder.
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    \38\ 15 U.S.C. 78m(b)(2).
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Request for Comment

    We request and encourage any interested person to submit comments 
regarding the proposed extension of the compliance dates described 
above. In particular, we solicit comment on the following questions:
     Is it appropriate to provide a further extension of the 
compliance dates of the internal control over financial reporting 
requirements for non-accelerated filers? If so, are the proposed 
extensions for compliance with management and auditor attestation 
report requirements appropriate in length or should they be shorter or 
longer than proposed? Should the Commission consider a further 
extension if the revisions to Auditing Standard No. 2 and the release 
of guidance for management are not completed in sufficient time to 
permit issuers and auditors to rely on them?
     Is it appropriate to implement sequentially the 
requirements of Section 404(a) and (b) of the Sarbanes-Oxley Act, as 
proposed, so that a non-accelerated filer would only have to include 
management's internal control assessment in the annual report that it 
files for its first fiscal year ending on or after December 15, 2007 
and would not have to begin providing an accompanying auditor's 
attestation report until it files an annual report for a fiscal year 
ending on or after December 15, 2008?
     Would the phasing-in of the management assessment 
requirement and auditor attestation report requirement make the 
ultimate application of Auditing Standard No. 2 more or less efficient 
and effective?
     Is it appropriate to deem the management report on 
internal control over financial reporting to be ``furnished'' rather 
than ``filed'' during the first year of a non-accelerated filer's 
compliance with the Section 404

[[Page 47064]]

requirements? If so, is it also appropriate to take the same action 
during the first year of compliance with the Section 404 requirements 
by a foreign private issuer that is an accelerated filer, but not a 
large accelerated filer, and that files its annual reports on Form 20-F 
or 40-F?
     Would management's assessment of internal control over 
financial reporting provide meaningful disclosure to investors, 
independent of the auditor attestation report? Is there an increased 
risk that management will fail to identify a material weakness in the 
company's internal control over financial reporting, and if so, do the 
potential benefits of the proposal outweigh this risk?
     Are the proposed extensions in the best interests of 
investors?
     Should we require a non-accelerated filer to disclose in 
its annual report that management's assessment has not been attested to 
by the auditor during the year that the audit attestation report is not 
required?
     Simultaneously with the publication of this release, we 
are issuing 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 reports on Form 20-F or 
40-F, must begin to comply with the auditor attestation report portion 
of the Section 404 requirements. Is there any additional relief or 
guidance that we should consider specifically with respect to foreign 
private issuers?

III. Proposed Transition Period for Compliance with the Internal 
Control Over Financial Reporting Requirements by Newly Public Companies

    In the future, after all types of Exchange Act reporting companies 
(i.e. large accelerated filers, accelerated filers and non-accelerated 
filers) 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 will be required to comply fully with our internal 
control reporting requirements as of the end of the fiscal year in 
which it becomes a public company. If the initial public offering or 
Exchange Act registration occurs in close proximity to the company's 
fiscal year end, the need to prepare for compliance with the internal 
control over financial reporting requirements therefore will arise very 
rapidly after the company becomes public. For a foreign private issuer, 
this requirement also might quickly follow its having had to prepare, 
for the first time, a reconciliation to U.S. GAAP.\39\
---------------------------------------------------------------------------

    \39\  See Item 17 or 18 of Form 20-F.
---------------------------------------------------------------------------

    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 also 
complete the management report and auditor attestation report on the 
effectiveness of the company's internal control over financial 
reporting within the same timeframe might impose undue burdens on this 
process. In addition, we are concerned that this requirement could 
affect a company's decision to undertake an initial public offering or 
to list a class of its securities on a U.S. exchange or a company's 
timing decisions with regard to such an offering or listing. During our 
roundtable on May 10, 2006, we received comments indicating that some 
private companies are more likely to consider alternative capital 
markets in view of the regulatory hurdles that newly public companies 
face in the U.S.\40\ We believe that the current due date for filing 
the first Section 404 reports may exacerbate that disincentive.
---------------------------------------------------------------------------

    \40\ Noreen Culhane, Peter Lyons, Robert Pozen and David Warren 
were among those making this observation at the roundtable. The 
roundtable webcast is archived at http://www.connectlive.com /

events/secicr2006. See also the letter from Stephan Stephanov 
available in File No. 4-511 at http://www.sec.gov/news/ press/4-

511.shtml.
---------------------------------------------------------------------------

    A transition period also would alleviate reporting burdens imposed 
on some foreign companies that become subject to the Exchange Act 
reporting requirements solely by virtue of their registration of 
securities under the Securities Act in connection with an exchange 
offer for the securities of, or business combination with, another 
foreign company that does not have securities registered with the 
Commission.\41\ Under Section 15(d) of the Exchange Act and related 
rules, the foreign private issuer that files a Securities Act 
registration statement in connection with the acquisition must file at 
least one annual report after the effective date of the registration 
statement before becoming eligible to terminate its periodic filing 
obligations. Under existing rules, the foreign private issuer would 
have to include the management and auditor reports on internal control 
over financial reporting in the only annual report that the foreign 
private issuer ever files with the Commission.\42\ The proposed 
transition period similarly would alleviate reporting burdens imposed 
on domestic companies that become subject to Section 15(d) after filing 
a Securities Act registration statement but are eligible to terminate 
their periodic filing obligations after filing just one annual report.
---------------------------------------------------------------------------

    \41\ Although Rule 802 [17 CFR 230.802] under the Securities Act 
of 1933 [15 U.S.C. 77a et seq.] provides an exemption from 
Securities Act registration for certain securities offerings by 
foreign private issuers in connection with an exchange offer or 
business combination, a transaction that does not meet all of the 
conditions for reliance on the exemption must be registered under 
the Securities Act, typically on Form F-4 [17 CFR 239.34].
    \42\ As a result, the current rules may serve as a disincentive 
to extend offers of securities in connection with a business 
acquisition transaction on a registered basis.
---------------------------------------------------------------------------

    In light of these concerns, we think that it may be appropriate to 
provide a transition period for newly public companies. Under the 
proposed amendments, a newly public company would not need to comply 
with our internal control over financial reporting requirements in the 
first annual report that it is required to file with the 
Commission.\43\ Rather, the company would begin to comply with these 
requirements in the second annual report that it files with the 
Commission.
---------------------------------------------------------------------------

    \43\ Proposed Instruction 1 to Item 308 of Regulation S-B and S-
K, Item 15 of Form 20-F, and General Instruction B(6) of Form 40-F, 
and Rules 13a-15(c) and (d) and 15d-15(c) and (d), as we proposed to 
revise them.
---------------------------------------------------------------------------

    We believe that providing additional time for newly public 
companies to conduct their first assessment of internal control should 
benefit investors by making implementation of the internal control 
reporting requirements more effective and efficient and reducing some 
of the costs that these companies face in their first year as a public 
company. We also believe that the proposed transition period would 
remove a possibility that our rules may unnecessarily interfere with 
companies' business decisions regarding the timing and use of resources 
relating to their initial U.S. listings or public offerings. Like the 
proposed extension for non-accelerated filers, the proposed transition 
period for newly public companies would not in any way alter 
requirements regarding internal control that already are in effect with 
respect to all Exchange Act reporting companies, including without 
limitation, Section 13(b)(2) of the Exchange Act \44\ and the rules 
thereunder.
---------------------------------------------------------------------------

    \44\ 15 U.S.C. 78m(b)(2).

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[[Page 47065]]

Request for Comment

    We request and encourage any interested person to submit comments 
regarding the proposed transition period for compliance with the 
internal control over financial reporting requirements.
     Do the timing requirements for initial compliance with the 
internal control reporting requirements make it overly burdensome or 
costly to undertake an initial public offering or public listing in the 
U.S.? Do they otherwise discourage companies from undertaking initial 
public offerings or seeking public listings in the U.S.? Is the 
proposed relief appropriate and in the interest of investors? Is some 
other type of relief appropriate?
     Should newly public companies, or a subgroup of newly 
public companies, be given additional time after going public before 
they are required to include management and auditor attestation reports 
on internal control over financial reporting in their annual reports 
filed with the Commission? If so, how much time? Should we propose a 
transition period only for companies that become public in the third or 
fourth quarter of their fiscal year?
     As an alternative to the proposed transition period, 
should we require a newly public company to include management's 
assessment, but not the auditor's attestation report on management's 
assessment in the first annual report that the company is required to 
file?
     Would the proposed transition period allow newly public 
companies to complete their internal control reporting processes more 
efficiently and effectively? Would it improve the quality of internal 
control reporting by newly public companies?

IV. Paperwork Reduction Act

    In connection with our original proposal and adoption of the rule 
and from amendments implementing the Section 404 requirements, 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'').\45\ OMB approved these requirements.
---------------------------------------------------------------------------

    \45\ 44 U.S.C. 3501 et seq. and 5 CFR 1320.11.
---------------------------------------------------------------------------

V. Cost-Benefit Analysis

A. Benefits

    The proposed 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. The proposed 
extension would postpone for five 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 
companies' 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. 
In addition, under the proposed extension, a non-accelerated filer 
would not have 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. This would result in all non-accelerated filers having to 
complete only management's assessment in their first year of compliance 
with the Section 404 requirements. We believe that the following 
benefits would 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 would have more time to 
conform their initial attestation reports on management's assessment of 
internal control over financial reporting to the changes that the PCAOB 
anticipates making to Auditing Standard No. 2 (as approved by the 
Commission) and other actions that the PCAOB intends to take as 
described above;
     non-accelerated filers would save 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 could begin the 
process of assessing the effectiveness of internal control over 
financial reporting before their auditors attest to such assessment 
(and investors could begin to see and evaluate the results of these 
initial efforts); and
     non-accelerated filers with a fiscal year ending between 
July 15, 2007 and December 15, 2007 would have additional time to 
consider the management guidance to be issued by the Commission and 
recently issued COSO guidance on understanding and applying the COSO 
framework, before planning and conducting their first internal control 
assessment.
    Many public commenters 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. We believe that the 
potential cost savings that would result from the fact that the non-
accelerated filers would not have to include an auditor's attestation 
report on management's assessment of the effectiveness of their 
internal control over financial reporting during the filers' first year 
of compliance with the Section 404 requirements would be substantial. 
Estimates of the average fee for an auditor's attestation report on 
management's assessment of internal control over financial reporting 
from various surveys suggest that, on average, a non-accelerated filer 
could save between $475,000 and $300,000 in auditor costs for one 
year.\46\
---------------------------------------------------------------------------

    \46\ Estimates of costs savings are from highest: (1) Foley and 
Lardner Survey (http://www.foley.com/ files/tbl--s31Publications/ 

FileUpload137/2777/2005%20Cost%20 of%20Being%20Public %20Final.pdf) 
which estimates that the increase in audit fees from 2003 to 2004 
for the S&P Small cap was $475,000; (2) FEI Survey (http://www2.fei.org//
 404--survey--3--21--05.cfm) which estimates 2005 

auditor attestation fees for non-accelerated filers of $393,333 (a 
decline of -12.8% from 2004); and (3) CRA Survey (http://www.s-oxinternalcontrolinfo.com/
 pdfs/CRA--III.pdf) total audit costs are 

estimated for companies with market capitalization below $125 
million to be between $312,800 in year 1 and $206,700 in year two 
(based on the percent of total audit costs as a percent of total 
Section 404 fees from Table 1 in the study and multiplied by the 
total Section 404 fees estimated for this category of companies.) 
The Commission has not independently verified the reliability or 
accuracy of these survey data.
---------------------------------------------------------------------------

    Additionally, we have learned from public comments, including our 
roundtables on implementation of the internal control reporting 
provisions,\47\ 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 auditor costs 
until the second year would help non-accelerated filers smooth the 
significant cost spike that many accelerated filers have experienced in 
the first year of compliance.
---------------------------------------------------------------------------

    \47\ 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
.

---------------------------------------------------------------------------

    We think that benefits of the proposed transition for newly public 
companies include the following:
     Companies that are going public would be able to 
concentrate on their

[[Page 47066]]

initial securities offering without the additional burden of becoming 
subject to the Section 404 requirements soon after the offering;
     Newly public companies would be 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 would 
have to prepare to satisfy the Section 404 requirements; and
     The proposed transition period would eliminate any 
incentive that the current rules may create 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.

 B. Costs

    Under the proposals, 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 proposals 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.
    Another potential cost in the form of increased litigation risk may 
be created by the proposed 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 tried to mitigate that risk by proposing that the management 
report be furnished to, rather than filed with, the Commission in the 
first year of compliance.
    A potential cost of the proposed transition 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 current 
requirements.
    We request comment on the costs and benefits of the proposed 
extension and amendments to the internal control over financial 
reporting requirements, including any costs and benefits that we have 
not identified but that we should consider.

VI. Consideration of Impact on the Economy, Burden on Competition and 
Promotion of Efficiency, Competition and Capital Formation

    For purposes of the Small Business Regulatory Enforcement Fairness 
Act of 1996, or SBREFA,'' \48\ we solicit data to determine whether the 
proposals constitute a ``major'' rule. Under SBREFA, a rule is 
considered ``major'' where, if adopted, it results or is likely to 
result in:
---------------------------------------------------------------------------

    \48\ 5 U.S.C. 801 et seq.
---------------------------------------------------------------------------

     An annual effect on the economy of $100 million or more 
(either in the form of an increase or a decrease);
     A major increase in costs or prices for consumers or 
individual industries; or
     Significant adverse effects on competition, investment or 
innovation.
    We request comment on the potential impact of the proposals on the 
economy on an annual basis. Commenters are requested to provide 
empirical data and other factual support for their views if possible. 
Section 23(a)(2) of the Exchange Act \49\ also requires us, when 
adopting rules under the Exchange Act, to consider the impact that any 
new rule would have on competition. In addition, 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.
---------------------------------------------------------------------------

    \49\ 15 U.S.C. 78w(a).
---------------------------------------------------------------------------

    We expect the proposed extension of compliance dates, if adopted, 
to 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 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. 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 proposals will have any measurable effect on competition.
    The proposed transition period for newly public companies should 
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.
    In addition, the current requirements might provide an incentive 
for private companies to time their public offerings so as to maximize 
the length of time that they will have after going public before having 
to comply with the Section 404 requirements. The proposal to allow 
newly public companies to defer compliance with these requirements 
until they file their second annual report with the Commission would 
eliminate this incentive. This would enhance capital formation by 
allowing companies to time their offerings to raise the most 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.
    We solicit public comment that will assist us in assessing the 
impact that the proposals could have on competition, efficiency and 
capital formation.

VII. Initial Regulatory Flexibility Analysis

    This Initial Regulatory Flexibility Analysis (``IRFA'') has been 
prepared in accordance with the Regulatory Flexibility Act.\50\ This 
IRFA relates to proposed amendments to extend the compliance dates 
applicable to non-accelerated filers for certain internal control over 
financial reporting requirements in Rules 13a-14, 15d-14, 13a-15 and 
15d-15 under the Securities Exchange Act of 1934, Items 308(a) and (b) 
of Regulations S-K and S-B, Rule 2-02(f) of Regulation S-X, Item 15 of 
Form 20-F and General Instruction B of Form 40-F. These amendments 
require Exchange Act reporting companies, other than registered 
investment companies, to include in their annual reports a report of 
management on the company's internal control over

[[Page 47067]]

financial reporting. These amendments also require the registered 
public accounting firm that issues an audit report on the company's 
financial statements to attest to, and report on, management's 
assessment.
---------------------------------------------------------------------------

    \50\ 5 U.S.C. 603.
---------------------------------------------------------------------------

    Non-accelerated filers currently are scheduled to begin to comply 
with the management's assessment and auditor attestation report 
requirements for their first fiscal year ending on or after July 15, 
2007. We propose to extend this compliance date with respect to the 
management's assessment portion of these requirements for five months, 
so that a non-accelerated filer would begin including a report by 
management on the company's internal control over financial reporting 
in the annual report that it files for its first fiscal year ending on 
or after December 15, 2007. Furthermore, we propose to extend the 
compliance date with respect to the auditor attestation report portion 
of these requirements so that a non-accelerated filer would need to 
begin including an auditor's attestation report on management's 
assessment of the company's internal control over financial reporting 
in the annual report that it files for its first fiscal year ending on 
or after December 15, 2008.
    This IRFA also relates to a proposed transition period for 
compliance with the internal control over financial reporting 
requirements by newly public companies. Under the proposed amendments, 
a newly public company would not need to comply with our internal 
control over financial reporting requirements until after it has been 
subject to the reporting requirements of Section 13(a) or 15(d) of the 
Exchange Act for at least 12 months, and has filed at least one annual 
report with the Commission.

A. Reasons for the Proposed Action

    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. The proposed extension is designed to afford non-accelerated 
filers additional time to consider this planned guidance and the new 
guidance for smaller companies regarding application of the COSO 
Framework. The proposed transition period for newly public companies 
would eliminate the need for a public company with the Section 404 
requirements in the first annual report that it files with the 
Commission.

B. Objectives

    The proposed amendments aim to further the goals of the Sarbanes-
Oxley Act to enhance the quality of public company disclosure 
concerning the company's internal control over financial reporting and 
increase investor confidence in the financial markets.

C. Legal Basis

    We are issuing the proposals under the authority set forth in 
Sections 12, 13, 15 and 23 of the Exchange Act.

D. Small Entities Subject to the Proposed Revisions

    The proposed changes would affect some issuers that are small 
entities. Exchange Act Rule 0-10(a) \51\ 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. We estimate that there are 
approximately 2,500 issuers, other than registered investment 
companies, that may be considered small entities. The proposed 
extensions would apply to any small entity that is subject to Exchange 
Act reporting requirements.
---------------------------------------------------------------------------

    \51\ 17 CFR 240.0-10(a).
---------------------------------------------------------------------------

E. Reporting, Recordkeeping, and Other Compliance Requirements

    The proposed compliance date extensions would alleviate reporting 
and compliance burdens by postponing 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, and by eliminating the requirement for all non-
accelerated filers that they must include an auditor's report on 
internal control over financial reporting in their annual report during 
their initial year of compliance with the internal control over 
financial reporting requirements.
    The proposed transition for newly public companies also would 
alleviate reporting and compliance burdens. We are concerned that 
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 that it is preparing its first annual report might 
impose undue burdens on this process. In addition, we are concerned 
that the requirement that a newly public company must begin to comply 
with the Section 404 requirements in the first annual report that it 
files could affect a company's decision to undertake an initial public 
offering or to list a class of its securities on a U.S. exchange or a 
company's timing decisions with regard to such an offering or listing.

F. Duplicative, Overlapping, or Conflicting Federal Rules

    The internal control over financial reporting requirements, as they 
apply to any small entities, do not duplicate, overlap, or conflict 
with other federal rules.

G. Significant Alternatives

    The Regulatory Flexibility Act directs us to consider alternatives 
that would accomplish our stated objectives, while minimizing any 
significant adverse impact on small entities. In connection with the 
proposed extension, 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 are not proposing a complete and permanent exemption for small 
entities from coverage of the Section 404 requirements. However, the 
proposed amendments would establish a different compliance and 
reporting timetable for small entities and provide additional time for 
newly public companies to prepare to comply with the internal control 
over financial reporting requirements. We believe that the proposed 
amendments would promote the primary goal of enhancing the quality of 
reporting and increasing investor confidence in the fairness and 
integrity of the securities markets. The proposed extensions are 
designed to provide companies that are non-accelerated filers with 
sufficient 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 revisions to Auditing Standard 
No. 2 that we expect to be issued by the PCAOB and approved by the 
Commission. The proposed 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.

[[Page 47068]]

H. Solicitation of Comments

    We encourage the submission of comments with respect to any aspect 
of this Initial Regulatory Flexibility Analysis. In particular, we 
request comments regarding:
     the number of small entity issuers that may be affected by 
the proposed extension;
     the existence or nature of the potential impact of the 
proposed extension on small entity issuers discussed in the analysis; 
and
     how to quantify the impact of the proposed extension.
    Commenters are asked to describe the nature of any impact and 
provide empirical data supporting the extent of the impact. Such 
comments will be considered in the preparation of the Final Regulatory 
Flexibility Analysis, if the proposed revisions are adopted, and will 
be placed in the same public file as comments on the proposed 
amendments themselves.

VIII. Statutory Authority and Text of the Amendments

    The amendments described in this release are being proposed 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.

Text of Amendments

    For the reasons set out in the preamble, the Commission proposes to 
amend 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

    1. The authority citation for Part 210 continues to read, in part, 
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, 79e(b), 79k(a), 79n, 79t(a), 80a-8, 80a-20, 80a-
29, 80a-30, 80a-31, 80a-37(a), 80b-3, 80b-11, 7202 and 7262 et seq., 
unless otherwise noted.

    2. Section 210.2-02T is amended by:
    a. Redesignating existing paragraph (b) as paragraph (c).
    b. Revising newly redesignated paragraph (c).
    b. Adding new paragraph (b).
    The addition 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) The requirements of Section 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.
    (c) This temporary section will expire on June 30, 2009.

PART 228--INTEGRATED DISCLOSURE SYSTEM FOR SMALL BUSINESS ISSUERS

    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, 7201 et seq., and 18 U.S.C. 1350, unless 
otherwise noted.
* * * * *
    4. Section 228.308 is amended by:
    a. Adding an ``s'' to the word ``instruction'' in the heading at 
the end of the Section.
    b. Redesignating the existing instruction to Item 308 as 
Instruction 2.
    c. Adding new Instruction 1.
    The additions read as follows:

Sec.  228.308 (Item 308)  Internal control over financial reporting.

* * * * *
    1. A small business issuer need not comply with paragraphs (a), (b) 
and (c) of this Item until it previously has been required to file an 
annual report pursuant to section 13(a) or 15(d) of the Act (15 U.S.C. 
78m or 78o(d)).
* * * * *
    4a. 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.

    (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 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 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.
    (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 registrant's fourth fiscal quarter in the case of 
an annual report) that has materially affected, or is reasonably

[[Page 47069]]

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 paragraphs (a) and 
(b) of this Item until it previously has been required to file an 
annual report pursuant to section 13(a) or 15(d) of the Act (15 U.S.C. 
78m or 78o(d)).
    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

    5. The authority citation for Part 229 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, 77iii, 77jjj, 
77nnn, 77sss, 78c, 78i, 78j, 78l, 78m, 78n, 78o, 78u-5, 78w, 78ll, 
78mm, 79e, 79j, 79n, 79t, 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.

    6. Section 229.308 is amended by:
    a. Adding an ``s'' to the word ``instruction'' in the descriptive 
heading at the end of the section.
    b. Redesignating the existing instruction to Item 308 as 
Instruction 2.
    c. Adding new Instruction 1.
    The additions read as follows:

Sec.  229.308 (Item 308)  Internal control over financial reporting.

* * * * *
    1. A registrant need not comply with paragraphs (a), (b) and (c) of 
this Item until it previously has been required to file an annual 
report pursuant to section 13(a) or 15(d) of the Act (15 U.S.C. 78m or 
78o(d)).
* * * * *
    6a. 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 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.
    (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 paragraphs (a) and (b) of this 
Item until it previously has been required to file an annual report 
pursuant to section 13(a) or 15(d) of the Act (15 U.S.C. 78m or 
78o(d)).
    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

    7. The authority citation for Part 240 continues to read, in part, 
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, 79q, 79t, 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.
* * * * *
    8. Section 240.13a-14 is amended by adding a sentence at the end of 
paragraph (a) to read as follows:
    (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.
* * * * *
    9. Section 240.13a-15 is amended by revising the first sentences of 
paragraphs (c) and (d) to read as follows:

Sec.  240.13a-15  Controls and procedures.

* * * * *
    (c) The management of each such issuer that previously has 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)), other than an investment company 
registered under section 8 of the Investment Company Act of 1940, 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 has been 
required to file an annual report pursuant to section 13(a) or 15(d) of 
the Act (15

[[Page 47070]]

U.S.C. 78m(a) or 78o(d), other than an investment company registered 
under section 8 of the Investment Company Act of 1940, 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. * * *
* * * * *
    10. 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.
* * * * *
    11. Section 240.15d-15 is amended by revising the first sentences 
of paragraphs (c) and (d) to read as follows:

Sec.  240.15d-15  Controls and procedures.

* * * * *
    (c) The management of each such issuer that previously has 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)), other than an investment company 
registered under section 8 of the Investment Company Act of 1940, 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 has 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)), other than an investment company 
registered under section 8 of the Investment Company Act of 1940, 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

    12. 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.
* * * * *
    13. 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.
* * * * *
    14. 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.
* * * * *
    15. Form 20-F (referenced in Sec.  249.220f), Part II, is amended 
by:
    a. adding an ``s'' to the word ``Instruction'' in the descriptive 
heading at the end of Item 15.
    b. redesignating the existing Instruction to Item 15 as Instruction 
2.
    c. adding new Instruction 1 to Item 15.
    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.
* * * * *
    1. An issuer need not comply with paragraphs (b), (c) and (d) of 
this Item until it previously has 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)).
* * * * *
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'' or 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

[[Page 47071]]

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; and
    (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 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.
    (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.
    Instructions to Item 15T
    1. An issuer need only comply with paragraphs (b) and (c) of this 
Item until it previously has 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)).
    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.
    (d) This temporary Item 15T, and accompanying note and 
instructions, will expire on June 30, 2009.
* * * * *
    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:
    a. redesignating existing Instruction 1 as Instruction 2.
    b. redesignating existing Instruction 2T as Instruction 3T.
    c. adding Instruction 1.
    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) * * *
* * * * *
    1. An issuer need not comply with paragraphs (c), (d) and (e) of 
this Item until it previously has been required to file an annual 
report pursuant to the requirements of section 13(a) or 15(d) of the 
Act (15 U.S.C. 78m(a) or 78o(d)).
    2. The issuer 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.
    3T. Paragraph (d) of this General Instruction B.6 does 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'' or an ``accelerated filer,'' as those terms are 
defined in Rule 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.
    This temporary Instruction 3T will expire on June 30, 2009.
* * * * *

    By the Commission.

    Dated: August 9, 2006.
Nancy M. Morris,
Secretary.
[FR Doc. E6-13277 Filed 8-14-06; 8:45 am]

BILLING CODE 8010-01-P