[Federal Register: September 29, 2005 (Volume 70, Number 188)]
[Rules and Regulations]
[Page 56825-56828]
[DOCID:fr29se05-7]

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SECURITIES AND EXCHANGE COMMISSION

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

[Release Nos. 33-8618; 34-52492; File Nos. S7-40-02; S7-06-03]
RIN 3235-AI66 and 3235-AI79

Management's Report on Internal Control Over Financial Reporting
and Certification of Disclosure in Exchange Act Periodic Reports of
Companies That Are Not Accelerated Filers

AGENCY: Securities and Exchange Commission.

ACTION: Final rule; extension of compliance dates; request for comment.

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SUMMARY: We are extending the compliance dates that were published on
March 8, 2005, in Release No. 33-8545 [70 FR 11528], for companies that
are not accelerated filers, for certain amendments to Rules 13a-15 and
15d-15 under the Securities Exchange Act of 1934, Items 308(a) and (b)
of Regulations S-K and S-B, Item 15 of Form 20-F and General
Instruction B of Form 40-F. These amendments require companies, other
than registered investment companies, to include in their annual
reports a report of management and accompanying auditor's report on the
company's internal control over financial reporting. The amendments
also require management to evaluate, as of the end of each fiscal
period, 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. We are also extending the compliance
dates applicable to companies that are not accelerated filers for
amendments to certain representations that must be included in the
certifications required by Exchange Act Rules 13a-14 and 15d-14
regarding a company's internal control over financial reporting.
Finally, we are soliciting comment about the implementation of these
rules.

DATES: Effective Date: The effective date published on June 18, 2003,
in Release No. 33-8238 [68 FR 36636] remains August 14, 2003. The
effective date of this document is September 29, 2005.
    Comment Date: Comments should be received on or before October 31,
2005.
    Compliance Dates: The compliance dates are extended as follows: A
company that is not an accelerated filer must begin to comply with
these requirements for its first fiscal year ending on or after July
15, 2007. Companies must begin to comply with the provisions of
Exchange Act Rule 13a-(d) or 15d-(d), whichever applies, requiring an
evaluation of changes to internal control over financial reporting
requirements with respect to the company's first periodic report due
after the first annual report that must include management's report on
internal control over financial reporting.
    In addition, during the extended compliance period, a company that
is not an accelerated filer may continue to omit the amended portion of
the introductory language in paragraph 4 of the certification required
by Exchange Act Rules 13a-14(a) and 15d-14(a) that refers to the
certifying officers' responsibility for establishing and maintaining
internal control over financial reporting for the company, as well as
paragraph 4(b). This language, however, must 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 apply to the amendments
of Exchange Act Rules 13a-15(a) and 15d-15(a) relating to the
maintenance of internal control over financial reporting. The
compliance dates relating to accelerated filers and registered
investment companies published in Release No. 33-8392 [69 FR 9722] are
not affected by this release.
    While the definition of an accelerated filer in Exchange Act Rule
12b-2 previously has had applicability only for a foreign private
issuer that files its Exchange Act periodic reports on Forms 10-K and
10-Q, the definition by its terms does not exclude foreign private
issuers. As of December 1, 2005, a foreign private issuer that is an
accelerated filer and files its annual report on Form 20-F will become
subject to a requirement in new Item 4A of Form 20-F to disclose
unresolved staff comments. This change was part of our recently adopted
Securities Offering Reform final rules published in Release No. 33-8591
[70 FR 44722]. A foreign private issuer that is an accelerated filer
under the Exchange Act Rule 12b-2 definition, and that files its annual
reports on Form 20-F or Form 40-F, must begin to comply with the
internal control over financial reporting and related requirements in
the annual report for its first fiscal year ending on or after July 15,
2006. A foreign private issuer that is not an accelerated filer under
the Exchange Act Rule 12b-2 definition must begin to comply in its
annual report for its first fiscal year ending on or after July 15,
2007.

ADDRESSES: Comments may be submitted by any of the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/other.shtml.
); or     Send an e-mail to<EMAIL_ADDRESS>Please include

File Number S7-06-03 on the subject line; or
     Use the Federal eRulemaking Portal (http://www.regulations.gov
). Follow the instructions for submitting comments.

Paper Comments

     Send paper comments in triplicate to Jonathan G. Katz,
Secretary, Securities and Exchange Commission, 100 F Street, NE.,
Washington, DC 20549-9303.
    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/other.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<PHONE_NUMBER>, U.S.
Securities and Exchange Commission, 100 F Street, NE., Washington, DC
20549-3628.

SUPPLEMENTARY INFORMATION: On June 5, 2003,\1\ the Commission adopted
several amendments to its rules and forms implementing Section 404 of
the Sarbanes-Oxley Act of 2002.\2\ Among other things, these amendments
require companies, other than registered investment companies, to
include in their annual reports a report of management on the company's
internal control over financial reporting and an accompanying auditor's
report, 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,\3\ 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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    \1\ See Release No. 33-8238 (June 5, 2003) [68 FR 36636].
    \2\ 15 U.S.C. 7262.
    \3\ 17 CFR 249.20f and 249.40f.
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    On February 24, 2004, we approved an extension of the original
compliance dates for the amendments related to internal control
reporting.\4\ Specifically, we extended the compliance dates for
companies that are accelerated filers, as defined in Rule 12b-2 \5\
under the Securities Exchange Act of 1934,\6\ to fiscal years ending on
or after November 15, 2004, and for companies that are not accelerated
filers and for foreign private issuers, to fiscal years ending on or
after July 15, 2005. We believed that providing additional time for
compliance was appropriate in light of both the substantial time and
resources needed to properly implement the rules and to provide
additional time for companies and their auditors to implement Auditing
Standard No. 2, which set forth new standards for conducting an audit
of internal control over financial reporting performed in conjunction
with an audit of the financial statements.\7\
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    \4\ See Release No. 33-8392 (February 24, 2004) [69 FR 9722].
    \5\ 17 CFR 240.12b-2. An ``accelerated filer'' means an issuer
after it first meets the following conditions as of the end of its
fiscal year: (i) the aggregate market value of the voting and non-
voting common equity held by non-affiliates of the issuer is $75
million or more; (ii) the issuer has been subject to the
requirements of Section 13(a) or 15(d) of the Exchange Act for a
period of at least twelve calendar months; (iii) the issuer has
filed at least one annual report pursuant to Section 13(a) or 15(d)
of the Exchange Act; and (iv) the issuer is not eligible to use
Forms 10-KSB and 10-QSB for its annual and quarterly reports. In a
separate release that we are issuing today, we are proposing to add
a definition of ``large accelerated filer'' to Exchange Act Rule
12b-2. If we adopt that proposal, the extension of compliance dates
for internal control reports affected by this release would apply to
companies, including foreign private issuers, that are neither
accelerated filers nor large accelerated filers. See Release No. 33-
8617 (September 22, 2005).
    \6\ 15 U.S.C. 78a et. seq.
    \7\ See Release No. 34-49884 File No. PCAOB 2004-03 (June 17,
2004) [69 FR 35083]. Auditing Standard No. 2 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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    On March 2, 2005, we approved a further one-year extension of the
compliance dates for companies that are not accelerated filers and for
foreign private issuers filing annual reports on Form 20-F or 40-F.\8\
In granting this relief, we noted that an extension was warranted, in
part, in view of the significant effort being expended by many foreign
private issuers to begin complying with new International Financial
Reporting Standards.\9\
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    \8\ See Release No. 33-8545 (March 2, 2005) [70 FR 11528].
    \9\ In March 2004, we proposed amendments to Form 20-F under the
Exchange Act to provide foreign private issuers a one-time
accommodation relating to financial statements prepared under the
International Financial Reporting Standards. These amendments were
adopted in April 2005. See Release No. 34-49403 (March 11, 2004) [69
FR 12904] and Release No. 34-51535 (April 12, 2005) [70 FR 20674].
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    In addition, we thought it was appropriate to provide an additional
extension for non-accelerated filers in recognition of other efforts in
the market place that might affect the implementation of internal
control reporting by smaller companies. For example, at the request of
Commission staff, the Committee of Sponsoring Organizations of the
Treadway Commission (``COSO'') established a task force to provide more
guidance on how the COSO Internal Control-Integrated Framework (the

``framework'')\10\ can be applied to smaller public companies.
Moreover, the Commission organized the Advisory Committee on Smaller
Public Companies in March 2005 to examine the impact of the Sarbanes-
Oxley Act and other federal securities laws on smaller companies.\11\
These efforts were just commencing at the time we approved the
extension.
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    \10\ Under Commission rules, a reporting company is required to
use a suitable, recognized control framework that is established by
a body or group that has followed due-process procedures, such as
the COSO Framework, to assess the effectiveness of the company's
internal control over financial reporting. See Exchange Act Rules
13a-15(c) and 15d-15(c) [17 CFR 240.13a-15(c) and 240.15d-15(c)].
    \11\ See SEC Press Release 2004-174 (December 16, 2004) and
Release No. 33-8514 (December 16, 2004) [69 FR 76498]. The Advisory
Committee held its first meeting on April 12, 2005.
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    Today we are again extending the dates for complying with our
internal control over financial reporting requirements for companies,
including foreign private issuers, that are not accelerated filers. The
extended compliance period does not in any way alter requirements
regarding internal control that are in effect, including, without
limitation, Section 13(b)(2) of the Exchange Act \12\ and the rules
thereunder. In this regard, notwithstanding the deferral of the
applicability of the specific requirements of our rules under Section
404 of the Sarbanes-Oxley Act (and also, as a result, the deferral of
the applicability of Auditing Standard No. 2 of the Public Company
Accounting Oversight Board), non-accelerated filers must continue to
assess whether the company's internal accounting controls are
sufficient to meet applicable requirements under federal securities
laws, and we would expect that officers with responsibility for
financial reporting and internal control and audit committees (or in
the absence of audit committees, boards of directors) would continue to
work together in this area. Moreover, independent auditors of non-
accelerated filers must consider filers' internal accounting controls
in connection with the conduct of audits of financial statements in
accordance with the standards of the Public Company Accounting
Oversight Board.\13\
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    \12\ 15 U.S.C. 78m(b)(2).
    \13\ See Auditing Standards Board, AICPA, Statement on Auditing
Standards No. 78, Consideration of Internal Control in a Financial
Statement Audit: An Amendment to Statement on Auditing Standards No.
55 (1995), adopted by the PCAOB in Rule 3200T, Interim Auditing
Standards, and as amended by the PCAOB on September 15, 2004 in
Conforming Amendments to PCAOB Interim Standards Resulting From the
Adoption of PCAOB Auditing Standard No. 2, ``An Audit of Internal
Control Over Financial Reporting Performed in Conjunction With an
Audit of Financial Statements.''
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    The Commission, for good cause, finds that notice and solicitation
of comment regarding extension of the compliance dates is impractical,
unnecessary and contrary to the public interest.\14\ First, comments
regarding current requirements under Section 404, including comments
provided at, and in connection with our Roundtable on Implementation of
Internal Control Reporting Provisions held on April 13, 2005, raise
issues as to whether a broadly accepted or demonstrably suitable
framework is currently in place for evaluating internal control at
smaller public companies, including non-accelerated filers. As stated
above, the Commission staff has sought an enhanced framework for
smaller public companies, including by calling on COSO to evaluate its
existing framework and possible adjustments, modifications or
supplemental guidance for smaller public companies.
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    \14\ See Section 553(b)(3)(B) of the Administrative Procedure
Act [5 U.S.C. 553(b)(3)(B)] (stating that an agency may dispense
with prior notice and comment when it finds, for good cause, that
notice and comment are ``impracticable, unnecessary, or contrary to
the public interest.'').
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    We believe that the COSO task force has devoted significant time
and effort to this matter and appreciate their contribution in an
important area. We also believe, however, that the task has proven
challenging and more time-consuming than anticipated. The COSO task
force has indicated to the Commission staff that it is approaching the
point when an exposure draft will be made available for public comment.
Any conclusions are a number of months away.
    Second, by that time, significant work will have been done, and
significant expenses incurred, by many non-accelerated filers to comply
with the existing requirement for their first fiscal year ending on or
after July 15, 2006, unless the current compliance date is extended. We
believe that only an immediate deferral of the current compliance date
can forestall that result. Due to the significant costs that smaller
companies are likely to incur to prepare for initial compliance with
the internal control requirements, we think that it is critical to make
the extension effective as soon as possible so that they have the
certainty of knowing that they can rely on it. We believe that many
smaller companies already have begun to prepare for compliance with the
internal reporting control requirements.\15\
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    \15\ See, for example, the statement of William A. Loving, Jr.,
Executive Vice President and Chief Executive Officer of Pendleton
County Bank that he submitted on behalf of the Independent Community
Bankers of America. In his statement, Mr. Loving indicated that his
bank already has spent approximately $40,000 in consultancy and
outside vendor costs, $10,000 in training and education, and 160
staff hours to comply with Sarbanes-Oxley Act requirements. It
anticipated incurring an additional 1,600 staff hours to prepare for
compliance with the internal control requirements. Mr. Loving
estimated the costs of the testing alone to be $50,000, not
including internal staffing costs and additional external audit
costs. Mr. Loving's statement is available at: http://www.sec.gov/rules/other/265-23/icba060805.pdf
.

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    In addition, the Advisory Committee on Smaller Public Companies
continues to study the internal control over financial reporting
requirements for smaller public companies and is scheduled to complete
its work by April 2006. In the interim, the Advisory Committee recently
has recommended that the Commission further extend the compliance date
for companies that are not accelerated filers.\16\
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    \16\ On August 10, 2005, the Advisory Committee adopted a
resolution recommending that the Commission extend the compliance
dates of the internal control reporting requirements for companies
that are not accelerated filers. The Advisory Committee is of the
opinion that there is overall consensus and widely-held support for
its recommendation and suggested that we implement it as soon as
possible. See The Advisory Committee's Letter to Securities and
Exchange Commission Chairman Christopher Cox, dated August 18, 2005.
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    The Commission further notes that many accelerated filers who
became subject to the internal control over financial reporting
requirements for the first time this year had difficulty filing their
Form 10-K annual reports on time.\17\ Moreover, several of the
responses that we received from accelerated filers in connection with
our internal control roundtable indicated that many of the costs that
they incurred in the initial year of compliance would not be recurring
costs; they expected the internal control reporting process to become
more efficient and less costly in subsequent years. Companies that are
not accelerated filers may be able to benefit from the experiences of
accelerated filers in the second year of compliance with the internal
control reporting requirements as best practices emerge and increased
efficiencies are realized. Finally, the Commission notes that the
overwhelming majority of market capitalization of U.S. public companies
is subject to our requirements under Section 404 notwithstanding this
deferral. On the basis of the foregoing, for good cause and because the
extension will relieve a

restriction, the extension will be effective on September 29, 2005.
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    \17\ During the first 11 months of the Commission's current
fiscal year which ends on September 30, 2005, we received 2,320
notifications of late Form 10-K filings on Form 12b-25. This
represented a 13% increase over the total number of similar
notifications that we received during all of our 2004 fiscal year.
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    To assist us in our ongoing consideration of Section 404 of the
Sarbanes-Oxley Act in the context of smaller public companies, we are
including a list of questions below to solicit public comment on some
substantive issues regarding the application of our internal control
over financial reporting requirements to these companies. We also are
soliciting public comment on the amount of time and expense that
companies that are not accelerated filers have incurred to date to
prepare for compliance with the internal control reporting
requirements. These comments will assist us in any future proposals
regarding our rules under Section 404. We would expect to provide
formal notice and an additional opportunity for public comment on any
such proposals.
    In this regard, we note that the Advisory Committee recently also
has solicited public input on a range of issues related to the current
securities regulatory system for smaller companies, including the
impact on smaller public companies of the internal control reporting
requirements mandated by Section 404 of the Sarbanes-Oxley Act of 2002.
In formulating any possible proposed revisions to the internal control
reporting requirements that would affect smaller reporting companies,
we intend to consider relevant recommendations made to the Commission
by the Advisory Committee.

Request for Comment

     Should there be a different set of internal control over
financial reporting requirements that applies to smaller companies than
applies to larger companies? Would it be appropriate to apply a
different set of substantive requirements to non-accelerated filers, or
for management of non-accelerated filers to make a different kind of
assessment? Why or why not? If you think that there should be a
different set of requirements for companies that are not accelerated
filers, what should those requirements be? What would be the impact of
any such differences in the requirements on investors?
     Would a public float threshold that is higher or lower
than the $75 million threshold that we use to distinguish accelerated
filers from non-accelerated filers be more appropriate for this
purpose? If so, what should the threshold be and why? Would it be
better to use a test other than public float for this purpose, such as
annual revenues, number of segments or number of locations or
operations? If so, why?
     Should the independent auditor attestation requirements be
different for smaller public companies? If so, how should the
requirements differ?
     Should the same standard for auditing internal control
over financial reporting apply to auditors of all public companies, or
should there be different standards based on the size of the public
company whose internal control is being audited? If the latter, how
should the standards differ?
     How can we best assure that the costs of the internal
control over financial reporting requirements imposed on smaller public
companies are commensurate with the benefits?
     We solicit comment describing the actions that non-
accelerated filers already have taken to prepare for compliance with
the internal control over financial reporting requirements. Specific
time and cost estimates would be particularly helpful. We also would be
interested in receiving additional information about the compliance
burdens incurred this year by smaller accelerated filers that included
internal control reports in their Form 10-K annual reports.

    Dated: September 22, 2005.

    By the Commission.
Jonathan G. Katz,
Secretary.
[FR Doc. 05-19426 Filed 9-28-05; 8:45 am]

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