[Federal Register Volume 85, Number 59 (Thursday, March 26, 2020)]
[Rules and Regulations]
[Pages 17178-17242]
[FR Doc No: 2020-05546]

Vol. 85

Thursday,

No. 59

March 26, 2020

Part II

Securities and Exchange Commission

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17 CFR Parts 229, 230, 240, et al.

Accelerated Filer and Large Accelerated Filer Definitions; Final Rule

Federal Register / Vol. 85 , No. 59 / Thursday, March 26, 2020 /
Rules and Regulations

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SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 229, 230, 240, and 249

[Release No. 34-88365; File No. S7-06-19]
RIN 3235-AM41

Accelerated Filer and Large Accelerated Filer Definitions

AGENCY: Securities and Exchange Commission.

ACTION: Final rule.

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SUMMARY: The Securities and Exchange Commission (``Commission'') is
adopting amendments to the accelerated filer and large accelerated
filer definitions to more appropriately tailor the types of issuers
that are included in the categories of accelerated and large
accelerated filers and promote capital formation, preserve capital, and
reduce unnecessary burdens for certain smaller issuers while
maintaining investor protections. The amendments exclude from the
accelerated and large accelerated filer definitions an issuer that is
eligible to be a smaller reporting company and that had annual revenues
of less than $100 million in the most recent fiscal year for which
audited financial statements are available. The amendments also include
a specific provision excluding business development companies from the
accelerated and large accelerated filer definitions in analogous
circumstances. In addition, the amendments increase the transition
thresholds for accelerated and large accelerated filers becoming non-
accelerated filers from $50 million to $60 million, and for exiting
large accelerated filer status from $500 million to $560 million.
Further, the amendments add a revenue test to the transition thresholds
for exiting from both accelerated and large accelerated filer status.
Finally, the amendments add a check box to the cover pages of Forms 10-
K, 20-F, and 40-F to indicate whether an internal control over
financial reporting (``ICFR'') auditor attestation is included in the
filing. As a result of the amendments, certain low-revenue issuers will
remain obligated, among other things, to establish and maintain ICFR
and have management assess the effectiveness of ICFR, but they will not
be required to have their management's assessment of the effectiveness
of ICFR attested to, and reported on, by an independent auditor.

DATES: This final rule is effective April 27, 2020.

FOR FURTHER INFORMATION CONTACT: John Fieldsend, Special Counsel, in
the Division of Corporation Finance, at<PHONE_NUMBER>, and Brian
Johnson, Assistant Director, in the Division of Investment Management,
at<PHONE_NUMBER>, U.S. Securities and Exchange Commission, 100 F
Street NE, Washington, DC 20549-3628.

SUPPLEMENTARY INFORMATION: We are amending 17 CFR 229.10(f) (``Item
10(f)'') under Regulation S-K; \1\ 17 CFR 230.405 (``Rule 405'') under
the Securities Act of 1933; \2\ and 17 CFR 12b-2 (``Rule 12b-2''), 17
CFR 249.220f (``Form 20-F''), 17 CFR 249.240f (``Form 40-F''), and 17
CFR 249.310 (``Form 10-K'') under the Securities Exchange Act of 1934
(``Exchange Act'').\3\
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    \1\ 15 U.S.C. 229.10 through 229.1305.
    \2\ 15 U.S.C. 77a et seq.
    \3\ 15 U.S.C. 78a et seq.
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Table of Contents

I. Introduction
II. Discussion of the Final Amendments
    A. Background
    B. Amendments to Exclude Low-Revenue SRCs From the Accelerated
and Large Accelerated Filer Definitions
    1. Proposed Amendments
    2. Comments on the Proposed Amendments
    a. Comments on Using Revenue for Determining Accelerated and
Large Accelerated Filer Status
    b. Comments on the Proposed Amendments' Effect on Capital
Formation and the Number of Public Issuers
    c. Comments on the Proposed Amendments' Effect on Investor
Protection
    d. Comments on the Disproportionate Costs and Benefits of the
ICFR Auditor Attestation Requirement to Small and Low-Revenue
Companies
    e. Comments on the Relationship Between Non-Accelerated Filers
and SRCs
    f. Other Comments
    3. Final Amendments
    a. Using Revenue for Determining Accelerated and Large
Accelerated Filer Status
    b. Effect on Capital Formation and the Number of Public
Companies
    c. Effect on Investor Protection
    d. Disproportionate Costs and Benefits of the ICFR Auditor
Attestation for Small and Low-Revenue Companies
    e. Relationship Between Non-Accelerated Filers and SRCs
    f. Effect on Business Development Companies
    g. Effect on Foreign Private Issuers
    h. Requiring ICFR Auditor Attestation Less Frequently Than
Annually
    i. Check Box Indicating Whether an ICFR Auditor Attestation Is
Included in a Filing
    C. Amendments To Increase the Public Float Transition Thresholds
From $50 million to $60 million and $500 million to $560 million and
To Add the SRC Revenue Test to the Transition Threshold
    1. Proposed Amendments
    2. Comments
    3. Final Amendments
    D. Transition Issues
III. Other Matters
IV. Economic Analysis
    A. Introduction
    B. Baseline
    1. Regulatory Baseline
    2. Characteristics of Accelerated Filer Population
    3. Timing of Filings
    4. Internal Controls and Restatements
    C. Discussion of Economic Effects
    1. Affected Issuers
    2. Potential Benefits of Expanding the Exemption From the ICFR
Auditor Attestation Requirement for Affected Issuers
    a. Evidence on Possible Indirect Costs of the ICFR Auditor
Attestation Requirement
    b. Evidence on Net Costs of the ICFR Auditor Attestation
Requirement
    i. Studies Involving Avoidance Behavior
    ii. Studies Based on Comparative Analysis or Market Reactions
    iii. Other Evidence on Net Costs
    c. Potential Reduction in Audit Fees
    d. Additional Potential Compliance Cost Savings
    e. Implications of the Cost Savings
    3. Potential Costs of Expanding the Exemption From the ICFR
Auditor Attestation Requirement for Affected Issuers
    a. Broad Considerations and Evidence Regarding the Effects of
ICFR Auditor Attestations on Financial Reporting
    b. Estimated Effects on ICFR, the Reliability of Financial
Statements, and Potential Fraud
    i. Effects on the Prevalence of Ineffective ICFR
    ii. Effects on the Detection and Disclosure of Material
Weaknesses in ICFR
    iii. Effects on Restatements
    iv. Effects on Fraudulent Financial Reporting
    v. Timing of the Effects
    c. Implications for Investor Decision-Making
    d. Potential Economic Costs of Effects on ICFR, the Reliability
of Financial Statements, and Potential Fraud
    i. Computation of Monetized Estimates of Costs
    ii. Discussion of Economic Costs
    4. Potential Benefits and Costs Related to Other Aspects of the
Amendments
    a. Filing Deadlines
    b. Disclosures Required of Accelerated Filers
    c. Transition Thresholds
    d. Disclosure
    5. Alternatives to the Amendments
    a. Exclude All SRCs From Accelerated Filer Category
    b. Include or Exclude Certain Issuer Types
    c. Alternative Threshold
V. Paperwork Reduction Act
    A. Summary of the Collections of Information
    B. Burden and Cost Estimates Related to the Final Amendments
    1. ICFR Auditor Attestation Requirement

    2. Filing Deadlines, Disclosure Regarding Filing Availability,
and Unresolved Staff Comments
    3. Check Box Disclosure
    4. Total Burden Reduction
VI. Regulatory Flexibility Act Analysis
    A. Need for, and Objectives of, the Final Amendments
    B. Significant Issues Raised by Public Comments
    C. Small Entities Subject to the Amendments
    D. Projected Reporting, Recordkeeping, and Other Compliance
Requirements
    E. Agency Action To Minimize Effect on Small Entities
Statutory Authority and Text of Rule Amendments

I. Introduction

    On May 9, 2019, we proposed amendments \4\ to the ``accelerated
filer'' and ``large accelerated filer'' definitions in Rule 12b-2.\5\
We proposed these amendments to promote capital formation for certain
smaller issuers while maintaining investor protections by more
appropriately tailoring the types of issuers that are included in the
categories of accelerated and large accelerated filers and revising the
transition thresholds for accelerated and large accelerated filers.
Specifically, we proposed to exclude from the accelerated and large
accelerated filer definitions an issuer that is eligible to be a
smaller reporting company (``SRC'') \6\ and that has annual revenue of
less than $100 million in the most recent fiscal year for which audited
financial statements are available (``SRC revenue test''), with the
effect that such an issuer would not need to satisfy the requirements
applicable to an accelerated or large accelerated filer. We also
proposed to increase the public float transition threshold for
accelerated and large accelerated filers to become a non-accelerated
filer from $50 million to $60 million, and to increase the exit
threshold in the large accelerated filer transition provision from $500
million to $560 million in public float. Finally, we proposed to add a
revenue test to the transition thresholds for exiting both accelerated
and large accelerated filer status.
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    \4\ Amendments to the Accelerated and Large Accelerated Filer
Definitions, Release No. 34-85814 (May 9, 2019) [84 FR 24876 (May
29, 2019)] (``Proposing Release'').
    \5\ Although Rule 12b-2 defines the terms ``accelerated filer''
and ``large accelerated filer,'' it does not define the term ``non-
accelerated filer.'' If an issuer does not meet the definition of
accelerated filer or large accelerated filer, it is considered a
non-accelerated filer.
    \6\ See Item 10(f), Rule 405, and Rule 12b-2 (defining SRC).
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    We received over 60 comment letters on the proposal, including over
40 unique letters and approximately 20 letters that were substantially
similar. Many of the commenters generally supported the proposed
amendments \7\ while other commenters generally opposed them or
suggested the need for further empirical study.\8\ In addition, the
SEC's Small Business Capital Formation Advisory Committee (``SBCFAC'')
adopted a recommendation supporting the proposed amendments,\9\ and the
2019 SEC Government-Business Forum on Small Business Capital Formation
(``SEC Small Business Forum'') provided a recommendation on the
accelerated filer definition.\10\ After taking into consideration these
recommendations and the public comments, we are adopting the amendments
substantially as proposed. The final amendments are consistent with our
historical practice of providing scaled disclosure and other
accommodations for smaller issuers and with recent actions by Congress
to reduce unnecessary burdens on new and smaller issuers.\11\
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    \7\ See, e.g., letters from Adamas Pharmaceuticals, Inc. (July
19, 2019) (``Adamas''); Advanced Medical Technology Association
Accel (July 26, 2019) (``AdvaMed''); Aequor, Inc. (July 18, 2019)
(``Aequor''); Ardelyx, Inc. (July 18, 2019) (``Ardelyx''); American
Securities Association (July 29, 2019) (``ASA''); Biotechnology
Innovation Organization (July 29, 2019) (``BIO''); Broadmark Capital
(July 29, 2019) (``Broadmark''); California Life Sciences
Association (Jun. 10, 2019) (``CLSA''); Catalyst Biosciences, Inc.
(July 29, 2019) (``Catalyst''); Cerecor Inc. (July 3, 2019)
(``Cerecor''); Chiasma, Inc. (July 11, 2019) (``Chiasma'');
Coalition of Four Small Businesses and their Investors (July 24,
2019) (``AdvaMed et al.''); Concert Pharmaceuticals, Inc. (July 1,
2019) (``Concert''); Corvus Pharmaceuticals, Inc. (July 19, 2019)
(``Corvus''); Council of State Bioscience Associations (July 25,
2019) (``CSBA''); CSB Bancorp, Inc. (July 26, 2019) (``CSB'');
CymaBay Therapeutics, Inc. (July 24, 2019) (``CymaBay'');
Dar[eacute] Bioscience, Inc. (July 10, 2019) (``Dar[eacute]'');
Darian B. Andersen, General Counsel, PC (Jun. 5, 2019)
(``Andersen''); Equillium, Inc. (July 22, 2019) (``Equillium'');
Evoke Pharma, Inc. (July 17, 2019) (``Evoke''); Gritstone Oncology
Inc. (July 24, 2019) (``Gritstone''); Guaranty Federal Bancshares,
Inc. (July 23, 2019) (``Guaranty''); Independent Community Bankers
of America (July 24, 2019) (``ICBA''); Kezar Life Sciences, Inc.
(July 17, 2019) (``Kezar''); Kyle Carver (May 25, 2019)
(``Carver''); Marinus Pharmaceuticals, Inc. (July 17, 2019)
(``Marinus''); Millendo Therapeutics, Inc. (July 29, 2019)
(``Millendo''); MSB Financial Corp. (July 19, 2019) (``MSB'');
Nasdaq, Inc. (July 29, 2019) (``Nasdaq''); Organovo, Inc. (July 18,
2019) (``Organovo''); Pieris Pharmaceuticals, Inc. (July 11, 2019)
(``Pieris''); Revance Therapeutics, Inc. (July 22, 2019)
(``Revance''); SI-BONE, Inc. (July 19, 2019) (``SI-BONE''); South
Carolina Bankers Association (July 26, 2019) (``SCBA''); Summit
State Bank (May 28, 2019) (``Summit''); Sutro Biopharma, Inc. (July
8, 2019) (``Sutro''); Syros Pharmaceuticals, Inc. (July 22, 2019)
(``Syros''); Teligent, Inc. (July 23, 2019) (``Teligent''); Terra
Tech Corp. (May 29, 2019) (``Terra Tech''); The Bank of South
Carolina (July 26, 2019) (``BSC''); U.S. Chamber of Commerce's
Center for Capital Markets Competitiveness (July 29, 2019)
(``Chamber''); Xenon Pharmaceuticals Inc. (Jun. 19, 2019)
(``Xenon''); and Zynerba Pharmaceuticals, Inc. (July 8, 2019)
(``Zynerba'').
    \8\ See, e.g., letters from BDO USA, LLP (July 29, 2019)
(``BDO''); Better Markets, Inc. (July 29, 2019) (``Better
Markets''); Center for Audit Quality (July 29, 2019) (``CAQ''); CFA
Institute, in consultation with its Corporate Disclosure Policy
Council (Aug. 22, 2019) (``CFA Inst.''); Colleen Honigsberg,
Associate Professor of Law, Stanford Law School, et al. (July 22,
2019) (``Prof. Honigsberg et al.''); Consumer Federation of America
(July 29, 2019) (``CFA''); Council of Institutional Investors (July
25, 2019) (``CII''); Crowe LLP (July 29, 2019) (``Crowe''); Deloitte
& Touche LLP (July 26, 2019) (``Deloitte''); Grant Thornton LLP
(July 17, 2019) (``Grant Thornton''); John Hassell, Indiana
University (May 19, 2019) (``Prof. Hassell''); Mary Barth, Stanford
University, Wayne Landsman, University of North Carolina, Joseph
Schroeder, Indiana University, and Daniel Taylor, University of
Pennsylvania (July 11, 2019) (``Prof. Barth et al.''); RSM US LLP
(July 29, 2019) (``RSM''); and Weili Ge, University of Washington;
Allison Koester, Georgetown University; and Sarah McVay, University
of Washington (July 26, 2019) (``Prof. Ge et al.'').
    \9\ See U.S. Sec. and Exch. Comm'n Small Bus. Capital Formation
Advisory Comm., Recommendation on the Commission's Proposal to Amend
the Accelerated and Large Accelerated Filer Definitions (Aug. 23,
2019) (``SBCFAC Recommendations''), available at https://www.sec.gov/spotlight/sbcfac/recommendations-rule-3-05-and-accelerated-filer-definition.pdf. Although it supported the proposed
amendments, the SBCFAC stated that it ``would welcome the Commission
to explore additional further amendments'' to the accelerated and
large accelerated filer definitions and recommended exploring
raising the revenue threshold to be a non-accelerated filer to one
higher than $100 million, basing the revenue test for an issuer to
qualify as a non-accelerated filer on a three-year rolling average
instead of basing it on the revenue in the most recent fiscal year,
and looking at whether all SRCs should be non-accelerated filers.
    \10\ See U.S. Sec. and Exch. Comm'n Gov't-Bus. Forum on Small
Bus. Capital Formation, Report on the 38th Annual Government-
Business Forum on Small Business Capital Formation (Aug. 14, 2019)
(``SEC Small Business Forum''), available at https://www.sec.gov/files/small-business-forum-report-2019.pdf. The SEC Small Business
Forum recommended aligning the definition of non-accelerated filer
with the definition of SRC to include issuers with a public float
less than $250 million or with annual revenues less than $100
million (and either no public float or a public float less than $700
million).
    \11\ For example, Title I of the Jumpstart Our Business Startups
Act of 2012 (``JOBS Act'') amended Section 404(b) of the Sarbanes-
Oxley Act (``SOX''), 15 U.S.C. 7262(b), which relates to an issuer's
ICFR to exempt emerging growth companies (``EGCs'') from the
requirement of SOX Section 404(b). In particular, SOX Section 404(b)
requires that an issuer's independent auditor attest to, and report
on, management's assessment of the effectiveness of the issuer's
ICFR (``ICFR auditor attestation''). See Public Law 112-106, Sec.
103, 126 Stat. 306 (2012). In addition, Section 72002 of the Fixing
America's Surface Transportation Act of 2015 requires the Commission
to revise Regulation S-K to further scale or eliminate requirements
to reduce the burden on EGCs, accelerated filers, SRCs, and other
smaller issuers, while still providing all material information to
investors. See Public Law 114-94, 129 Stat. 1312 (2015).
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II. Discussion of the Final Amendments

A. Background

    In June 2018, the Commission adopted amendments \12\ to the SRC

definition \13\ to expand the number of issuers that qualify for scaled
disclosure accommodations. The amended SRC definition allows an issuer
to use either a public float \14\ test or the SRC revenue test to
determine whether it is an SRC. The amendments increased the threshold
in the public float test for an issuer to initially qualify as an SRC
from less than $75 million to less than $250 million.\15\ The
Commission also expanded the revenue test to include issuers with
annual revenues \16\ of less than $100 million if they have no public
float or a public float of less than $700 million.\17\ The Commission
intended the amendments to promote capital formation for smaller
issuers by reducing compliance costs for the newly eligible SRCs while
maintaining appropriate investor protections.\18\
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    \12\ See Smaller Reporting Company Definition, Release No. 33-
10513 (June 28, 2018) [83 FR 31992 (July 10, 2018)] (``SRC Adopting
Release'').
    \13\ See note 6 above.
    \14\ Public float is defined in paragraph (3)(i)(A) of the SRC
definition in Rule 12b-2, which states that public float is measured
as of the last business day of the issuer's most recently completed
second fiscal quarter and computed by multiplying the aggregate
worldwide number of shares of its voting and non-voting common
equity held by non-affiliates by the price at which the common
equity was last sold, or the average of the bid and asked prices of
common equity, in the principal market for the common equity. See
also Item 10(f) (2)(i)(A) and Rule 405. An entity with no public
float because, for example, it has equity securities outstanding but
is not trading in any public trading market would not be able to
qualify on the basis of a public float test alone. That entity must
look to the SRC revenue test to determine whether it qualifies as an
SRC.
    \15\ To avoid situations where an issuer frequently enters and
exits SRC status, each test includes two thresholds--one for
initially determining whether an issuer qualifies as an SRC and a
subsequent transition threshold that is lower for issuers that did
not initially qualify as an SRC, or that no longer qualify as an SRC
because they exceeded the initial thresholds.
    \16\ Annual revenues are measured as of the most recently
completed fiscal year for which audited financial statements are
available. See Item 10(f)(2)(i)(B), Rule 405, and Rule 12b-2.
    \17\ See Item 10(f)(1), Rule 405, and Rule 12b-2. The prior
revenue test included issuers with no public float and annual
revenues of less than $50 million. See SRC Adopting Release, note 12
above, at 31995. The lower transition thresholds under the revenue
test for an issuer that did not initially qualify as an SRC, or that
no longer qualifies as an SRC because it exceeded the initial
thresholds, were revised from less than $40 million of annual
revenues and no public float to less than $80 million of annual
revenues and either no public float or a public float of less than
$560 million. See Item 10(f)(2)(iii)(B), Rule 405, and Rule 12b-2.
    \18\ SRC Adopting Release, note 12 above, at 31992.
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    In conjunction with these amendments, the Commission also revised
the accelerated filer and large accelerated filer definitions in Rule
12b-2 to remove the condition that, for an issuer to be an accelerated
filer or a large accelerated filer, it must not be eligible to use the
SRC accommodations.\19\ One result of these amendments is that some
issuers now are categorized as both SRCs and accelerated or large
accelerated filers.\20\ These issuers have some, but not all, of the
benefits of scaled regulation. In particular, issuers that are
categorized as both SRCs and accelerated or large accelerated filers
must comply with the earlier filing deadlines required of accelerated
and large accelerated filers for annual and quarterly reports and the
requirement of SOX Section 404(b).\21\
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    \19\ This amendment, among other things, preserved the existing
thresholds in those definitions and did not change the number of
issuers subject to the ICFR auditor attestation requirement.
    \20\ Although rare, under our existing rules, some issuers that
meet the large accelerated filer definition may be eligible to be an
SRC because of the expanded revenue test in the SRC definition. See
Proposing Release, note 4 above, at 24877, n. 25. As discussed
below, in Section II.B.3., we are adopting the proposed amendment to
the ``large accelerated filer'' definition so that an issuer that is
eligible to be an SRC under the SRC revenue test would not also
qualify as a large accelerated filer.
    \21\ 15 U.S.C. 7262(b).
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    Prior to the SRC amendments, the SRC category of filers generally
did not overlap with either the accelerated or large accelerated filer
categories.\22\ Now, however, as illustrated in Figure 1 of this
section, because the public float tests in the SRC and accelerated
filer definitions partially overlap, and the accelerated and large
accelerated filer definitions no longer specifically exclude an issuer
that is eligible to be an SRC, an issuer meeting the accelerated filer
definition will be both an SRC and an accelerated filer \23\ if it has:
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    \22\ See SRC Adopting Release, note 12 above, at 32001.
    \23\ The thresholds provided below are based on the initial
thresholds of each definition; however, due to the transition
provisions of the accelerated and large accelerated filer
definitions, additional issuers may also be both an SRC and an
accelerated or large accelerated filer.
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     A public float of $75 million or more, but less than $250
million, regardless of annual revenues; or
     Less than $100 million in annual revenues, and a public
float of $250 million or more, but less than $700 million.
[GRAPHIC] [TIFF OMITTED] TR26MR20.000

B. Amendments To Exclude Low-Revenue SRCs From the Accelerated and
Large Accelerated Filer Definitions

1. Proposed Amendments
    Under the existing accelerated filer and large accelerated filer
definitions in Rule 12b-2, an issuer must satisfy three conditions to
be an accelerated filer or large accelerated filer.\24\ We proposed to

add a new condition to the definitions of accelerated filer and large
accelerated filer that would exclude from those definitions an issuer
that is eligible to be an SRC and that meets the SRC revenue test. The
most notable effect of the proposed amendments \25\ would be that an
issuer that is eligible to be an SRC and that meets the SRC revenue
test would not be subject to the requirement of SOX Section 404(b) that
an issuer's independent auditor must attest to, and report on,
management's assessment of the effectiveness of the issuer's ICFR.\26\
The final amendments do not change an auditor's role in a financial
statement audit.\27\
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    \24\ The three existing conditions for qualifying as an
accelerated filer are that an issuer: (1) Had an aggregate worldwide
public float of $75 million or more, but less than $700 million, as
of the last business day of the issuer's most recently completed
second fiscal quarter; (2) has been subject to the requirements of
15 U.S.C. 78m (Exchange Act Section 13(a)) or 15 U.S.C. 78o(d)
(Exchange Act Section 15(d)) for a period of at least twelve
calendar months; and (3) has filed at least one annual report
pursuant to those sections. For a large accelerated filer,
conditions (2) and (3) are the same, but condition (1) is that an
issuer had an aggregate worldwide public float of $700 million or
more, as of the last business day of the issuer's most recently
completed second fiscal quarter. Also, as discussed in note 20
above, some issuers that meet the ``large accelerated filer''
definition may be eligible to be an SRC.
    \25\ The issuer also would not have to abide by the filing
deadlines of an accelerated or large accelerated filer, provide the
disclosure required by Item 1B of Form 10-K and Item 4A of Form 20-F
about unresolved staff comments on its periodic and/or current
reports, or provide the disclosure required by Item 101(e)(4) of
Regulation S-K about whether it makes filings available on or
through its internet website. See 17 CFR 229.101(e)(4).
    \26\ See 17 CFR 240.13a-15(f) and 17 CFR 240.15d-15(f) (defining
ICFR).
    \27\ See letter from Deloitte (suggesting that the Commission
explain how an auditor's role in a financial statement audit will
change as a result of the amendments).
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    SOX Section 404(a) \28\ requires almost all issuers, including
SRCs, that file reports pursuant to Exchange Act Section 13(a) or 15(d)
\29\ to establish and maintain ICFR and have their management assess
the effectiveness of their ICFR.\30\ SOX Section 404(b) subjects
certain issuers not otherwise exempted to the ICFR auditor attestation
requirement.\31\ The most significant exemption from the ICFR auditor
attestation requirement is the exemption provided to EGCs pursuant to
Title I of the JOBS Act (``JOBS Act Exemption''). Generally, an EGC is
a company that has total annual gross revenues of less than $1.07
billion during its most recently completed fiscal year end and that has
not sold common equity securities under a registration statement.\32\
The JOBS Act Exemption provides EGCs with a five-year exemption from
the ICFR auditor attestation requirement. We estimate that the JOBS Act
Exemption applies to issuers with an aggregate market capitalization of
about $585 billion, compared to about $95 billion in aggregate for the
issuers that are newly exempt from the ICFR auditor attestation
requirement under the amendments.\33\
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    \28\ 15 U.S.C. 7262(a).
    \29\ See 17 CFR 240.13a-15 and 17 CFR 240.15d-15.
    \30\ Investment companies registered under Section 8 of the
Investment Company Act of 1940, 15 U.S.C 80a-8, are specifically
exempted from SOX Section 404 by SOX Section 405, 15 U.S.C. 7263.
Notwithstanding the exemption pursuant to SOX Section 405, these
registered investment companies are subject to other requirements
regarding internal controls. See Proposing Release, note 4 above, at
24879, n. 44.
    \31\ For example, SOX Section 404(c) exempts from Section 404(b)
any issuer that is neither a large accelerated filer nor an
accelerated filer. See 15 U.S.C. 7262(c).
    \32\ See 15 U.S.C. 77(b)(a)(19).
    \33\ These estimates are based on staff analysis of data on
market values from Compustat for annual reports in calendar year
2018. See note 298 below for details on the identification of the
population of different filer types. See note 336 below for details
on the identification of the population of affected issuers. Out of
the 1,430 issuers who qualified as EGCs in 2018, 1,097 are also non-
accelerated filers. The remaining EGCs are still exempt from the
ICFR auditor attestation requirement solely due to the JOBS Act
Exemption, and those issuers are significantly larger in terms of
aggregate market capitalization (approximately $145 billion) than
the issuers newly exempted under the amendments (approximately $95
billion). This estimate excludes 41 EGCs with an aggregate of
approximately $20 billion in market capitalization for which we are
unable to determine non-accelerated filer status, the majority of
which are Canadian issuers filing on Form 40-F.
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2. Comments on the Proposed Amendments
    Many commenters supported the portion of the proposed amendments
that would exclude an issuer that is eligible to be an SRC and that
meets the SRC revenue test from the accelerated and large accelerated
filer definitions.\34\ Other commenters opposed the proposed amendments
or suggested the need for further analysis.\35\ Commenters' views on
different aspects of the proposal, as well as its effects, are
discussed topically, below.
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    \34\ See, e.g., letters from Adamas, AdvaMed, AdvaMed et al.,
Aequor, Andersen, Ardelyx, Ardelyx's slides from its presentation to
the SBCFAC Meeting (Aug. 13, 2019) (``Ardelyx Presentation''), ASA,
BIO, Broadmark, BSC, Carver, Catalyst, Cerecor, Chamber, Chiasma,
CLSA, Concert, Corvus, CSB, CSBA, CymaBay, Dar[eacute], Equillium,
Evoke, Gritstone, Guaranty, ICBA, Institute of Management
Accountants' Financial Reporting and Small Business Committees (July
16, 2019) (``IMA''), Kezar, Marinus, Millendo, MSB, National
Association of Manufacturers (July 26, 2019) (``NAM''), Nasdaq,
Organovo, Pieris, Revance, SCBA, SI-BONE, Summit, Sutro, Syros,
Teligent, Terra Tech, Xenon, and Zynerba.
    \35\ See, e.g., letters from BDO, Better Markets, CAQ, CFA, CFA
Inst., CII, Crowe, Deloitte, Grant Thornton, Prof. Barth et al.,
Prof. Ge et al., Prof. Hassell, Prof. Honigsberg et al., and RSM.
---------------------------------------------------------------------------

a. Comments on Using Revenue for Determining Accelerated and Large
Accelerated Filer Status
    A number of commenters stated explicitly that they supported using
revenue as a measure to determine whether an issuer should be subject
to the ICFR auditor attestation requirement.\36\ These commenters
suggested that using a revenue measurement is preferable to using a
public float measurement \37\ because public float is often affected by
industry or economic trends not specific to any particular issuer,\38\
and that revenue is more predictable,\39\ a better indicator of an
issuer's complexity,\40\ and a better indicator of an issuer's ability
to absorb the burdens of the ICFR auditor attestation requirement.\41\
Other commenters questioned whether revenue is an appropriate measure
for determining whether an issuer should be a non-accelerated filer in
all cases.\42\ One commenter asserted that low-revenue companies may
have less sophisticated or experienced accounting functions and some
aspects of their business may be associated with accounting
complexities.\43\ This commenter also suggested that issuers may
recognize revenue in ways that could result in them frequently
transitioning in and out of non-accelerated filer status.\44\ Another
commenter indicated that an issuer could have a relatively low amount
of revenue but still have a large market capitalization and thus
``greater investor exposure.'' \45\
---------------------------------------------------------------------------

    \36\ See, e.g., letters from BIO, Broadmark, Chamber, Concert,
Corvus, and MSB.
    \37\ See, e.g., letters from Broadmark, Chamber, Concert,
Corvus, and MSB.
    \38\ See letter from MSB.
    \39\ See letter from Broadmark.
    \40\ See, e.g., letters from Concert and Corvus.
    \41\ See letter from Broadmark.
    \42\ See letter from Ernst & Young LLP (July 29, 2019) (``EY''),
Grant Thornton, and National Association of State Boards of
Accountancy (July 23, 2019) (``NASBA'').
    \43\ See letter from EY.
    \44\ Id.
    \45\ See letter from Grant Thornton.
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b. Comments on the Proposed Amendments' Effect on Capital Formation and
the Number of Public Issuers
    Commenters expressed mixed views on the effect that the proposed
amendments would have on capital formation, the cost of capital, and
the decisions of companies as to whether to enter the public capital
markets. Some commenters agreed with the view expressed in the
Proposing Release that, by expanding the JOBS Act Exemption, the
proposed amendments would enhance capital formation or allow affected
issuers to preserve capital \46\ while also maintaining investor

protection.\47\ One commenter, questioning the benefits, if any, of the
ICFR auditor attestation requirement, asserted that there is no
correlation between a smaller issuer's compliance with the ICFR auditor
attestation requirement and stronger markets in general.\48\
Additionally, some commenters suggested that eliminating the ICFR
auditor attestation requirement would encourage certain companies to
enter the public markets.\49\
---------------------------------------------------------------------------

    \46\ See, e.g., letters from Andersen, CLSA, Concert, ICBA, and
NASBA.
    \47\ See, e.g., letters from ICBA and NASBA.
    \48\ See letter from BIO.
    \49\ See, e.g., letters from AdvaMed, AdvaMed et al., Broadmark,
Cerecor, and ICBA.
---------------------------------------------------------------------------

    Conversely, other commenters asserted that the proposed amendments
would not enhance capital formation, and some indicated they could even
reduce capital formation.\50\ Two of these commenters expressed the
view that eliminating the ICFR auditor attestation requirement could
increase the cost of capital for certain issuers because investors
would require a premium to invest in issuers due to the heightened risk
of ineffective internal controls.\51\ In addition, some commenters
maintained that the ICFR auditor attestation requirement does not
prevent companies from entering the public markets.\52\ For example,
one commenter suggested that the Proposing Release's statement about
the significant decline in the number of issuers listed on major
exchanges implied that the cost of compliance with the ICFR auditor
attestation requirement has contributed materially to that decline.\53\
This commenter and some others asserted that the decline can be
attributed to many other factors.\54\ Some commenters stated that
confidence in the U.S. capital market system, likely stems, at least in
part, from financial reporting safeguards, including the ICFR auditor
attestation requirement, and contended that the proposed amendments
would thereby reduce investor confidence in issuers' financial
reporting.\55\
---------------------------------------------------------------------------

    \50\ See, e.g., letters from Better Markets, CII, CFA, CFA
Inst., and Prof. Ge et al.
    \51\ See letters from Better Markets and CFA.
    \52\ See, e.g., letters from CFA, CFA Inst., CII, and Crowe.
    \53\ See letter from CFA.
    \54\ See, e.g., letters from CII, CFA, CFA Inst., and Crowe.
Other factors commenters cited include the expansion of exemptions
to registration that increase companies' ability to raise funds
privately, see, e.g., letters from CFA, CII, and Crowe; corporate
consolidations, see, e.g., letters from CFA and CII; market
conditions, see letter from CFA; and the general regulatory
environment, see letter from Crowe.
    \55\ See, e.g., letters from CAQ and CII.
---------------------------------------------------------------------------

    Several commenters indicated that the ICFR auditor attestation
requirement is not necessary because issuers are permitted to
voluntarily obtain an ICFR auditor attestation if they believe it is in
their interest to do so.\56\ Some instances in which commenters
suggested that issuers may choose to voluntarily obtain an ICFR auditor
attestation include when their investors demand it,\57\ when not
obtaining it would have a negative impact on investment analysts'
coverage,\58\ or when issuers otherwise deem it a good use of their
capital resources.\59\ In this regard, one commenter suggested
clarifying that it is the authority and responsibility of the issuer's
audit committee to determine whether the issuer should voluntarily
obtain an ICFR auditor attestation.\60\
---------------------------------------------------------------------------

    \56\ See, e.g., letters from ASA, BIO, Broadmark, Chamber,
Guaranty, and Nasdaq.
    \57\ See, e.g., letters from BIO and Guaranty.
    \58\ See letter from Guaranty.
    \59\ Id.
    \60\ See letter from EY.
---------------------------------------------------------------------------

c. Comments on the Proposed Amendments' Effect on Investor Protection
    Commenters' views as to the effect of the proposed amendments on
investor protection were also mixed. Many commenters asserted that,
even if the ICFR auditor attestation requirement did not apply, other
existing requirements would provide investors in these issuers with
sufficient protection.\61\ Commenters cited a number of these other
requirements, including SOX Section 404(a); \62\ Nasdaq's listing
standards, surveillance, and enforcement; \63\ the required management
certifications; \64\ and the obligation of an independent auditor to
consider ICFR when conducting a financial statement audit.\65\
---------------------------------------------------------------------------

    \61\ See, e.g., letters from ASA, Broadmark, BSC, Carver,
Cerecor, Guaranty, ICBA, MSB, NAM, Nasdaq, Pieris, SCBA, and Xenon.
    \62\ See, e.g., letters from ASA, Broadmark, Carver, ICBA, MSB,
Nasdaq, and Xenon.
    \63\ See letter from Nasdaq.
    \64\ See 17 CFR 229.601(31)(i), 17 CFR 240.13a-14(a), and 17 CFR
240.15d-14(a). See, e.g., letters from MSB, Nasdaq, and Xenon.
    \65\ See, e.g., letters from ASA, Carver, Cerecor, MSB, NAM, and
Xenon.
---------------------------------------------------------------------------

    For example, several commenters noted that, when conducting a
financial statement audit, the auditor is required to obtain an
understanding of each component of ICFR,\66\ which a few of these
commenters asserted would provide investors with sufficient protection
absent the ICFR auditor attestation requirement.\67\ Other commenters
noted that the requirement that an auditor communicate to the issuer's
management and its audit committee any significant deficiencies or
material weaknesses related to ICFR in a financial statement audit
would provide a certain level of protection for investors in the
affected issuers.\68\ Some commenters expressed a view that the ICFR
auditor attestation requirement is not important or material to
investors generally.\69\ A few of these commenters asserted that
investors rarely ask an issuer that is exempt from the ICFR auditor
attestation requirement to voluntarily obtain such an attestation.\70\
One commenter \71\ cited a study \72\ that found no statistically
significant market response on average to disclosures of material
weaknesses in disclosure controls, which suggests, according to the
commenter, that investors do not significantly change their long-term
value assessment of an issuer based on these disclosures.
---------------------------------------------------------------------------

    \66\ See, e.g., letters from ASA, CAQ, CFA Inst., Crowe, EY,
Grant Thornton, Guaranty, NASBA, Nasdaq, PricewaterhouseCoopers LLP
(July 25, 2019) (``PWC''), and RSM.
    \67\ See, e.g., letters from ASA, Guaranty, and Nasdaq.
    \68\ See letter from Nasdaq.
    \69\ See, e.g., letters from Adamas; Ardelyx; Ardelyx
Presentation, ASA, BIO, Carver, Catalyst, Chiasma, Corvus, CymaBay,
Equillium, Evoke, Gritstone, Kezar, Marinus, Millendo, Organovo,
Pieris, Revance, SI-BONE, Syros, Teligent, and Zynerba. Some of
these commenters and others asserted that the ICFR auditor
attestation requirement is not material for, or important to,
investors based on the results of a study and their own experience.
See, e.g., letters from Adamas, Ardelyx, Catalyst, Chiasma, Corvus,
CymaBay, Equillium, Evoke, Gritstone, Kezar, Marinus, Millendo,
Organovo, Pieris, Revance, SI-BONE, Syros, Teligent, and Zynerba
(citing Craig Lewis and Joshua White, Science or Compliance: Will
Section 404(b) Compliance impede Innovation by Emerging Growth
Companies in the Biotech Industry, (Feb. 2019) (``BIO Study''),
available at https://www.bio.org/sites/default/files/BIO_EGC_White_Paper_02_11_2019_FINAL.pdf).
    \70\ See, e.g., letters from Ardelyx Presentation and BIO.
    \71\ See letter from BIO.
    \72\ Jacqueline Hammersley, Linda Myers, and Catherina
Shakespeare, Market Reactions to the Disclosure of Internal Control
Weaknesses and to the Characteristics of those Weaknesses under
Section 302 of the Sarbanes Oxley Act of 2002 (Mar. 2008), available
at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=979538.
---------------------------------------------------------------------------

    In addition to these broader points, several commenters in the
banking sector pointed out that community banks and bank holding
companies are subject to extensive supervision and regulation by
federal and state banking regulators, which they stated would protect
investors in this industry even if the affected issuers were not
subject to the ICFR auditor attestation requirement.\73\
---------------------------------------------------------------------------

    \73\ See, e.g., letters from BSC, Guaranty, ICBA, and SCBA.
---------------------------------------------------------------------------

    Conversely, other commenters asserted that the ICFR auditor
attestation requirement is an important investor protection and that
eliminating it would undermine such protection.\74\

One commenter disputed the contention in the Proposing Release that
eliminating the ICFR auditor attestation requirement for low-revenue
issuers would not significantly affect the ability of investors to make
informed investment decisions.\75\ Some commenters stated that the ICFR
auditor attestation requirement increases investor confidence generally
\76\ and that investors view the requirement as beneficial.\77\
---------------------------------------------------------------------------

    \74\ See, e.g., letters from Better Markets, Grant Thornton, and
Prof. Barth et al.
    \75\ See letter from Prof. Barth et al.
    \76\ See, e.g., letters from Better Markets, CAQ, CFA Inst., and
EY.
    \77\ See, e.g., letters from CII, CFA Inst., and EY.
---------------------------------------------------------------------------

    Some commenters asserted that the SOX Section 404(a) requirement
would not provide investors in low-revenue SRCs with sufficient
protection if they were not also subject to the ICFR auditor
attestation requirement \78\ because, as one commenter stated, the ICFR
auditor attestation requirement acts as an effective check on SOX
Section 404(a).\79\ Another commenter asserted that management's
assessment is weakened when management knows that it will not be
challenged by an ICFR auditor attestation.\80\ A third commenter
claimed that investors would place undue reliance on management's
report when not accompanied by an ICFR auditor attestation.\81\
---------------------------------------------------------------------------

    \78\ See, e.g., letters from Better Markets, CFA Inst., Crowe,
Grant Thornton, and Prof. Barth et al.
    \79\ See letter from Better Markets.
    \80\ See letter from CFA Inst.
    \81\ See letter from Grant Thornton.
---------------------------------------------------------------------------

    A few commenters noted that a financial statement audit does not
provide the same level of assurance as an integrated audit \82\ because
a financial statement audit's objective is different from that of an
integrated audit as it relates to ICFR.\83\ Therefore, some commenters
asserted that, without the ICFR auditor attestation requirement, the
requirement for auditors to obtain an understanding of each component
of ICFR when conducting a financial statement audit would not provide
sufficient investor protection.\84\ Similarly, other commenters
suggested that some testing of ICFR conducted as part of a financial
statement audit would not provide sufficient investor protection.\85\
One commenter asserted that the control testing performed by a
financial statement auditor would not be as extensive as testing
performed in an ICFR auditor attestation and that it is more difficult
for a financial statement auditor to challenge the design of ICFR.\86\
Another commenter noted that, despite the requirement that a financial
statement auditor communicate any significant deficiencies or material
weaknesses related to ICFR to the issuer's management and its audit
committee, a financial statement audit is not designed to identify such
significant deficiencies or material weaknesses.\87\
---------------------------------------------------------------------------

    \82\ See, e.g., letters from CFA Inst., Crowe, and EY.
    \83\ See, e.g., letters from CAQ, CFA Inst., and RSM (noting
that a financial statement audit's objective is for the auditor to
obtain an understanding of the issuer's ICFR that is sufficient to
assess the factors that affect the risks of material misstatement
and to design further audit procedures, whereas an integrated
audit's objective is to test and express an opinion on the
effectiveness of the issuer's ICFR).
    \84\ See, e.g., letters from CAQ, CFA Inst. Crowe, EY, and RSM.
    \85\ See, e.g., letters from EY, Grant Thornton, and NASBA.
    \86\ See letter from EY.
    \87\ Id.
---------------------------------------------------------------------------

    Some commenters indicated that the ICFR auditor attestation
requirement promotes effective ICFR and more accurate disclosures
related to ICFR,\88\ including the likelihood and timeliness of
disclosing ineffective ICFR.\89\ Also, a number of commenters noted
that, as discussed in the Proposing Release, effective ICFR, generally,
and the ICFR auditor attestation requirement, more specifically,
enhances transparency; \90\ increases the quality and reliability of
issuers' financial statements,\91\ corporate governance,\92\
audits,\93\ and analyst forecasts; \94\ and reduces the number of
issuers' restatements, misstatements,\95\ the instances of fraud,\96\
and occurrences of insider trading.\97\
---------------------------------------------------------------------------

    \88\ See, e.g., letters from Better Markets, CFA, CII, Crowe,
Grant Thornton, Prof. Barth et al., and PWC.
    \89\ See, e.g., letters from Better Markets, CFA, Crowe, and
Prof. Barth et al.
    \90\ See letter from EY.
    \91\ See, e.g., letters from Better Markets, CAQ, CFA, CII,
Deloitte, EY, Grant Thornton, Prof. Barth et al., PWC, and RSM.
    \92\ See letter from Deloitte.
    \93\ See letter from CAQ.
    \94\ See letter from CFA.
    \95\ See, e.g., letters from CAQ, CFA, CFA Inst., Crowe,
Deloitte, EY, Grant Thornton, and Prof. Barth et al.
    \96\ See, e.g., letters from Better Markets and Deloitte.
    \97\ See letter from CFA.
---------------------------------------------------------------------------

    A few commenters expressed concern about the effect that the
amendments could have on the reliability of key performance indicators
and other measures. One commenter indicated that investors in certain
issuers that would become non-accelerated filers under the amendments
rely on key performance indicators that are derived from their
financial statements, such as backlog, sales orders, and number of
customers, and asserted that eliminating the ICFR auditor attestation
requirement could reduce the reliability of those indicators.\98\
Another commenter noted that investors in those issuers rely on non-
GAAP financial measures, key performance indicators, and other
disclosures and stated that the Commission may wish to consider auditor
involvement with that information to address potential risks related to
completeness and accuracy.\99\
---------------------------------------------------------------------------

    \98\ See letter from NASBA.
    \99\ See letter from CAQ.
---------------------------------------------------------------------------

d. Comments on the Disproportionate Costs and Benefits of the ICFR
Auditor Attestation Requirement to Small and Low-Revenue Companies
    A number of commenters stated that the ICFR auditor attestation
requirement is quite costly.\100\ One of these commenters indicated
that the ICFR auditor attestation requirement ``is the most costly
aspect of being an [a]ccelerated [f]iler.'' \101\ Several commenters
asserted more specifically that the ICFR auditor attestation
requirement is disproportionally costly to small and/or low-revenue
issuers.\102\ Some of these commenters indicated that the reason for
the disproportionate costs is that there are fixed costs associated
with the ICFR auditor attestation requirement that are not scalable for
smaller issuers.\103\ Other commenters stated that the benefits of the
ICFR auditor attestation requirement do not outweigh the costs,\104\
including the costs associated with ICFR auditor attestation fees,\105\
issuer personnel time,\106\ and outside consultants.\107\
---------------------------------------------------------------------------

    \100\ See, e.g., letters from BIO, Broadmark, Carver, Guaranty,
ICBA, MSB, Summit, and Syros.
    \101\ Letter from Guaranty.
    \102\ See, e.g., letters from AdvaMed et al., Andersen, BIO,
Broadmark, Chamber, CLSA, CSB, Guaranty, and NAM.
    \103\ See, e.g., letters from Broadmark and Guaranty.
    \104\ See, e.g., letters from ICBA, MSB, and Syros.
    \105\ See, e.g., letters from MSB and Summit.
    \106\ See, e.g., letters from Carver, MSB, and Summit.
    \107\ See, e.g., letters from MSB and Summit.
---------------------------------------------------------------------------

    Some commenters asserted that eliminating the ICFR auditor
attestation requirement would not substantially reduce costs to
issuers.\108\ A few of these commenters noted that ICFR auditor
attestations have become less expensive and more effective because
auditors are more experienced in conducting them.\109\ Some commenters
stated that potential compliance cost reductions may be negated if
there is a loss of investor confidence and protection,\110\ if ICFR
deficiencies go undetected,\111\ if there is an increase in
restatements and misstatements,\112\ or if there are higher

costs of capital.\113\ Additionally, some commenters stated that any
cost reductions would vary widely among issuers \114\ and would be hard
to quantify.\115\
---------------------------------------------------------------------------

    \108\ See, e.g., letters from BDO, Better Markets, CFA, CFA
Inst., EY, Grant Thornton, and RSM.
    \109\ See, e.g., letters from CFA Inst. and Deloitte.
    \110\ See, e.g., letters from Better Markets and CII.
    \111\ See letter from CFA Inst.
    \112\ See, e.g., letters from BDO, CFA, and CFA Inst.
    \113\ See, e.g., letters from CFA and CFA Inst.
    \114\ See, e.g., letters from EY, Grant Thornton, and PWC.
    \115\ See, e.g., letters from Grant Thornton, PWC, and RSM.
---------------------------------------------------------------------------

    Other commenters asserted that the benefits of the ICFR auditor
attestation requirement are not as great for low-revenue and smaller
issuers as they are for other issuers.\116\ These commenters expressed
the view that the issuers that would be exempt from the ICFR auditor
attestation requirement under the proposed amendments are less likely
to have ineffective ICFR than other issuers. One commenter cited a
study that concluded that biotech EGCs are less likely to have
ineffective ICFR than other issuers.\117\ Another commenter noted that
ineffective ICFR is less of a concern for banking issuers because of
the ``federal and state regulatory oversight and internal control
audits of community banks.'' \118\
---------------------------------------------------------------------------

    \116\ See, e.g., letters from BIO and Guaranty.
    \117\ See letter from BIO (citing the BIO Study). Note that the
BIO Study investigates only the incremental effect of being in the
category of biotech EGCs after accounting for the association of
ineffective ICFR with the other characteristics of these issuers
(such as their size and return on assets). It is unclear from the
study whether these issuers have a higher or lower rate of
ineffective ICFR on average, when considering all of their
characteristics.
    \118\ See letter from Guaranty.
---------------------------------------------------------------------------

    Conversely, a number of other commenters contended that the
benefits of the ICFR auditor attestation requirement are greater for
low-revenue and smaller issuers than for other issuers.\119\ Some of
the commenters discussed how those issuers are more likely to have
ineffective ICFR.\120\ Commissioner Robert J. Jackson Jr.'s dissent
from the Proposing Release (``Commissioner Jackson's Statement'') \121\
asserted that investors care most about ICFR auditor attestations at
those issuers that would not be subject to the ICFR auditor attestation
requirement under the proposed amendments, and that high-growth
companies, which potentially would include some of the affected
issuers, are those in which the risk and consequences of fraud are the
greatest.\122\ Some commenters referred to statistics cited in the
Proposing Release to argue that issuers not subject to the ICFR auditor
attestation requirement have higher levels of ineffective ICFR compared
with issuers subject to that requirement.\123\ Additionally, commenters
observed that some low-revenue issuers or smaller companies may still
have complex financial statements that require sophisticated
accounting.\124\
---------------------------------------------------------------------------

    \119\ See, e.g., letters from Better Markets, CAQ, CFA, CFA
Inst., CII, Crowe, EY, Grant Thornton, IMA, NASBA, Prof. Barth et
al., Prof. Hassell, and RSM.
    \120\ See, e.g., letters from Better Markets, CAQ, CFA, CII,
Grant Thornton, IMA, NASBA, Prof. Barth et al., and Prof. Hassell.
    \121\ Commissioner Robert J. Jackson Jr., Statement on Proposed
Amendments to Sarbanes Oxley 404(b) Accelerated Filer Definition
(May 9, 2019), available at https://www.sec.gov/news/public-statement/jackson-statement-proposed-amendments-accelerated-filer-definition. A few commenters cited Commissioner Jackson's Statement.
See, e.g., letters from CFA, CFA Inst., and CII.
    \122\ We address Commissioner Jackson's Statement in the
Economic Analysis. See Section IV.C.3.c. below.
    \123\ Commenters cited the statistics in the Proposing Release,
note 4 above, that over 40 percent of non-accelerated filers that
are not subject to the ICFR auditor attestation requirement have
ineffective ICFR, compared to less than approximately nine and five
percent of accelerated and large accelerated filers, respectively.
As noted in the Proposing Release, note 4 above, over 68 percent of
non-accelerated filers have reported two consecutive years of
ineffective ICFR and over 38 percent have reported four consecutive
years of ineffective ICFR in their annual reports. See, e.g.,
letters from Better Markets and Grant Thornton.
    \124\ See, e.g., letters from BDO and RSM.
---------------------------------------------------------------------------

    Finally, some commenters maintained that the risks of fraud \125\
and financial statement restatements or misstatements \126\ are greater
for the issuers that would not be subject to the ICFR auditor
attestation requirement under the proposed amendments than they are for
other issuers. Other commenters cited research that concludes that,
since 2003, non-accelerated U.S. filers accounted for 62 percent of the
total U.S. financial statement restatements.\127\ Some commenters
contended that issuers that would not be subject to the ICFR auditor
attestation requirement under the proposed amendments have fewer
resources and personnel,\128\ which could result in increased
misstatements,\129\ unidentified material weaknesses,\130\ and
ineffective ICFR.\131\
---------------------------------------------------------------------------

    \125\ See, e.g., letters from Better Markets, CFA, CII, and
Prof. Barth et al.
    \126\ See, e.g., letters from Better Markets, CAQ, EY, Grant
Thornton, IMA, Prof. Barth et al., and RSM.
    \127\ See, e.g., letters from CAQ and CFA Inst.
    \128\ See, e.g., letters from CAQ, Crowe, EY, and Grant
Thornton.
    \129\ See, e.g., letter from Crowe.
    \130\ See, e.g., letter from EY.
    \131\ See, e.g., letters from CAQ and Grant Thornton.
---------------------------------------------------------------------------

e. Comments on the Relationship Between Non-Accelerated Filers and SRCs
    A number of commenters discussed the relationship between the non-
accelerated filer and SRC definitions.\132\ Some commenters noted the
current relationship is incongruent, which results in complexity.\133\
Several commenters indicated that the proposed amendments would reduce
some of this complexity by more closely aligning the definitions.\134\
In contrast, other commenters asserted that the proposed amendments
would increase the complexity of determining filer status.\135\
---------------------------------------------------------------------------

    \132\ See, e.g., letters from ASA, BDO, BIO, Broadmark, CFA, CFA
Inst., Chamber, EY, Grant Thornton, Guaranty, KPMG LLP (July 29,
2019) (``KPMG''), NAM, Nasdaq, PWC, and RSM.
    \133\ See, e.g., letters from BDO, BIO, Broadmark, CFA, and
Nasdaq.
    \134\ See, e.g., letters from BIO, Grant Thornton, KPMG, and
Nasdaq.
    \135\ See, e.g., letters from BDO, CFA Inst., EY, PWC, and RSM.
See also SBCFAC Meeting Transcript (Aug. 13, 2019), available at
https://www.sec.gov/info/smallbus/acsec/sbcfac-transcript-081319.pdf.
---------------------------------------------------------------------------

    While supporting the proposed amendments, some commenters
recommended that the final amendments completely align the SRC and non-
accelerated filer definitions.\136\ Additionally, one commenter
recommended further extending the relief from the ICFR auditor
attestation requirement to issuers with a public float that exceeds
$700 million if their annual revenues are less than $100 million.\137\
---------------------------------------------------------------------------

    \136\ See, e.g., letters from ASA, Guaranty, NAM, and Nasdaq.
    \137\ See letter from Corvus.
---------------------------------------------------------------------------

f. Other Comments
    We received a variety of other comments on the Proposing Release.
Some commenters noted that it is difficult for investors to easily
determine whether an issuer's filing includes an ICFR auditor
attestation.\138\ These commenters suggested requiring issuers to
disclose whether they are exempt from the ICFR auditor attestation
requirement \139\ and/or have voluntarily obtained an ICFR auditor
attestation \140\ either on a filing's cover page,\141\ such as with a
check box,\142\ or in management's report on ICFR.\143\ Two commenters
recommended that the Commission engage in a post-implementation review
of the impact of the final amendments,\144\ with one of these
commenters recommending that

the final amendments require a review of the impact of the changes on
the affected registrants five years after adoption of the
amendments.\145\ Some commenters requested that we allow sufficient
time and notice for auditors and issuers to prepare for compliance with
the final amendments,\146\ whereas other commenters noted that some
issuers may be subject to the ICFR auditor attestation requirement for
only a short time \147\ and requested the Commission adopt final
amendments quickly.\148\ One commenter asserted that the measurement
date for non-accelerated filer status and the timing of the start of
the auditor's attestation of ICFR is burdensome to small biotech
registrants.\149\
---------------------------------------------------------------------------

    \138\ See, e.g., letters from CAQ, CFA Inst., and Grant
Thornton.
    \139\ See, e.g., letters from CFA Inst., CII, and Grant
Thornton.
    \140\ See, e.g., letters from CFA Inst. and KPMG.
    \141\ See, e.g., letters from CAQ, CFA Inst., CII, and Grant
Thornton.
    \142\ See, e.g., letters from CAQ and Grant Thornton.
    \143\ See letter from Grant Thornton.
    \144\ See letters from IMA and PWC.
    \145\ See letter from IMA.
    \146\ See, e.g., letters from BDO, CAQ, Crowe, EY, KPMG, PWC,
and RSM.
    \147\ See, e.g., letters from Concert, MSB, Nasdaq, and Xenon.
    \148\ See, e.g., letters from MSB and Summit.
    \149\ See letter from Corvus. Public float for both SRC status
and accelerated and large accelerated filer status is measured on
the last business day of the issuer's most recently completed second
fiscal quarter, and revenue for purposes of determining SRC status
is measured based on annual revenues for the most recent fiscal year
completed before the last business day of the second fiscal quarter.
Therefore, an issuer will be aware of any change in SRC status or
accelerated or large accelerated filer status as of that date.
Although an issuer that determines it will no longer be eligible to
be an SRC is permitted to continue to use the SRC accommodations for
the Form 10-K for the year in which it fails the measurement test,
an issuer that becomes an accelerated or large accelerated filer on
that same measurement date would be required to include the ICFR
auditor attestation in that Form 10-K. See Rule 12b-2, Item
10(f)(2)(i)(C), and Rule 405. Although the transition provisions
apply differently, the measurement dates for SRC status and
accelerated and large accelerated filer status each provide an
issuer with at least six months to prepare for a change in its
status, and we continue to believe that this is an adequate amount
of time to prepare for the transition.
---------------------------------------------------------------------------

    Additionally, although we did not propose amendments to the
accelerated and large accelerated filer definitions that would
specifically address foreign private issuers (``FPI'') or business
development companies (``BDC''), we solicited comment on these points
and a few commenters requested we do so.\150\ One commenter asserted
that there should be no disparity between an FPI that presents its
financial statements in accordance with International Financial
Reporting Standards (``IFRS'') and a domestic issuer or FPI that
presents its financial statements in accordance with U.S. GAAP.\151\
The commenter noted that an FPI that presents its financial statements
in accordance with IFRS cannot be an SRC, so such an FPI cannot rely on
the proposed amendments. Another commenter recommended that the
Commission extend the benefits of non-accelerated filer status to BDCs
if they have total investment income of less than $80 million in their
most recently completed fiscal year for which audited financial
statements are available and have either no public float or public
float of less than $700 million.\152\ The commenter stated that
allowing BDCs to qualify as non-accelerated filers under this modified
SRC revenue test would reduce regulatory asymmetry between BDCs and
operating companies, consistent with recent congressional mandates to
allow BDCs to use the same offering rules as operating companies. The
commenter also suggested that allowing smaller BDCs to benefit from
non-accelerated filer status would ease regulatory costs and burdens,
which could encourage more BDCs to enter public markets, creating
greater access to capital for small operating companies and expanding
investment opportunities for retail investors.\153\
---------------------------------------------------------------------------

    \150\ See, e.g., letters from Dorsey & Whitney LLP (Aug. 16,
2019) (``Dorsey & Whitney'') and Proskauer Rose LLP (July 26, 2019)
(``Proskauer'').
    \151\ See letter from Dorsey & Whitney.
    \152\ See letter from Proskauer.
    \153\ Id.
---------------------------------------------------------------------------

3. Final Amendments
    After considering the comments, we are adopting the final
amendments substantially as proposed. The final amendments add a new
condition to the accelerated and large accelerated filer definitions in
Rule 12b-2 that excludes an issuer that is eligible to be an SRC and
that had annual revenues of less than $100 million in the most recent
fiscal year for which audited financial statements are available. The
amendments also allow BDCs to qualify for this exclusion if they meet
the requirements of the SRC revenue test using their annual investment
income as the measure of annual revenue, although BDCs would continue
to be ineligible to be SRCs.\154\ The final amendments are consistent
with our historical practice of providing scaled disclosure and other
accommodations for smaller issuers \155\ and with recent actions by
Congress to reduce burdens on new and smaller issuers.\156\ The table
below summarizes the conditions required to be considered an
accelerated and large accelerated filer under the final amendments to
Rule 12b-2.
---------------------------------------------------------------------------

    \154\ See Section II.B.3.f. below.
    \155\ See, e.g., Smaller Reporting Company Regulatory Relief and
Simplification, Release No. 33-8876 (Dec. 19, 2007) [73 FR 934 (Jan.
4, 2008)]; Smaller Reporting Company Regulatory Relief and
Simplification, Release No. 33-8876 (Dec. 19, 2007) [73 FR 934 (Jan.
4, 2008)] (``2007 SRC Adopting Release''); and SRC Adopting Release,
note 12 above.
    \156\ See note 11 above.

 Table 1--Accelerated Filer and Large Accelerated Filer Conditions Under
                          the Final Amendments
------------------------------------------------------------------------
                                               Final large accelerated
     Final accelerated filer conditions            filer conditions
------------------------------------------------------------------------
The issuer has a public float of $75         The issuer has a public
 million or more, but less than $700          float of $700 million or
 million, as of the last business day of      more, as of the last
 the issuer's most recently completed         business day of the
 second fiscal quarter.                       issuer's most recently
                                              completed second fiscal
                                              quarter.
The issuer has been subject to the           Same.
 requirements of Exchange Act Section 13(a)
 or 15(d) for a period of at least twelve
 calendar months.
The issuer has filed at least one annual     Same.
 report pursuant Exchange Act Section 13(a)
 or 15(d).
The issuer is not eligible to use the        Same.
 requirements for SRCs under the revenue
 test in paragraph (2) or (3)(iii)(B), as
 applicable, of the ``smaller reporting
 company'' definition in Rule 12b-2 or, in
 the case of a BDC, does not meet the
 requirements of the revenue test in those
 paragraphs using annual investment income
 as the measure of its annual revenues.
------------------------------------------------------------------------

    Below we discuss specific aspects of the final amendments about
which we received significant public comment and our response to those
comments. In many cases, our responses reflect analysis and data that
is more comprehensively presented in the Economic Analysis.\157\
---------------------------------------------------------------------------

    \157\ See Section IV. below.

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

a. Using Revenue for Determining Accelerated and Large Accelerated
Filer Status
    As discussed above,\158\ several commenters supported the use of
revenue in the proposal, providing a variety of reasons that a revenue
measurement is preferable to using a public float measurement.\159\
Others, however, questioned whether revenue is an appropriate measure
for determining whether an issuer should be considered a non-
accelerated filer.\160\ One of these commenters asserted that low-
revenue issuers may have less sophisticated or experienced accounting
functions and some aspects of their business may be associated with
accounting complexities.\161\ Also, the commenter suggested that these
issuers may recognize revenue in ways that could result in them
frequently transitioning in and out of non-accelerated filer
status.\162\
---------------------------------------------------------------------------

    \158\ See Section II.A.2.a. above.
    \159\ See, e.g., letters from Broadmark, Chamber, Concert,
Corvus, and MSB.
    \160\ See, e.g., letters from EY and Grant Thornton, and NASBA.
    \161\ See letter from EY.
    \162\ Id.
---------------------------------------------------------------------------

    As we discuss in more detail below,\163\ we continue to believe, as
a general matter, that there may be greater costs and relatively lower
benefits to including low-revenue issuers, as compared to other
issuers, in the accelerated and large accelerated filer definitions.
While we recognize that the circumstances of individual issuers and
their accounting systems and processes may vary, we believe that low-
revenue issuers may, on average, be less susceptible to the risk of
certain types of restatements, such as those related to revenue
recognition.\164\ We also note that the revisions to the transition
thresholds included in the final amendments may help minimize the risk
of frequent reclassifications of issuer status.\165\ For these reasons,
we continue to believe that revenue is an appropriate measure for
determining whether an issuer should be considered a non-accelerated
filer.
---------------------------------------------------------------------------

    \163\ See Sections II.B.3.d. and Section IV.C.2.d. below.
    \164\ See Section IV.C.3. below.
    \165\ See Section II.C. below.
---------------------------------------------------------------------------

b. Effect on Capital Formation and the Number of Public Companies
    Under the final amendments, an issuer that is eligible to be an SRC
and that meets the SRC revenue test will not be required to comply with
accelerated or large accelerated filer requirements and, thereby, will
not be subject to the ICFR auditor attestation requirement. Not
subjecting these affected issuers to the ICFR auditor attestation
requirement should reduce their compliance costs. As discussed in the
Economic Analysis,\166\ we estimate that, consistent with the proposal,
an issuer no longer subject to the ICFR auditor attestation requirement
would save approximately $210,000 per year comprised of approximately
$110,000 per year reduction in audit fees and an additional reduction
in non-audit costs of approximately $100,000.
---------------------------------------------------------------------------

    \166\ See Section IV.C.2.b. below.
---------------------------------------------------------------------------

    Some commenters stated that eliminating the ICFR auditor
attestation requirement would enhance capital formation or allow those
issuers to preserve capital.\167\ We note, however, that a number of
other commenters asserted that these cost savings would be small,\168\
and may not help capital formation.\169\ As we discuss in the Economic
Analysis,\170\ we continue to believe that the expected savings are
likely to represent a meaningful cost savings for many of the affected
issuers and, therefore, may have a positive effect on capital
preservation and formation. Although the average annual cost savings
may represent a small percentage of the average affected issuer's
revenues and market capitalization, we believe those savings may be
meaningful given that affected issuers have, on average, negative net
income and negative net cash flows from operations.\171\ More
generally, low-revenue issuers are likely to face financing constraints
because they do not have access to internally generated capital.\172\
Therefore, the average savings of $210,000 per year for these issuers
may be put to productive use \173\ such as developing the company.\174\
---------------------------------------------------------------------------

    \167\ See, e.g., letters from Andersen, CLSA, Concert, ICBA, and
NASBA.
    \168\ See letters from CFA, CFA Inst., CII, and Prof. Barth et
al.
    \169\ See note 50 above.
    \170\ See Section IV.C.2.d. below.
    \171\ See note 362 below.
    \172\ This information is based on staff analysis of data from
Compustat. See Section IV.C.2.d. below.
    \173\ For example, in a survey of issuers in the biotech
industry, among 11 biotech EGCs that responded to a question
regarding how an extension of the exemption from the ICFR auditor
attestation requirement would affect them given the costs associated
with the requirement, eight out of the 11 issuers indicated that
they expected a positive impact on investments in research and
development and six out of the 11 issuers indicated that they
expected a positive impact on hiring employees. See BIO Study, note
423 above.
    \174\ See, e.g., letters from Adamas, Aequor, Andersen, Ardelyx,
Catalyst, Chiasma, CLSA, Concert, Corvus, CymaBay, Dar[eacute],
Evoke, Equillium, Gritstone, ICBA, Kezar, Marinus, Millendo, NASBA,
Organovo, Pieris, Revance, SI-BONE, Sutro, Syros, Teligent, and
Zynerba.
---------------------------------------------------------------------------

    As we noted in the Proposing Release,\175\ the affected issuers are
a type of smaller issuer whose representation in public markets has
decreased relative to the years before SOX. Over the past two decades,
the number of issuers listed on major exchanges has decreased by about
40 percent,\176\ but the decline has been concentrated among smaller
size issuers. For example, the number of listed issuers with a market
capitalization below $700 million has decreased by about 65
percent,\177\ and the number of issuers with less than $100 million in
revenue has decreased by about 60 percent.\178\ Although factors other
than the ICFR auditor attestation requirement may have contributed to
the decline,\179\ we believe that the described cost reductions
associated with the final amendments could be a positive factor in
encouraging additional small companies to register their securities
offerings or a class of their securities, which would provide an
increased level of transparency and investor protection with respect to
those companies.\180\
---------------------------------------------------------------------------

    \175\ See Section III.C.1. of the Proposing Release, note 4
above. Staff extracted information regarding whether issuers
reported having securities registered under Section 12(b) of the
Exchange Act from the cover page of annual report filings using a
computer program supplemented with hand collection. See note 336
below for details on the identification of the population of
affected issuers.
    \176\ This estimate is based on staff analysis of data from the
Center for Research in Security Prices database for December 1998
versus December 2018. The estimate excludes RICs and issuers of
ADRs.
    \177\ Id.
    \178\ This estimate is based on staff analysis of data from
Standard & Poor's Compustat and Center for Research in Security
Prices databases for fiscal year 1998 versus fiscal year 2017. The
estimate excludes RICs and issuers of ADRs.
    \179\ See note 54 above.
    \180\ See, e.g., letters from AdvaMed, AdvaMed et al.,
Broadmark, Cerecor, and ICBA.
---------------------------------------------------------------------------

c. Effect on Investor Protection
    We continue to believe that the amendments are not likely to have a
significant effect on the overall ability of investors in the affected
issuers to make informed investment decisions and note that many
commenters agreed with this assessment.\181\ As discussed in greater
detail in the Proposing Release,\182\ issuers have a number of other
obligations that we believe will provide sufficient protections for
investors in the affected issuers and allow investors in those issuers
to make informed investment decisions. These responsibilities derive
from the Foreign Corrupt Practices Act (``FCPA'')

requirements with respect to internal accounting controls \183\ as well
as a number of different changes to financial reporting that were
introduced by SOX.\184\
---------------------------------------------------------------------------

    \181\ See note 61 to 68 above and accompanying text.
    \182\ See Section II.B. of the Proposing Release, note 4 above.
    \183\ The FCPA added Section 13(b)(2)(B) to the Exchange Act, 15
U.S.C 78m(b)(2)(B) (referring to ``internal accounting controls''
rather than ICFR).
    \184\ See, e.g., SOX Sections 302, 15 U.S.C. 7241, and 404(a)
and related rules. See 17 CFR 229.308, 17 CFR 240.13a-15, 17 CFR
240.15d-15, Form 20-F, Form 40-F, 17 CFR 270.30a-2, and 17 CFR
270.30a-3.
---------------------------------------------------------------------------

    For example, although a non-accelerated filer that is eligible to
be an SRC and that meets the SRC revenue test will not be subject to
the ICFR auditor attestation requirement, it will remain subject to the
SOX Section 404(a) requirement to state in its annual report the
responsibility of management for establishing and maintaining an
adequate control structure and procedures for financial reporting, and
for that report to contain an assessment of the effectiveness of that
structure and its procedures. In addition, affected issuers are
required to devise and maintain a system of internal accounting
controls sufficient to provide reasonable assurances that transactions
are recorded as necessary to permit the preparation of financial
statements in conformity with GAAP.\185\ Also, the principal executive
and financial officers of certain issuers are required to certify that,
among other things, they are responsible for establishing and
maintaining ICFR, have designed disclosure controls and procedures to
ensure material information relating to the issuer and its consolidated
subsidiaries is made known to such officers by others within those
entities, and have evaluated and reported on the effectiveness of the
issuer's disclosure controls and procedures.\186\
---------------------------------------------------------------------------

    \185\ 15 U.S.C. 78m(b)(2)(B).
    \186\ See 17 CFR 240.13a-14 or 17 CFR 240.15d-14 (requiring
certification) and 17 CFR 229.601(b)(31) (prescribing certification
content). These rules were adopted pursuant to SOX Section 302. See
15 U.S.C. 7241.
---------------------------------------------------------------------------

    Furthermore, the issuers that are subject to the final amendments
will remain subject to a financial statement audit by an independent
auditor, which will help maintain appropriate investor protections.
Even without an ICFR auditor attestation requirement, an independent
auditor is required to consider ICFR in the performance of a financial
statement audit.\187\ We acknowledge, as stated by some
commenters,\188\ that the objective of a financial statement audit and
the level of control testing performed is different from an ICFR audit.
However, we believe that the requirements of a financial statement
audit, among other requirements, provide some additional protections
and that, for low-revenue SRCs, this and the other protections and
factors associated with these issuers described above sufficiently
mitigate the risk that the final amendments will adversely affect the
ability of investors to make informed investment decisions.\189\
---------------------------------------------------------------------------

    \187\ See Public Company Accounting Oversight Board (``PCAOB'')
Accounting Standard (``AS'') 2110, Identifying and Assessing Risks
of Material Misstatement, paragraphs .18 through .40 (``PCAOB AS
2110''), paragraphs .18 through .40.
    \188\ See note 83 above.
    \189\ See Section IV.C.3.b. below (stating that, in the
Proposing Release, note 4 above, we noted that low-revenue issuers
may be less likely than other issuers to fail to detect and disclose
material weaknesses in the absence of an ICFR auditor attestation,
perhaps because they have less complex financial systems and
controls).
---------------------------------------------------------------------------

    For example, the auditor in a financial statement audit is required
to identify and assess the risks of material misstatements, which is
similar to the risk assessment evaluation required in an ICFR auditor
attestation. Additionally, the auditor engaged in a financial statement
audit often may test the operating effectiveness of certain internal
controls even if not performing an integrated audit to reduce the
extent of substantive testing required to issue an opinion on the
financial statements. Moreover, even if an auditor decides not to rely
on internal controls to reduce the extent of substantive testing, the
auditor may still identify internal control deficiencies during such
substantive testing in a financial statement audit.
    Under PCAOB standards, the evaluation and communication of
significant deficiencies and material weaknesses in ICFR to management
and the issuer's audit committee is required in both a financial
statement audit and an ICFR auditor attestation.\190\ The evaluation of
the severity of a control deficiency identified by the auditor is the
same for a financial statement audit and an ICFR auditor attestation.
Further, a financial statement auditor has the responsibility to review
management's disclosure for any misstatement of facts, such as a
statement that ICFR is effective when there is a known material
weakness.\191\ Therefore, we continue to believe significant
deficiencies and material weaknesses that an ICFR auditor attestation
may uncover also may be uncovered as a part of the financial statement
audit of a low-revenue SRC. As discussed above,\192\ because of these
requirements, a number of commenters agreed that an auditor of the
financial statements of a low-revenue issuer that would be exempt from
the ICFR auditor attestation requirement under the final amendments
would still be required to consider ICFR and therefore this process
would provide sufficient investor protection.
---------------------------------------------------------------------------

    \190\ See Section II.C. of the Proposing Release, note 4 above.
    \191\ Id.
    \192\ See notes 61 to 68 above and accompanying text.
---------------------------------------------------------------------------

    Other developments may serve to reinforce these existing investor
protections. In 2010, the PCAOB adopted enhanced auditing standards
related to the auditor's assessment of, and response to, risk that, in
part, clarify and augment the extent to which internal controls are to
be considered in a financial statement audit.\193\ In particular, these
risk assessment standards require auditors in both an integrated and
financial statement audit to evaluate the design of certain
controls.\194\ The PCAOB has expressed concern about the number and
significance of deficiencies in auditing firm compliance with these
risk assessment auditing standards, but it has also noted promising
improvements in their application.\195\
---------------------------------------------------------------------------

    \193\ See Auditing Standards Related to the Auditor's Assessment
of and Response to Risk and Related Amendments to PCAOB Standards,
PCAOB Release No. 2010-004 (Aug. 5, 2010) (``PCAOB Release No. 2010-
004''). See also Public Company Accounting Oversight Board; Order
Approving Proposed Rules on Auditing Standards Related to the
Auditor's Assessment of and Response to Risk and Related Amendments
to PCAOB Standards, Release No. 34-63606, File No. PCAOB 2010-01
(Dec. 23, 2010) [75 FR 82417 (Dec. 30, 2010)] (``PCAOB Release No.
2010-01''). These auditing standards are discussed in further detail
in the Economic Analysis. See Section IV.B.1. below.
    \194\ See AS 2110, paragraphs .18 through .40, note 187 above.
    \195\ See Inspection Observations Related to PCAOB ``Risk
Assessment'' Auditing Standards (No. 8 through No.15), PCAOB Release
No. 2015-007 i through iii (Oct. 15, 2015) (``PCAOB Release No.
2015-007'').
---------------------------------------------------------------------------

    Additionally, recent settled charges against four public companies
for failing to maintain effective ICFR for seven to 10 consecutive
annual reporting periods \196\ may have a deterrent effect on issuers
failing to remediate material weaknesses, which could reduce the
overall rate of persistence of material weaknesses in ICFR. Also, if
management elects to obtain and use automated controls testing and
process automation,\197\ this may result in

improvements in ICFR regardless of the ICFR auditor attestation
requirement if their increased application results in more robust
financial reporting with fewer opportunities for ICFR deficiencies and/
or in an increase by management in their testing and related
improvements of controls. In Section IV.C.3.b.5, we note, as an
example, that issuers may have made investments in systems, procedures,
or training to explain how control improvements may persist for certain
affected issuers. Finally, we note that auditors have had many years of
experience with the 2010 risk assessment standards, and therefore
auditors may be more likely to test ICFR, even if an ICFR auditor
attestation is not required, as a means of enhancing auditing
efficiency.\198\
---------------------------------------------------------------------------

    \196\ See SEC Charges Four Public Companies with Longstanding
ICFR Failures, press release (Jan. 29,2019) (``SEC Press Release''),
available at https://www.sec.gov/news/press-release/2019-6.
    \197\ See, e.g., Kevin Moffitt, Andrea Rozario, & Miklos
Vasarhelyi (2018), Robotic Process Automation for Auditing, Journal
of Emerging Technologies, 15(1) Acct. 1 (``Robotic Process
Automation'') (describing how, for example, a robotic process
automation program can be ``set up to automatically match purchase
orders, invoices, and shipping documents [and] can check that the
price and quantity on each of the documents match [to] help auditors
validate the effectiveness of preventive internal controls . . .
.'').
    \198\ See Study and Recommendations on Section 404(b) of the
Sarbanes-Oxley Act of 2002 For Issuers With Public Float Between $75
and $250 Million at 106 (Apr. 2011) (``2011 SEC Staff Study''),
available at https://www.sec.gov/news/studies/2011/404bfloat-study.pdf (stating that ``. . . once effective controls are in place
at the issuer, the auditor is more likely to continue to test them
even if [it is] not issuing an auditor attestation during a
particular year in order to rely on them for purposes of reducing
substantive testing in the audit of the financial statements,
particularly for issuers that are larger and more complex'').
---------------------------------------------------------------------------

    We recognize that some commenters disagreed with this assessment
and asserted that investor protections other than the ICFR auditor
attestation requirement would not be sufficient because, among other
reasons, a financial statement audit has a different objective than an
integrated audit,\199\ testing of ICFR in a financial statement audit
is not as extensive,\200\ it is more difficult for a financial
statement auditor to challenge the design of ICFR,\201\ and a financial
statement audit is not designed to identify significant ICFR
deficiencies or material weaknesses.\202\ As discussed in the Economic
Analysis, we acknowledge that the amendments may be associated with
some adverse effects on the effectiveness of ICFR and the reliability
of financial statements for the affected issuers.\203\ However, the
Proposing Release presented evidence that suggests that these effects
and their impact on investor protection are likely to be mitigated in
the case of the affected issuers as compared to other accelerated
filers. The Economic Analysis provides further related analysis in
response to commenter feedback and does not find evidence that leads us
to alter this view.\204\
---------------------------------------------------------------------------

    \199\ See, e.g., letters from CAQ, CFA Inst., and RSM.
    \200\ See letter from EY.
    \201\ Id.
    \202\ Id.
    \203\ See Section IV.A. below.
    \204\ Id.
---------------------------------------------------------------------------

    One commenter indicated that a low-revenue issuer could have a
large market capitalization and thus ``greater investor exposure.''
\205\ As discussed in the Economic Analysis,\206\ we agree that, as
capitalization increases, there is more investor capital at risk. We
note, however, that relative to higher-revenue issuers, on average,
risk among these issuers is likely more associated with their future
prospects than their current financial statements.\207\ Therefore,
exempting low-revenue issuers from the ICFR auditor attestation
requirement is less likely to affect investor protections with respect
to those issuers.
---------------------------------------------------------------------------

    \205\ See letter from Grant Thornton.
    \206\ See Section IV.C.3.d. below.
    \207\ Also, the affected parties are limited to issuers with no
more than $700 million in public float. Further, as discussed in
Section IV.C.3.d below, we estimate that in aggregate the affected
issuers that will be newly exempt from all ICFR auditor attestation
requirements represent 0.2 percent of the total equity market
capitalization of issuers.
---------------------------------------------------------------------------

    One commenter noted its concern that certain issuers that would no
longer be subject to the ICFR auditor attestation requirement are
conducting large initial public offerings (``IPOs'') based on key
performance indicators that are derived from financial systems, and
that eliminating the ICFR auditor attestation requirement could result
in potentially less robust internal controls and unreliable data.\208\
To the extent the commenter is primarily concerned with the information
available to investors at the time of an IPO, we note that the affected
issuers that would be newly exempt from the ICFR auditor attestation
requirement are generally more mature firms that are not within five
years of their IPO.
---------------------------------------------------------------------------

    \208\ See letter from NASBA.
---------------------------------------------------------------------------

    Also, we believe the risk for those low-revenue issuers for which
key performance indicators are material to investors and that are
derived from financial systems is mitigated by the requirement to
maintain, evaluate, and disclose effectiveness of disclosure controls
and procedures \209\ on a quarterly basis.\210\ Key performance
indicators or non-GAAP measures disclosed within a report filed or
submitted to the Commission generally are within the scope of
disclosure controls and procedures. The financial systems from which an
issuer derives the key performance indicator or non-GAAP measure would
normally be included in ICFR and, therefore, within the scope of
management's assessments as well. Further, the Commission recently
issued disclosure guidance on key performance indicators and metrics
and reminded issuers of the importance of effective controls and
procedures when disclosing material key performance indicators or
metrics that are derived from their own information.\211\
---------------------------------------------------------------------------

    \209\ Although there is substantial overlap between an issuer's
disclosure controls and procedures and ICFR, there are elements of
each that are not subsumed by the other. See 17 CFR 240.13a-15 and
17 CFR 240.15d-15.
    \210\ See 17 CFR 240.13a-14 and 17 CFR 240.15d-14.
    \211\ See Commission Guidance on Management's Discussion and
Analysis of Financial Condition and Results of Operations, Release
No. 34-88094 (Jan. 30, 2020).
---------------------------------------------------------------------------

d. Disproportionate Costs and Benefits of the ICFR Auditor Attestation
for Small and Low-Revenue Companies
    Not only is the ICFR auditor attestation requirement costly in
general, as discussed above, a number of commenters asserted that the
ICFR auditor attestation requirement is disproportionally costly to
small and low-revenue issuers.\212\ We agree that the costs of the ICFR
auditor attestation requirement may be particularly burdensome for
these issuers because they include fixed costs that are not scalable
for smaller issuers, as also noted by several commenters.\213\ Further,
low-revenue issuers have limited access to internally generated
capital, and so the costs may more directly impact their ability to
spend on investments or hiring.\214\ We therefore expect that reducing
these costs would have a more beneficial impact on small and low-
revenue issuers than it would for other issuers. Some commenters
similarly expressed the view that the amendments would enhance these
issuers' ability to preserve capital without significantly affecting
the ability of investors to make informed investment decisions based on
the financial reporting of those issuers.\215\
---------------------------------------------------------------------------

    \212\ See note 102 above and accompanying text.
    \213\ See letters from ASA, Broadmark, Chamber, and Guaranty.
    \214\ See, e.g., letters from Dar[eacute], Summit and Xenon.
    \215\ See letters from Andersen, CLSA, Concert, ICBA, and NASBA.
---------------------------------------------------------------------------

    As discussed above, other commenters claimed that eliminating the
ICFR auditor attestation requirement would not substantially reduce
costs to issuers \216\ and that there would be other negative impacts
of this change.\217\ We acknowledge that the magnitude of these cost
savings likely will vary among issuers depending upon their

particular facts and circumstances \218\ and, as some commenters
asserted,\219\ ICFR auditor attestations have become less expensive
over time because auditors are more experienced in conducting them.
However, based on the comments received and our own analysis of
available data,\220\ we believe the cost reductions from not being
subject to the ICFR auditor attestation requirement could be
substantial for affected issuers.
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    \216\ See note 108 above and accompanying text.
    \217\ See notes 110 to 113 above and accompanying text.
    \218\ See, e.g., letters from EY, Grant Thornton, and PWC.
    \219\ See, e.g., letters from CFA Inst. and Deloitte.
    \220\ See Section IV.C.2.d.
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    We believe the benefits of the ICFR auditor attestation requirement
likely are fewer for low-revenue SRCs than for other issuers, an
assessment supported by some commenters.\221\ As a result, obtaining
the ICFR auditor attestation is likely, on average, to be less
meaningful for these issuers, and not obtaining one should have less of
an impact on investor protection than for other types of issuers.
First, we note that low-revenue SRCs may be less susceptible to the
risk of certain kinds of misstatements, such as those related to
revenue recognition. As discuss in the Economic Analysis,\222\ 10 to 20
percent of restatements and about 60 percent of financial disclosure
fraud cases in recent times have been associated with improper revenue
recognition,\223\ which is less of a risk, for example, for issuers
that currently have little to no revenue.
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    \221\ See notes 116 to 118 above and accompanying text.
    \222\ See Section IV.C.3. below.
    \223\ See Audit Analytics, 2017 Financial Restatements: A
Seventeen Year Comparison, (May 2018), and Committee of Sponsoring
Organizations of the Treadway Commission, (``COSO''), Fraudulent
Financial Reporting 1998-2007: An Analysis of U.S. Public Companies
(2010).) (``COSO 2010 Fraud Study''), available at http://www.coso.org/documents/COSO-Fraud-Study-2010-001.pdf.
---------------------------------------------------------------------------

    Second, as we noted in Table 14 of the Proposing Release,\224\
issuers with revenues of less than $100 million have, on average,
restatement rates that are three to nine percentage points lower than
those for higher-revenue issuers. Moreover, certain low-revenue SRCs
likely have less complex financial systems and controls and, therefore,
may be less likely than other issuers to fail to detect and disclose
material weaknesses in the absence of an ICFR auditor attestation.
---------------------------------------------------------------------------

    \224\ See Section III.C.4.b. of the Proposing Release, note 4
above.
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    Third, we believe that those issuers' financial statements may be
less critical to assessing their valuation given, for example, the
relative importance of their future prospects. We recognize that other
commenters disagreed and asserted that benefits of the ICFR auditor
attestation requirement are greater for lower-revenue and smaller
issuers than for other issuers.\225\ We carefully considered these
comments and, as discussed in the Economic Analysis, investigated the
claims by conducting supplemental analysis, but we did not find
evidence that led us to alter our views.\226\
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    \225\ See notes 119 to 124 above and accompanying text.
    \226\ See Section IV.C.3.a. below.
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e. Relationship Between Non-Accelerated Filers and SRCs
    Under the final amendments, some, but not all, SRCs would become
non-accelerated filers. We are not adopting an alternative suggested by
some commenters of fully aligning the SRC and non-accelerated filer
definitions. As we note in the Economic Analysis,\227\ although full
alignment of the two definitions could provide several benefits,
including greater regulatory simplicity, reducing any frictions or
confusion associated with issuers' determination of their filer status
or reporting regime, and expanding the number of issuers that qualify
as non-accelerated filers, fully aligning the two definitions also
could result in costs that are greater than those for the amendments we
are adopting. For example, the mitigating factors associated with
exempting low-revenue issuers, such as a potential lower susceptibility
to the risks of certain kinds of misstatements and a greater role of
future prospects relative to current financial statements in driving
market valuations for these issuers as compared to other issuers,\228\
may not be present or may be more limited, for other types of SRCs.
---------------------------------------------------------------------------

    \227\ See Section IV.C.5.a. below.
    \228\ See Section IV.C.3. below.
---------------------------------------------------------------------------

    As a result, fully aligning the SRC and non-accelerated filer
thresholds could have adverse effects on the reliability of the
financial statements of the issuers with higher revenues and the
ability of investors to make informed investment decisions about those
issuers.\229\ Therefore, we do not believe it would be appropriate at
this time to increase the public float threshold for non-accelerated
filers to align that definition with the SRC definition. Additionally,
we note that many non-accelerated filers remain eligible for the JOBS
Act Exemption for their first five years as a public company. The table
below summarizes the relationships between SRCs and non-accelerated and
accelerated filers under the final amendments.
---------------------------------------------------------------------------

    \229\ Id.

  Table 2--Relationships Between SRCs and Non-Accelerated, Accelerated, and Large Accelerated Filers Under the
                                                Final Amendments
----------------------------------------------------------------------------------------------------------------
    Relationships between SRCs and non-accelerated, accelerated, and large accelerated filers under the final
                                                   amendments
-----------------------------------------------------------------------------------------------------------------
                Status                         Public float                       Annual revenues
----------------------------------------------------------------------------------------------------------------
SRC and Non-Accelerated Filer.........  Less than $75 million....  N/A.
                                        $75 million to less than   Less than $100 million.
                                         $700 million.
SRC and Accelerated Filer.............  $75 million to less than   $100 million or more.
                                         $250 million.
Accelerated Filer (not SRC)...........  $250 million to less than  $100 million or more.
                                         $700 million.
Large Accelerated Filer (not SRC).....  $700 million or more.....  N/A.
----------------------------------------------------------------------------------------------------------------

f. Effect on Business Development Companies
    In a change from the proposal, the final amendments also exclude
BDCs from the accelerated and large accelerated filer definitions under
circumstances that are analogous to the exclusions for other issuers
under the amendments. The amendments include a specific provision
applicable to BDCs, because BDCs are not eligible to be SRCs and to
provide a definition of ``revenue'' for BDCs to use for this
purpose.\230\ Specifically, a BDC will be excluded from the accelerated
and large

accelerated filer definitions in Rule 12b-2 if the BDC: (1) Has a
public float of $75 million or more, but less than $700 million; and
(2) has investment income of less than $100 million.\231\ The
amendments to Rule 12b-2 provide that, for this purpose, a BDC's
revenue is the BDC's investment income, as defined in Rule 6-07.1 of
Regulation S-X.\232\ BDCs are subject to the same transition provisions
for accelerated filer and large accelerated status that apply to other
issuers under the amendments, except that the amendments' BDC-specific
``revenue'' definition will apply to these transition provisions as
well.\233\
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    \230\ Although a BDC is considered to be eligible to use the
requirements for SRCs under the revenue test in paragraph (2) or
(3)(iii)(B) of the ``smaller reporting company'' definition in Rule
12b-2 for purposes of the amended accelerated filer and large
accelerated filer definitions, BDCs will continue to be ineligible
to be SRCs under the final amendments.
    \231\ See paragraphs (1)(iv), (2)(iv), and (4) of the amended
definitions of accelerated filer and large accelerated filer in Rule
12b-2. Consistent with the current definitions of these terms, a BDC
with public float of less than $75 million is already a non-
accelerated filer, regardless of the amount of its annual investment
income.
    \232\ See 17 CFR 210.6-07.1.
    \233\ See Section II.C. below (discussing the amended transition
provisions more generally).
---------------------------------------------------------------------------

    Although the Commission did not propose to exclude BDCs from the
accelerated and large accelerated filer definitions using the SRC
revenue test, the Commission did solicit comment on such an approach
and discussed the relative costs and benefits of this alternative in
the Proposing Release.\234\ In response, one commenter urged that we
adopt such an approach, stating that, among other reasons, the policy
reasons that support providing regulatory relief to smaller reporting
companies should apply equally to smaller BDCs.\235\ This commenter
suggested that the Commission expand the proposed amendment to the
definition of accelerated filer and large accelerated filer to exclude
BDCs with total investment income of less than $80 million in the most
recently completed fiscal year for which audited financial statements
are available and either no public float or public float of less than
$700 million.
---------------------------------------------------------------------------

    \234\ See Sections II.C., II.E., and III.C.6. of the Proposing
Release, note 4 above.
    \235\ See letter from Proskauer.
---------------------------------------------------------------------------

    Although we observed in the Proposing Release that the SRC revenue
test would not be meaningful for BDCs because BDCs prepare financial
statements under Article 6 of Regulation S-X and generally do not
report revenue, the final amendments' definition of ``revenue'' for
purposes of the BDC-specific provisions incorporate information that
BDCs report in their financial statements. A BDC's investment income
includes income from dividends, interest on securities, and other
income.\236\ We recognize, as stated in the Proposing Release, that
investors in BDCs generally may place greater significance on the
financial reporting of BDCs relative to low-revenue non-investment
company issuers and BDC financial statements will continue to be
audited by an independent auditor. As the commenter supporting this
approach observed, however, the policy considerations supporting the
final amendments generally apply to BDCs.\237\ Moreover, BDCs that are
excluded from the accelerated and large accelerated filer definitions
will remain obligated, among other things, to establish and maintain
internal control over financial reporting and have management assess
the effectiveness of internal control over financial reporting. The
final amendments also are consistent with other rulemaking initiatives
in which we have sought to provide BDCs parity with other reporting
companies in appropriate circumstances.\238\
---------------------------------------------------------------------------

    \236\ A BDC's annual investment income is equivalent to annual
revenues solely for purposes of the accelerated filer and large
accelerated filer definitions. These amendments do not affect the
meaning of ``revenue'' or ``investment income'' in other Commission
rules or provisions of the securities laws.
    \237\ See letter from Proskauer.
    \238\ See Securities Offering Reform for Closed-End Investment
Companies, Release No. 33427 (Mar. 20, 2019) [84 FR 14448 (Apr. 10,
2019)].
---------------------------------------------------------------------------

g. Effect on Foreign Private Issuers
    Under the proposed amendments, an FPI would be excluded from the
accelerated and large accelerated filer definitions if it qualifies as
an SRC \239\ under the SRC revenue test in Exchange Act Rule 12b-2. One
commenter asserted that the final amendments should permit an FPI that
presents its financial statements using IFRS to qualify for the
exemption based on the low-revenue test.\240\ We note that foreign
issuers that qualify as FPIs or SRCs are permitted to avail themselves
of special accommodations unique to each reporting regime, but must
select one reporting regime or the other. The final amendments provide
an exemption from the ICFR auditor attestation requirement for low-
revenue SRCs. Issuers that qualify as FPIs and elect to use the FPI
reporting regime have other accommodations available to them, such as
the ability to disclose material changes in their ICFR and
effectiveness of disclosure controls and procedures on an annual basis,
as compared to the quarterly basis required of U.S. issuers, including
SRCs.\241\
---------------------------------------------------------------------------

    \239\ See 2007 SRC Adopting Release, note 155 above, Section II,
and Acceptance From Foreign Private Issuers of Financial Statements
Prepared in Accordance with International Financial Reporting
Standards without Reconciliation to U.S. GAAP, Release No. 33-8879
(Dec. 21, 2007) [73 FR 985 (Jan. 4, 2008)], Section III.E.4.
(stating that an FPI is not an SRC unless it makes its filings on
forms available to U.S. domestic issuers and otherwise qualifies to
use the SRC scaled disclosure accommodations). We are adding
instructions to the SRC definitions in Item 10(f), Rule 405, and
Rule 12b-2 clarifying our position that an FPI is not eligible to
use the requirements for SRCs unless it uses the forms and rules
designated for domestic issuers and provides financial statements
prepared in accordance with U.S. GAAP.
    \240\ See letter from Dorsey & Whitney.
    \241\ See Rule 13a-15(d), Rule 15d-15(d), Item 15(d) of Form 20-
F, and General Instruction B(6)(e) of Form 40-F.
---------------------------------------------------------------------------

h. Requiring ICFR Auditor Attestation Less Frequently Than Annually
    The final amendments do not revise our rules to require an ICFR
auditor attestation requirement less frequently than annually. Issuers
that are accelerated or large accelerated filers will be required to
obtain an ICFR auditor attestation every year, unless they qualify as
EGCs, as under our current rules. We did not propose to revise this
requirement, but requested comment on this matter, and every commenter
that discussed the subject \242\ asserted that issuers that are subject
to the ICFR auditor attestation requirement should obtain one annually.
A few of these commenters asserted that requiring the ICFR auditor
attestation only once every three years would not decrease costs
significantly because auditors consider prior year audit results when
planning and performing the current year audit, so performing an audit
of ICFR every three years would reduce efficiencies gained from
performing audits annually and add complexity and costs.\243\ Also, one
commenter indicated that auditors in many instances may continue to
test internal controls in the financial statement audit, which
potentially limits any resulting cost reduction.\244\
---------------------------------------------------------------------------

    \242\ See, e.g., letters from Crowe, KPMG, and NASBA.
    \243\ See, e.g., letters from Crowe and KPMG.
    \244\ See letter from KPMG.
---------------------------------------------------------------------------

i. Check Box Indicating Whether an ICFR Auditor Attestation Is Included
in a Filing
    Although we did not propose a requirement that issuers report
whether they have obtained an ICFR auditor attestation, we requested
comment on whether we should do so. As discussed above,\245\ some
commenters recommended that the final rule include a requirement for an
issuer to prominently disclose in its filing whether an ICFR auditor
attestation is included. This type of disclosure was also recommended
by the Government Accountability Office (``GAO'') in a

2013 study of internal controls requirements.\246\ No commenters
opposed such a requirement. Disclosure of the ICFR auditor attestation
is currently required within the auditor's report on the financial
statements and management's annual report on ICFR.\247\ After reviewing
these comments, we are persuaded to add a check box to the cover pages
of Forms 10-K, 20-F, and 40-F to indicate whether an ICFR auditor
attestation is included in the filing because we agree that more
prominent and easily accessible disclosure of this information would be
useful to investors and market participants while imposing only minimal
burdens on issuers.
---------------------------------------------------------------------------

    \245\ See notes 138 to 143 above and the accompanying text.
    \246\ See U.S. Gov't Accountability Office, GAO-13-582, Internal
Controls: SEC Should Consider Requiring Companies to Disclose
Whether They Obtained an Auditor Attestation (July 2013) (``2013 GAO
Study'').
    \247\ See Item 308 of Regulation S-K and PCAOB AS 3101.
---------------------------------------------------------------------------

    Under the new rule, issuers will be required to include the check
box on their cover pages in any annual report filed on or after the
final amendments' effective date. Once issuers are required to tag the
cover page disclosure data using Inline eXtensible Business Reporting
Language (``Inline XBRL''), they will also be required to tag this
cover page check box disclosure in Inline XBRL because Item 406 of
Regulation S-T (``Item 406''),\248\ Item 601(b)(104),\249\ paragraph
104 to ``Instructions as to Exhibits'' of Form 20-F, and paragraph B.17
under the ``General Instructions'' of Form 40-F require those issuers
to tag every data point on the cover pages of Form 10-K, Form 20-F, and
Form 40-F.\250\ We do not expect the incremental compliance burden
associated with tagging the additional cover page information to be
significant, given that registrants already are being required on a
phased-in basis to tag other cover page information as well as
information in their financial statements.\251\
---------------------------------------------------------------------------

    \248\ 17 CFR 232.406.
    \249\ 17 CFR 229.601(b)(4).
    \250\ Item 406 mandates that companies required to tag their
financial statements in Inline XBRL must also tag their cover page
data in Inline XBRL. Operating companies are required to tag their
financial statements in Inline XBRL on a phase-in basis. See Inline
XBRL Filing of Tagged Data, Release No. 33-10514 (June 28, 2018) [83
FR 40846 (July 10, 2018)] and 17 CFR 232.405.
    \251\ Electronic Data Gathering, Analysis and Retrieval System
(``EDGAR'') filers that are required by Item 406 to provide cover
page Inline XBRL data tagging will be required to tag the ICFR data
element only after a revised Document Entity Identifier taxonomy has
been posted to SEC.gov and the Commission has adopted a new EDGAR
Filer Manual that reflects appropriate changes to the submission of
Forms 10-K, 20-F and 40-F.
---------------------------------------------------------------------------

C. Amendments To Increase the Public Float Transition Thresholds From
$50 Million to $60 Million and $500 Million to $560 Million and To Add
the SRC Revenue Test to the Transition Threshold

1. Proposed Amendments
    An issuer initially becomes an accelerated filer after it first
meets certain conditions as of the end of its fiscal year, including
that it had a public float of $75 million or more but less than $700
million as of the last business day of its most recently completed
second fiscal quarter. An issuer initially becomes a large accelerated
filer in a similar manner, including that it had a public float of $700
million or more as of the last business day of its most recently
completed second fiscal quarter. Once the issuer becomes an accelerated
filer, it will not become a non-accelerated filer unless it determines
at the end of a fiscal year that its public float had fallen below $50
million on the last business day of its most recently completed second
fiscal quarter. Similarly, a large accelerated filer will remain one
unless its public float had fallen below $500 million on the last
business day of its most recently completed second fiscal quarter. If
the large accelerated filer's public float falls below $500 million but
is $50 million or more, it becomes an accelerated filer. Alternatively,
if the issuer's public float falls below $50 million, it becomes a non-
accelerated filer.\252\ The purpose of these transition thresholds is
to avoid situations in which an issuer frequently enters and exits
accelerated and large accelerated filer status due to small
fluctuations in its public float.
---------------------------------------------------------------------------

    \252\ For example, under the rules prior to these amendments, if
an issuer that is a non-accelerated filer determines at the end of
its fiscal year that it had a public float of $75 million or more,
but less than $700 million, on the last business day of its most
recently completed second fiscal quarter, it will become an
accelerated filer. On the last business day of its next fiscal year,
the issuer must re-determine its public float to re-evaluate its
filer status. If the accelerated filer's public float fell to $70
million on the last business day of its most recently completed
second fiscal quarter, it would remain an accelerated filer because
its public float did not fall below the $50 million transition
threshold. Alternatively, if the issuer's public float fell to $49
million, it would then become a non-accelerated filer because its
newly determined public float is below $50 million. As another
example, an issuer that has not been a large accelerated filer but
had a public float of $700 million or more on the last business day
of its most recently completed second fiscal quarter would then
become a large accelerated filer at the end of its fiscal year. If,
on the last business day of its subsequently completed second fiscal
quarter, the issuer's public float fell to $600 million, it would
remain a large accelerated filer because its public float did not
fall below $500 million. If, however, the issuer's public float fell
to $490 million at the end of its most recently completed second
fiscal quarter, it would become an accelerated filer at the end of
the fiscal year because its public float fell below $500 million.
Similarly, if the issuer's public float fell to $49 million, the
issuer would become a non-accelerated filer.
---------------------------------------------------------------------------

    In the SRC Adopting Release,\253\ we amended the SRC rules so that
the SRC transition thresholds were set at 80 percent of the
corresponding initial qualification thresholds. In the Proposing
Release, we proposed to revise the accelerated and large accelerated
filer transition thresholds to be 80 percent of the corresponding
initial qualification thresholds to align the transition thresholds
across the SRC, accelerated filer, and large accelerated filer
definitions. Additionally, we indicated that revising these thresholds
would limit the cases in which an issuer could be both an accelerated
filer and an SRC or a large accelerated filer and an SRC, thereby
reducing regulatory complexity.
---------------------------------------------------------------------------

    \253\ See note 12 above.
---------------------------------------------------------------------------

    We proposed to revise the transition threshold for becoming a non-
accelerated filer from $50 million to $60 million and the transition
threshold for leaving the large accelerated filer status from $500
million to $560 million. We also proposed to add the SRC revenue test
to the public float transition thresholds for accelerated and large
accelerated filers. If the SRC revenue test were not added to the
accelerated filer and large accelerated filer transition provisions, an
issuer's annual revenues would never factor into determining whether an
accelerated filer could become a non-accelerated filer, or whether a
large accelerated filer could become an accelerated or non-accelerated
filer. We proposed that an issuer that is already an accelerated filer
would remain one unless either its public float falls below $60 million
or it becomes eligible to use the SRC accommodations under the revenue
test in paragraph (2) or (3)(iii)(B) of the SRC definition,\254\ as
applicable.\255\ Therefore, under the proposed amendments, an
accelerated filer would remain an accelerated filer until its public
float falls below $60 million or its annual revenues fall below the

applicable revenue threshold ($80 million or $100 million), at which
point it would become a non-accelerated filer.
---------------------------------------------------------------------------

    \254\ Paragraph (2) of the SRC definition states that an issuer
qualifies as an SRC if its annual revenues are less than $100
million and it has no public float or a public float of less than
$700 million. Paragraph (3)(iii)(B) of the SRC definition states,
among other things, that an issuer that initially determines it does
not qualify as an SRC because its annual revenues are $100 million
or more cannot become an SRC until its annual revenues fall below
$80 million.
    \255\ An issuer that is initially applying the SRC definition or
previously qualified as an SRC would apply paragraph (2) of the SRC
definition. Once an issuer determines that it does not qualify for
SRC status, it would apply paragraph (3)(iii)(B) of the SRC
definition at its next annual determination.
---------------------------------------------------------------------------

    Similarly, we proposed conforming amendments to the large
accelerated filer transition provisions for when an issuer that is
already a large accelerated filer transitions to either accelerated or
non-accelerated filer status. To transition out of large accelerated
filer status at the end of the issuer's fiscal year, an issuer would
need to have a public float below $560 million as of the last business
day of its most recently completed second fiscal quarter or meet the
revenue test in paragraph (2) or (3)(iii)(B), as applicable, of the SRC
definition. A large accelerated filer would become an accelerated filer
at the end of its fiscal year if its public float fell to $60 million
or more but less than $560 million as of the last business day of its
most recently completed second fiscal quarter and its annual revenues
are not below the applicable revenue threshold ($80 million or $100
million). The large accelerated filer would become a non-accelerated
filer if its public float fell below $60 million as of the last
business day of its most recently completed second fiscal quarter or
its annual revenues fell below the applicable revenue threshold ($80
million or $100 million).\256\
---------------------------------------------------------------------------

    \256\ One exception to this requirement is that an issuer that
was a large accelerated filer whose public float had fallen below
$700 million (but remained $560 million or more) but became eligible
to be an SRC under the SRC revenue test in the first year the SRC
amendments became effective would become a non-accelerated filer
even though its public float remained at or above $560 million. See
SRC Adopting Release, note 12 above, at n. 31 (``For purposes of the
first fiscal year ending after effectiveness of the amendments, a
registrant will qualify as a SRC if it meets one of the initial
qualification thresholds in the revised definition as of the date it
is required to measure its public float or revenues (the
`measurement date'), even if such registrant previously did not
qualify as a SRC.'').
---------------------------------------------------------------------------

2. Comments
    We received very few comments regarding the proposed changes to the
transition thresholds. The commenters who discussed the proposed
amendments to increase the public float transition thresholds supported
them.\257\ One commenter also suggested that the Commission consider
indexing the thresholds to inflation in a manner similar to the
indexing that applies to the EGC definition.\258\ Only two commenters
addressed the proposed amendments to add the SRC revenue test to the
transition thresholds, and these commenters supported that
proposal.\259\
---------------------------------------------------------------------------

    \257\ See, e.g., letters from CLSA, Nasdaq, and RSM.
    \258\ See letter from RSM.
    \259\ See letters from CLSA and Nasdaq.