fraction of the affected issuers over time, initially issuers with
experience with ICFR auditor attestations are expected to represent a
substantial fraction of the affected issuers.
    Newly exempt issuers may have implemented control improvements that
would persist regardless of a transition. For example, they may have
made investments in systems, procedures, or training that are unlikely
to be reversed. It is difficult to predict the degree of inertia in
ICFR and financial reporting in order to gauge how quickly, if at all,
issuers that cease audits of ICFR may evolve such that their ICFR and
the reliability of their financial statements is more characteristic of
exempt issuers.\563\ The gradual nature of such an evolution, and the
associated halo effect of the last disclosed ICFR auditor attestation,
may limit the short-term costs of the amendments. In addition, issuers
that believe control improvements are valuable for reporting and
certifying results will be free to spend the resources saved on the
attestations on such improvements.
---------------------------------------------------------------------------

    \563\ We note that there is a relatively small sample of
accelerated filers transitioning to non-accelerated filer status
because of changes in their public float, as compared to transitions
in the other direction, and that such transitions likely represent
special circumstances such as underperformance. Therefore, such
transitions are not particularly helpful for predicting the outcomes
of accelerated filers transitioning to non-accelerated filer status
because of the amendments.
---------------------------------------------------------------------------

    Affected issuers with experience with audits of ICFR may also be
more likely to continue to obtain an ICFR auditor attestation on a
voluntary basis than other exempt issuers are to begin voluntary audits
of ICFR. This may be due to such issuers having already incurred
certain start-up costs or facing demand from their current investors to
continue to provide ICFR auditor attestations. Some issuers in the
groups that we use for comparison, which are not subject to an ICFR
auditor attestation requirement, voluntarily obtain an ICFR auditor
attestation. Thus, the comparisons made above at least partially
account for the fact that some issuers may choose to obtain an ICFR
auditor attestation even in the absence of a requirement. However, to
the extent the rate of voluntary ICFR auditor attestations would be
higher amongst the issuers that will be newly exempt from the ICFR
auditor attestation requirement than other exempt issuers, the
anticipated costs of the amendments in the near term may be further
reduced.
c. Implications for Investor Decision-Making
    While we anticipate that the frequency of ineffective ICFR and, to
a lesser extent, restatements may increase among the affected issuers
as a result of the amendments, the economic effects of these changes
may be reduced by another factor that may apply to many of these
issuers. In particular, the usefulness of more reliable financial
statements is linked to the degree to which they factor into the
decisions of investors,\564\ for example, with respect to these
investors' valuations of issuers.\565\ The financial statements of many
low-revenue issuers may have relatively lower relevance for market
performance if, for example, relative to higher-revenue issuers, their
valuation hinges more on their future prospects than on their current
financial performance.
---------------------------------------------------------------------------

    \564\ See, e.g., Dechow and Schrand 2004 Monograph, note 506
above.
    \565\ See, e.g., Jennifer Francis & Katherine Schipper, Have
Financial Statements Lost Their Relevance?, 37(2) J. of Acct. Res.
319 (1999) (``Francis and Schipper 1999 Study''); and S. P. Kothari,
Capital Markets Research in Accounting, 31 J. of Acct. and Econ. 105
(2001).
---------------------------------------------------------------------------

    We explored this possibility empirically in the Proposing Release,
which used the methodology applied in previous studies to calculate,
for issuers above and below the $100 million revenue threshold, the
extent to which the variation in market performance is related to the
variation in financial measures. For issuers at or above $100 million
in revenue, we found, consistent with the findings of previous studies
of all issuers, that key financial variables (the book value of assets
and liabilities, the book value of equity, earnings, and the change in
earnings) explain about 60 to 70 percent of the variation in equity
market capitalization and 7.5 percent of the variation in stock
returns.\566\ In contrast, for issuers with revenues of less than $100
million, we found that these financial variables explain about 30
percent of the variation in equity market capitalization and just over
4.5 percent of the variation in stock returns.
---------------------------------------------------------------------------

    \566\ See Table 15 of the Proposing Release, note 4 above. See
also Francis and Schipper 1999 Study note 565 above. While that
study ends in 1994, before our 20 year horizon, the results are
similar. For example, for the most recent ten years in that study,
the book values of assets and liabilities explain 54 to 70 percent
of the variation in equity market valuation, the book value of
equity and earnings explain 63 to 78 percent of the variation in
equity market valuation, and earnings and the change in earnings
explain six to 20 percent of the variation in stock returns.
---------------------------------------------------------------------------

    One commenter indicated that a low-revenue issuer could have a
large market capitalization and thus ``greater investor exposure.''
\567\ While we agree that such affected issuers would generally expose
more investors to risk, we note that the results discussed above
suggest that, on average, relative to higher-revenue issuers, less of
this risk seems to be associated with the issuers' current financial
statements than with their future prospects.\568\ Another commenter
agreed that future prospects are important to the valuation of entities
in a growth phase, but noted that the financial variables we consider
in our analysis are more likely to be considered in the valuation of
low-revenue issuers that are more seasoned, and that we should
therefore more fully consider the implications for these issuers in
particular.\569\ This commenter

also suggested that we might consider additional financial variables
that may be more relevant to the valuation of low-revenue issuers, such
as the rate of revenue growth and measures of liquidity. In response to
this comment, we conducted supplemental analysis of the empirical
relevance of financial statements for low-revenue issuers in Table
14.\570\ Specifically, because the affected issuers that will newly be
exempt from the ICFR auditor attestation requirement are generally not
within five years of their IPO, we limit the analysis to more seasoned
issuers. Further, we run the analysis with additional variables, as
discussed below.
---------------------------------------------------------------------------

    \567\ See letter from Grant Thornton.
    \568\ 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.
    \569\ See letter from Crane.
    \570\ The reported statistics are adjusted R-squared statistics
based on regression analysis by staff using data from the Standard &
Poor's Compustat and Center for Research in Security Prices
databases. Seasoned issuers are those for which the data date is not
within five years of the reported IPO date, where IPO dates are
available. Market value and financial variables are measured as of
the end of the fiscal year. Earnings is income before extraordinary
items. Stock return is the 15-month stock return ending three months
after fiscal year-end, to account for reporting lags. For the stock
return regression, the explanatory variables are scaled by the
lagged market value of equity, and outliers in one percent tails of
variable distributions are dropped to reduce noise. See Francis and
Schipper 1999 Study, note 565 above, for additional details.

Table 14--Percentage of Variation in Market Performance Explained by Variation in Financial Performance for 1999
                                        Through 2018, by Revenue Category
----------------------------------------------------------------------------------------------------------------
                                                                                Revenue         Revenue
                Market variable                       Explanatory variables           <$100M          >=$100M
----------------------------------------------------------------------------------------------------------------
Seasoned issuers (not within five years of
 IPO):
    Market value of equity....................  Book value of assets, book value            40.9            58.8
                                                 of liabilities.
    Market value of equity....................  Book value of equity, earnings..            46.2            70.2
    Stock return..............................  Earnings, change in earnings....             5.5             7.6
Seasoned issuers, additional variables:
    Market value of equity....................  Book value of equity, earnings,             55.8            81.5
                                                 revenue, R&D expense, quick
                                                 ratio.
    Stock return..............................  Earnings, change in earnings,                8.4             9.0
                                                 revenue, change in revenue, R&D
                                                 expense, change in R&D expense.
----------------------------------------------------------------------------------------------------------------

    The first three rows of Table 14 are similar to the analysis in the
Proposing Release, but are limited to issuers that are not within five
years of their IPO. Focusing on this subsample of low-revenue issuers,
which is more representative of the affected issuers that would be
newly exempt from the ICFR auditor attestation requirement, we find
that the financial variables considered in the Proposing Release
explain about 40 to 45 percent of the variation in equity market
capitalization and about 5.5 percent of the variation in stock returns.
These percentages are slightly higher than our results for all low-
revenue issuers in the Proposing Release (for which the variables
explain about 30 percent and 4.5 percent of the variation in equity
market capitalization and stock returns respectively, as noted above).
However, they remain substantially lower than the results for higher-
revenue seasoned issuers, for which the variables explain about 60 to
70 percent of the variation in equity market capitalization and about
7.5 percent of the variation in stock returns.
    The second panel of Table 14 considers additional variables based
on the comment letter discussed above and on academic accounting
literature on key value-relevant metrics. For example, the role of the
book value of equity in valuation may reflect, among other things, the
liquidation or adaptation value of an issuer.\571\ However, a commenter
noted that, for issuers with little to no revenue, liquidity metrics
are often relevant to a user's evaluation of future prospects.\572\ We
agree that there is evidence that, for certain issuers, liquidity
metrics that relate current assets to current liabilities may provide
key additional information on the likelihood of, and value upon,
liquidation.\573\ We therefore include the quick ratio (current assets
less inventories, which may be difficult to monetize in the short term,
minus current liabilities) in the analysis as a supplement to the book
value of equity.
---------------------------------------------------------------------------

    \571\ See, e.g., Philip Berger, Eli Ofek, and Itzahk Swary,
Investor Valuation of the Abandonment Option, 42(2) J. of Fin. Econ.
259 (1996); David Burgstahler and Ilia Dichev, Earnings, Adaptation
and Equity Value, 72(2) Acct. Rev. 187 (1997).
    \572\ See letter from Crowe.
    \573\ See, e.g., Sergei Davydenko, When Do Firms Default? A
Study of the Default Boundary, Working Paper (2012), available at
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=672343 (finding
that the quick ratio is highly correlated with the short-term
probability of default, particularly for firms with less access to
external capital).
---------------------------------------------------------------------------

    In considering further variables that would be appropriate to
include in this analysis, we note that low-revenue issuers are
significantly more likely to be loss-making than higher-revenue
issuers.\574\ The academic literature provides evidence that for loss
firms, revenues (and the change in revenues, or revenue growth) can be
more value-relevant than earnings (and the change in earnings).\575\ A
commenter also identified the rate of revenue growth as an example of a
financial statement variable that investors may consider for low-
revenue firms.\576\ Separately, we note that research and development
(``R&D'') costs are expensed and thereby reduce earnings, while there
is evidence that the future benefits of R&D activity may not be
reflected in the earnings of loss-making firms.\577\ For these reasons,
we include revenues and R&D expenses (and the change in these measures)
as a supplement to earnings (and the change in earnings) in the
analysis in the second panel of Table 14.
---------------------------------------------------------------------------

    \574\ In this analysis, about half of the low-revenue issuers
are loss-making, compared to about ten percent of the higher-revenue
issuers.
    \575\ See, e.g., Aswath Damodaran, The Dark Side of Valuation:
Firms with No Earnings, No History and No Comparables, Working Paper
(1999), available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1297075.
    \576\ See letter from Crowe.
    \577\ See, e.g., Laurel Franzen and Suresh Radhakrisnan, The
Value Relevance of R&D across Profit and Loss Firms, 28 (1) J. of
Acct. and Pub. Pol'y 16 (2009).
---------------------------------------------------------------------------

    As demonstrated in the last two rows of Table 14, including these
additional variables does increase the amount of variation in equity
market capitalization and stock returns explained by the financial
statement variables. However, the percentage of explained variation
remains lower for low-revenue seasoned issuers than for higher-revenue
seasoned issuers.
    These results demonstrate that financial statement information is
not irrelevant for low-revenue issuers. That is, information from
financial statements is associated with market prices and returns for
these issuers as well as other issuers. Thus, the potential reduction
in the reliability of financial

statements for the affected issuers is expected to have some negative
implications. However, the lower empirical relevance of financial
statements on average for these issuers may partially mitigate the
potential adverse effects of the amendments.
    In contrast to these findings, a number of commenters cited
analysis in Commissioner Jackson's Statement suggesting that, based on
the stock market reaction to annual report filings disclosing material
weaknesses in ICFR, investors care most about the information provided
by the ICFR auditor attestation of low-revenue issuers.\578\ Further,
one of these commenters stated that the markets impose a ``much heftier
penalty'' on small companies that restate than they do on larger
companies.\579\ On the other hand, other commenters expressed the view
that the ICFR auditor attestation requirement is not important or
material to the investors of affected issuers, based on their own
experience and/or a study referencing an analysis of the market
reaction to Section 302 internal control weakness disclosures.\580\ As
further evidence, two of these commenters asserted that investors
rarely ask an issuer that is exempt from obtaining an ICFR auditor
attestation to voluntarily comply with the requirement.\581\ In
response to these comments, we have conducted analyses of the investor
response to ICFR disclosures and restatement announcements at low-
revenue issuers versus other issuers.
---------------------------------------------------------------------------

    \578\ See, e.g., letters from CFA, CFA Inst., and CII, citing
the event study analysis in Commissioner Jackson's Statement.
    \579\ See letter from CFA.
    \580\ See, e.g., letters from Adamas, Ardelyx, ASA, BIO, Carver,
Catalyst, Chiasma, Corvus, CymaBay, Equillium, Evoke, Gritstone,
Kezar, Marinus, Millendo, Organovo, Pieris, Revance, SI-BONE, Syros,
Teligent, and Zynerba. Many of these letters cited the BIO Study,
note 69 above, which in turn cites 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,
13(1) Rev. of Acct. Stud. 141 (2008) (``Hammersley et al. 2008
Study''). The BIO letter also directly cites the latter study. The
BIO Study and BIO letter highlight the finding of the Hammersley et
al. 2008 Study that the market response to issuers disclosing
material weaknesses in disclosure controls in their Section 302
disclosures is, in the whole sample, not statistically different
from zero. However, we note that this study does find evidence of a
statistically significant negative market reaction to such
disclosures in a subsample uncontaminated by other announcements in
the event window.
    \581\ See letters from Ardelyx and BIO.
---------------------------------------------------------------------------

    First, we consider the market reaction to the filing of annual
reports that contain ICFR auditor attestations reporting material
weaknesses in ICFR. We only consider ICFR auditor attestation reports,
as opposed to Section 404(a) management reports, in order to focus on a
sample of issuers comparable to the affected issuers \582\ and those
reports that would no longer be required under the amendments. Because
material weaknesses may persist across years, consecutive disclosures
that continue to report material weaknesses are not likely to represent
news to the market. We therefore focus on material weakness disclosures
that are preceded by an ICFR auditor attestation reporting effective
ICFR. We consider issuers with revenues of less than $100 million and
higher-revenue issuers, but exclude those within five years of their
IPO to more closely represent the affected issuers.\583\ Figure 7 \584\
presents the results of our event study analysis for disclosures in the
last decade.\585\
---------------------------------------------------------------------------

    \582\ In particular, Section 404(a) management reports are
required of all issuers other than RICs and ABS issuers, including
those that are already non-accelerated filers and would therefore
not be affected by the amendments.
    \583\ We obtain substantially similar results if we consider all
issuers, rather than excluding those within five years of their IPO,
or if we include consecutive annual reports with material weakness
disclosures, rather than focusing on new material weakness
disclosures.
    \584\ This figure is based on results from the Event Study by
WRDS module available through Wharton Research Data Services and
staff analysis of data from Ives Group Audit Analytics, Compustat,
and CRSP. The figure includes all seasoned issuers that have an
auditor attestation of ICFR that newly reports material weaknesses
in ICFR following a previous attestation to effective ICFR in annual
reports filed in calendar years 2009 through 2018. We exclude
issuers for which the data date is within five years of the IPO date
(i.e., non-seasoned issuers), if available. The cumulative average
abnormal returns are calculated with respect to expected returns
based on a multi-factor model including the three Fama French
factors and a momentum factor, where the model parameters are
calculated over an estimation period of up to 100 trading days
ending 50 trading days before the event period.
    \585\ This time horizon was chosen to maximize the sample size
while limiting the study to the period after the effectiveness of AS
No. 5 (now referred to as AS 2201, note 292 above), which may have
changed the nature of ICFR auditor attestations. See Section IV.B.1.
above for a discussion of this auditing standard and the evidence
that the nature of ICFR auditor attestations may have changed as a
result of its adoption. Our results are substantially similar when
considering alternative time horizons, such as the past five years.

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

[GRAPHIC] [TIFF OMITTED] TR26MR20.006

    Our analysis does not suggest that investors care more about the
information produced by the ICFR auditor attestation requirement at
low-revenue issuers. In particular, investors did not react more
negatively to low-revenue issuers disclosing material weaknesses than
to such disclosures by the higher-revenue issuers. None of the
cumulative average abnormal returns plotted in the figure, whether for
low- or higher-revenue issuers, are statistically differentiable from
zero at conventional confidence levels.\586\
---------------------------------------------------------------------------

    \586\ The analysis applies the standardized cross-sectional
test, which is robust to cross-sectional dependence in abnormal
returns (which often results when events cluster in time, as in the
case of annual report filing dates) as well as any event-induced
increase in the variance of returns, to measure the statistical
significance of the abnormal returns. See Ekkehart Boehmer, Jim
Musumeci, and Annette Poulsen, Event-Study Methodology under
Conditions of Event-Induced Variance, 30(2) J. of Fin. Econ. 253
(1991) (``Boehmer et al. 1991'').
---------------------------------------------------------------------------

    Our figure differs from the similar analysis that was cited by
commenters for a number of reasons. First, that analysis includes a
number of duplicate observations.\587\ The duplication generally occurs
when there is both an ICFR auditor attestation and a Section 404(a)
management report reporting a material weakness in the same annual
report. While the duplicate observations appear to have only a modest
effect on the pattern of the measured cumulative abnormal returns, they
likely have the effect of biasing downward the width of the confidence
interval presented in the analysis. When we remove the duplicates, we
find that, as in our own analysis, the cumulative average abnormal
returns for low-revenue issuers are not statistically differentiable
from zero at conventional confidence levels for any day within the 11-
day event period surrounding the disclosure date.\588\ Also, we note
that even without this adjustment, the confidence intervals plotted in
the other analysis indicate that, by the end of the presented event
period, the cumulative average abnormal returns are no longer
statistically differentiable from zero for issuers with below $100
million in revenues.\589\
---------------------------------------------------------------------------

    \587\ About 30% of the low-revenue observations in the analysis
are exact duplicates in terms of company identifiers, event date,
revenue and returns. See ``Abnormal Returns Data,'' available at
https://www.sec.gov/news/public-statement/jackson-statement-proposed-amendments-accelerated-filer-definition.
    \588\ The width of the confidence interval at the far right side
of the figure (for day +5) in the analysis cited by commenters
appears to be about 0.85 percentage points. We understand that the
standard errors in that analysis are simple cross-sectional standard
errors (which are robust to event-induced increases in the variance
of returns but not to any cross-sectional dependence in abnormal
returns). Removing the duplicates, we find that the width of the
corresponding 95% confidence interval would be 2.02 percentage
points using this approach, which is about 2.4 times wider than the
reported confidence interval.
    \589\ In particular, the presented confidence bands for the
cumulative abnormal returns include zero by day 11 of the analysis,
which considers the 11-day period beginning five days prior and
ending five days subsequent to the date of disclosure.
---------------------------------------------------------------------------

    Second, more than half of the non-duplicate low-revenue
observations in the other analysis appear to reflect reports of
material weaknesses in Section 404(a) management reports in the absence
of an ICFR auditor attestation. As discussed above, our analysis
excludes observations where there is only a Section 404(a) management
report because we believe they have limited relevance when considering
the affected issuers and the effects of the amendments. Third, the
other analysis reflects a different time horizon (2004 through 2017)
than our analysis (2009 through 2018). In our analysis, we restrict the
time horizon to the period after the effectiveness of AS No. 5 because
the nature of ICFR auditor attestations may have changed after this
point. These additional differences in

the underlying sample appear to drive the differences in the pattern of
the cumulative average abnormal returns in the analysis cited by
commenters relative to our own analysis.\590\ However, even if we were
to use the broader set of reports and/or the time horizon of the other
analysis, we continue to find that the cumulative average abnormal
returns are not statistically differentiable from zero at conventional
confidence levels for any day within the 11-day event period
surrounding the disclosure date.
---------------------------------------------------------------------------

    \590\ While, as discussed above, we also refine the analysis
presented in Figure 7 to exclude consecutive disclosures that
continue to report material weaknesses and to limit the analysis to
seasoned issuers, we find that these choices have more modest
effects on the pattern of cumulative average abnormal returns.
---------------------------------------------------------------------------

    There is substantial noise inherent to an analysis of the
disclosure of material weaknesses in annual reports, both because these
reports often contain or are accompanied by significant confounding
information \591\ and because material weaknesses are often disclosed
in advance of the annual report.\592\ We therefore also undertook
analysis of the market and financial statement impact of material
restatements disclosed in Item 4.02 Form 8-K filings, which are
relatively less likely to be accompanied by unrelated news or to be
disclosed in advance of the filing. We consider restatements over the
10-year horizon from 2009 through 2018 to obtain more reliable
estimates while still focusing on a recent period that should be
reasonably representative of the current environment.\593\
---------------------------------------------------------------------------

    \591\ Staff analysis of material weakness disclosures that were
accompanied by large positive or negative stock returns found
evidence of announcements of confounding news that are associated
with large positive returns (e.g., significantly beat earnings
estimates, positive news about Phase III trial, liquidity infusion,
merger announcement) and large negative returns (e.g., significantly
miss earnings estimates, liquidity problems and security issuance at
significant discount). See also, e.g., Paul Griffin, Got
Information? Investor Response to Form 10-K and Form 10-Q EDGAR
Filings, 8(4) Rev. of Acct. Stud. 433 (2003) (for more detail on the
overall information content of annual reports) and Edward Li and K.
Ramesh, Market Reaction Surrounding the Filing of Periodic SEC
Reports, 84(4) Acct. Rev 1171 (2009) (for further analysis of the
information content released in, and at the time of, annual report
filing).
    \592\ Staff analysis of material weakness disclosures that were
preceded by an ICFR auditor attestation reporting effective ICFR
found that in about one-third of cases these new material weaknesses
had been disclosed prior to the annual report, such as in an Item
4.02 Form 8-K or a Form 10-Q filing.
    \593\ The estimates in Table 15 are based on staff analysis of
restatements associated with an Item 4.02 8-K dated within calendar
years 2009 through 2018. The sample includes, for issuers that are
not within five years of their IPO, 260 restatements by low-revenue
issuers and 384 restatements for higher-revenue issuers with non-
missing stock returns. The data on restatements, including their
financial statement effects, are from Audit Analytics. Revenues are
measured as of the beginning of the restated period. The data on
revenues and IPO dates are from Compustat. The announcement returns
are cumulative abnormal returns based on results from the Event
Study by WRDS module available through Wharton Research Data
Services. They represent the cumulative abnormal returns for the
two-day event period including the date of the associated 8-K filing
and the following trading day. These abnormal returns are estimated
relative to a benchmark model of returns based on the three Fama-
French factors and a momentum factor, where the model parameters are
calculated over an estimation period of up to 100 trading days
ending 50 trading days before the event date. The confidence
intervals are based on the standardized cross-sectional test of
Boehmer et al. 1991, note 586 above.

Table 15--Estimated Effects of Item 4.02 8-K Restatements Announced by Seasoned Issuers in 2009-2018, by Revenue
                                      Category at Time of the Misstatement
----------------------------------------------------------------------------------------------------------------
                                                           Issuers not within five years of IPO
                                         -----------------------------------------------------------------------
                                                    Revenue <$100M                      Revenue >=$100M
----------------------------------------------------------------------------------------------------------------
Average 2-day announcement return (%)...  -0.9%.............................  -3.3%.
Announcement return statistically         No................................  Yes.
 distinguishable from zero (95%
 confidence level).
Average 2-day announcement return (95%    -2.2% to +0.3%....................  -4.2% to -2.3%.
 confidence interval).
Average 2-day announcement effect ($)...  -$1.4M............................  -$22.0M.
Percent with adverse financial statement  78%...............................  80%.
 effect *.
Percent with income effect..............  83%...............................  81%.
Among those with income effect, average   -$1.9M............................  -$13.2M.
 net income effect ($) per year of
 restated financials.
Average length of restated period.......  1.4 years.........................  2.0 years.
----------------------------------------------------------------------------------------------------------------
* This row, based on the ``Effect'' variable from Ives Group Audit Analytics, indicates whether the net effect
  to the financial statements (income statement, balance sheet or cash flows) was negative.

    As with our previous analyses, this supplemental analysis also does
not support the assertion that investors care more about the
reliability of the information in the financial statements of low-
revenue issuers than that of higher-revenue issuers. The market
reaction to Item 4.02 Form 8-K filings is statistically
indistinguishable from zero for low-revenue, seasoned issuers, but is
negative and statistically significant for higher-revenue issuers.
While the point estimates for the market impact of the restatements are
uncertain, as demonstrated by the confidence intervals presented in the
second row of Table 15, the corresponding point estimates for the
dollar market impact per restatement announcement are also
substantially lower (at $1.4 million versus $22.0 million) for low-
revenue seasoned issuers as compared to higher-revenue seasoned
issuers. The rate of Item 4.02 restatements with negative financial
statement impact or with net income impact is similar for both
categories of issuers, at about 80 percent. We also consider how the
average dollar market impact of the restatements relates to the average
dollar correction in annualized net income, in case investors react
more strongly per dollar of the correction in annualized net income for
low-revenue issuers. However, Table 15 does not provide evidence that
the corresponding point estimate dollar market impact is
proportionately greater relative to the average annualized effect on
net income for low-revenue seasoned issuers than for high revenue
seasoned issuers.\594\
---------------------------------------------------------------------------

    \594\ In particular, the ratio of average dollar market impact
of the restatements relative to the average dollar correction in
annualized net income for low-revenue seasoned issuers is -$1.4M/-
$1.9M or about 0.7, while the corresponding ratio for higher-revenue
seasoned issuers is -$22.0/-$13.2 or about 1.7.
---------------------------------------------------------------------------

    Overall, we acknowledge that a lower reliability of their financial
statements may have significant effects on the valuation of certain
low-revenue issuers. It is possible, for example, as one commenter
stated, that ``[for] many low-revenue companies that are struggling to
become high revenue companies . . . their ability to attract capital
may depend primarily on their ability to convince analysts and
investors that their revenues are strong and steadily rising.'' \595\
However, when we consider

the evidence in aggregate across the population of low-revenue and
higher-revenue seasoned issuers based on the three different types of
analyses in this section, we find some evidence that financial
statements and their reliability are less associated with market prices
for low-revenue issuers and no evidence that there is a stronger
association with market prices for low-revenue issuers than for higher-
revenue issuers. Therefore, we continue to believe that the evidence
supports the supposition that relative to higher-revenue issuers, the
value of low-revenue issuers, on average, hinges more on their future
prospects than on their current financial performance, and that this
consideration should mitigate the potential adverse effects of the
amendments.
---------------------------------------------------------------------------

    \595\ See letter from CFA.
---------------------------------------------------------------------------

d. Potential Economic Costs of Effects on ICFR, the Reliability of
Financial Statements, and Potential Fraud
    A number of commenters indicated that we should make further
attempts to quantify the potential costs of the amendments.\596\ A few
commenters further asserted that the costs of the amendments will
significantly outweigh any benefits.\597\ In the previous section, we
estimated that the affected issuers that will newly be exempt from all
ICFR auditor attestation requirements may eventually experience a 15
percentage point increase in ineffective ICFR and, for a given year of
financial statements, an estimated 2 percentage point increase in
restatements, a 0.5 percentage point increase in Item 4.02
restatements, and a 0.05 percentage point increase in ``financial
reporting fraud'' associated with those financial statements. In this
section, we provide additional monetized estimates of the impact, in
dollar terms, which may be associated with certain potential adverse
effects. As noted earlier, this discussion and these estimates are
focused on affected issuers that will be newly exempt from the ICFR
auditor attestation requirement and are not expected to be subject to
the FDIC auditor attestation requirement.
---------------------------------------------------------------------------

    \596\ See, e.g., letters from Better Markets, CFA Inst., CII,
Prof. Barth et al., and Prof. Ge et al.
    \597\ See, e.g., letters from Better Markets and Prof. Barth et
al.
---------------------------------------------------------------------------

    Overall, as discussed in more detail below, we are able to
quantitatively estimate, per year per affected issuer, a total of
approximately $60,000 in costs and an additional approximately $10,000
in transfers across shareholders, which represent costs to some
shareholders and benefits to other shareholders.\598\ These estimates
reflect our quantification, based on the available evidence and data,
of potential effects related to operating performance, restatements,
and financial reporting fraud. We note that we are unable to adjust the
dominant component of the estimates (the estimated effect on operating
performance) for the mitigating factors associated with low-revenue
issuers that we discuss throughout this release, so the total estimate
of costs may be inflated.
---------------------------------------------------------------------------

    \598\ The costs we estimate represent actual forgone value,
while the transfers simply represent corrections to reflect an
issuer's true financial position.
---------------------------------------------------------------------------

    Given that our estimate of the cost savings per year per affected
issuer is $210,000, we do not find evidence to support the views of the
commenters that indicated that the costs of the amendments would
significantly outweigh the benefits. However, we note two main caveats
associated with our estimates of the costs and transfer that may result
from the amendments, and with the underlying components of these
estimates, which are discussed in more detail below. First, these
estimates are necessarily more uncertain than our monetized estimates
of cost savings to issuers because they are based on a larger number of
assumptions. Secondly, we caution against attempts to over-interpret
the relation between our quantitative estimates of monetized benefits
and monetized costs, because neither of these measures is complete. For
example, we are not able to monetize the potential benefit of reduced
management distraction from operating activities \599\ or the potential
market-level costs of reduced efficiency of investor allocation across
investment opportunities or reduced investor confidence.\600\ We
therefore are not able to quantify the overall net benefit or cost of
the amendments.
---------------------------------------------------------------------------

    \599\ See, e.g., letter from Sutro.
    \600\ See, e.g., letter from CII.
---------------------------------------------------------------------------

i. Computation of Monetized Estimates of Costs
    We provide further quantification of potential adverse effects of
the amendments in this section, while the next section provides a
discussion of these costs as well as other economic costs that we are
unable to quantify. We begin by considering costs that may represent
deadweight losses, or net costs to society, followed by a consideration
of transfers across shareholders. First, we estimate the potential
deadweight losses associated with a potential increase in the risk of
fraud. In Section IV.C.3.b.iv. above, we estimated the magnitude of the
potential increase in fraud risk to be about $17,500 in market
capitalization per year per affected issuer that will be newly exempt
from the ICFR auditor attestation requirements. A study that breaks
down the equity market impact of fraud into deadweight losses (such as
legal costs and impaired reputation) versus the effects that reflect
the market adjusting to a more accurate representation of issuers'
financial situations estimates that the former constitute approximately
75 percent of the total equity market loss.\601\ We therefore estimate
the potential average incremental deadweight loss associated with fraud
to be $17,500 times 75 percent or roughly $13,000 per year per affected
issuer. We consider the remainder of the estimated equity market
effect, which represents a transfer from some investors to other
investors, separately below.
---------------------------------------------------------------------------

    \601\ See Karpoff et al. 2008 Study, note 562 above.
---------------------------------------------------------------------------

    Commenters suggested that we should quantify effects on operating
performance associated with ICFR misreporting,\602\ which are less
likely to be corrected by remediation because the underlying material
weaknesses are likely undetected. As discussed in the Proposing
Release, potential effects of the amendments on operating performance
are difficult to measure because the existing studies may not be
generalizable to the affected issuers and the methods used in previous
studies are difficult to apply to a comparable sample of low-revenue
issuers in recent years.\603\ However, in response to these comments,
we rely on the results of a recent study \604\ to provide an estimate
of the possible loss in profits per year associated with ICFR
misreporting. While we expect that the anticipated effect on the
affected issuers would be reduced relative to those in the study given
the mitigating factors specific to low-revenue issuers discussed above,
we are unable to estimate an appropriate adjustment to reflect these
factors. The study estimates that the difference in return on assets
for issuers misreporting that they have effective ICFR versus those
that properly report that they have ineffective ICFR (and thereby
perhaps also work towards remediating their ICFR) is 3.3 percentage
points over three years, or 1.1 percentage point per year. We multiply
this difference by our estimate of the potential increase in
misreporting of effective ICFR from Section IV.C.3.b.ii. above, which
(based on statistics from the same study) is 3.5 percentage points, and
the estimated average total assets of the affected

issuers that will be newly exempt from all ICFR auditor attestation
requirements from Section IV.C.1 above, which is $125 million. This
results in an estimated reduction in potential earnings of about
$48,000 per year on average for an affected issuer. As noted above,
this estimate may be inflated, as it does not reflect any of the
mitigating factors specific to low-revenue issuers discussed above.
---------------------------------------------------------------------------

    \602\ See, e.g., letters from CII, Prof. Barth et al., and Prof.
Ge et al.
    \603\ See Section III.C.4.c. of the Proposing Release, note 4
above.
    \604\ See Ge et al. 2017 Study, note 393 above.
---------------------------------------------------------------------------

    In total, we estimate potential issuer-level costs of $48,000 in
reduced earnings plus $13,000 in losses related to the increased risk
of fraud, or roughly $60,000 in costs per year on average per affected
issuer, though we view this estimate as conservative because it does
not fully account for the mitigating factors discussed above. Next, we
note that some of the potential adverse effects quantified in Section
IV.C.3.b. above may be associated with stock market values that fail,
at a given time, to reflect issuers' actual financial position. This
potential inflation and later correction of stock market values would
result in transfers that benefit some shareholders and harm other
shareholders. Further, the same shareholder may benefit in certain of
his shareholdings and be harmed in other shareholdings. Also, at any
given time, the stock price may be inflated for certain reasons but
have corrected for other prior inflation, depending on the timing of
the revelation of the underlying issues. For the purpose of
quantification of these potential transfers, we assume that issues are
revealed gradually and smoothly over time, such that there is an even
effect across years.
    The first source of mispricing we consider is misstatements that
later translate into restatements. In Section IV.C.3.b.iii. above, we
estimated that the magnitude of the potential increase in Item 4.02
restatements represented -$5,000 in stock market impact per year per
affected issuer. Secondly, we estimated earlier in this section that
the magnitude of the potential increase in fraud risk is about -$17,500
in market capitalization per year per affected issuer, of which 25
percent or about -$4,500 reflects the market adjusting to a more
accurate representation of issuers' financial situations.\605\ Summing
these quantified effects, and rounding up, we estimate that there may
be approximately $10,000 of pure transfers across shareholders per year
per affected issuer representing these corrections in stock values to
reflect issuers' actual financial positions.
---------------------------------------------------------------------------

    \605\ We note that some portion of this correction may already
be incorporated in our estimate with respect to restatements given
that we do no separately consider restatements that are associated
with specific charges or allegations versus other statements.
---------------------------------------------------------------------------

    As discussed above, these estimates are intended to be responsive
to commenters who indicated that further quantitative analysis of the
costs of the amendments would be appropriate. One commenter also
provided alternative quantified estimates of the costs of expanding the
exemption from the ICFR auditor attestation requirement, estimating a
$1.7 million loss in future earnings and $2.2 million in forgone market
value per issuer.\606\ While we rely on evidence from the same
underlying study that this commenter uses for some of our estimates, we
do not rely on these specific estimates for two primary reasons. First,
the underlying study indicates that these per issuer estimates apply
not to all issuers but only to those issuers that are suspected of
misreporting that their ICFR is effective when exempted from the ICFR
attestation requirement, which the study estimates to be only 9.3
percent of the issuers.\607\ Secondly, these estimates reflect
aggregate effects over three years and we scale everything to
annualized effects for better comparability.\608\ We also note that the
estimate described by the commenter as forgone market value is
described in the underlying study as a delay in a market value decline
that would otherwise happen currently, not as an increase in market
capitalization that could be captured under the ICFR auditor
attestation requirement.\609\
---------------------------------------------------------------------------

    \606\ See letter from Prof. Barth et al.
    \607\ See Ge et al. 2017 Study, note 393 above.
    \608\ Id.
    \609\ Id. In particular, this study estimates a stock market
value correction that would be delayed until ICFR misreporters
experience the negative consequences of ineffective ICFR (such as
restatements or lower operating performance), rather than resulting
immediately because of a disclosure of ineffective ICFR. The study
estimates that a $2.2 million stock market value correction would be
delayed across a period of three years per suspected misreporter,
who are estimated to represent 9.3 percent of the issuers exempt
from the ICFR auditor attestation requirement. Annualizing and
generalizing the study's estimate across issuers' results in an
estimated delayed stock market correction per year per affected
issuer of about $70,000 ($2.2 million divided by three years times
9.3 percent). We note that this estimate is similar to the likely
stock market impact of the quantified costs and transfers that we
estimate may result from the adverse effects of removing the ICFR
auditor attestation requirement for the affected issuers (such as
restatements and lower operating performance). In particular, our
estimate of about $10,000 in potential transfers per year per
affected issuer represents a $10,000 potential stock market
correction per year per affected issuer. Our estimate of quantified
potential costs of about $60,000 per year per affected issuer would
likely be reflected in a similarly-sized stock market reaction, for
a further potential stock market correction of about $60,000 per
year per affected issuer, and a total of about $70,000 ($10,000 plus
$60,000) in stock market effects per year per affected issuer, the
same as the estimate implied by the study. That said, we differ
somewhat in the attribution of this total to deadweight costs versus
transfers, as the Ge et al. 2017 study, note 393 above, suggests
that the total estimated stock market effect may represent only a
difference in timing of the effect and thus a transfer across
shareholders.
---------------------------------------------------------------------------

    Another commenter \610\ cited the same underlying study's \611\
estimates of quantified costs and benefits associated with the ICFR
auditor attestation. As discussed above, the study estimates, in
aggregate and in present value terms, a total of $388 million in
aggregate audit fee savings and a total of $719 million in lower
earnings associated with exempting non-accelerated filers.\612\ While
the commenter did not suggest that we adopt those specific estimates,
we note that we do not rely directly on those estimates, which apply to
a different context. In particular, the estimates in that study are
intended to quantify the costs and benefits associated with the
exemption that applies to all existing non-accelerated filers, versus
those associated with extending the exemption to the smaller number and
different type of affected issuers discussed in this release. However,
as discussed in more detail throughout the release, we do rely on some
results and approaches from that study in constructing our own
estimates.
---------------------------------------------------------------------------

    \610\ See letter from Prof. Ge et al.
    \611\ See Ge et al. 2017 Study, note 393 above.
    \612\ This study also estimates a delay over three years in the
timing of a market value decline (that would otherwise have occurred
at the beginning of this three year period) of $935 million
associated with the exemption from the ICFR auditor attestation
requirement. See Section IV.C.2.b.ii. above.
---------------------------------------------------------------------------

ii. Discussion of Economic Costs
    While the previous section provided computations of monetary
estimates of certain potential adverse effects of the amendments, this
section provides further discussion of those costs as well as other
economic costs that we are unable to quantify. Per the discussion in
Section IV.C.3.a. above, any impact of the amendments on the
effectiveness of ICFR and the reliability of financial statements may
have issuer-level implications as well as market-level implications. At
the issuer level, the potential increase, on average, in the rate of
ineffective ICFR and restatements may lead investors to charge a
somewhat higher average cost of capital for the affected issuers. An
issuer's cost of capital, or the expected return that investors demand
to hold its securities, determines the price at which it can raise
funds. Thus, any such increase may be associated with a reduction in

capital formation to the extent that it decreases the rate at which the
affected issuers raise new capital towards new investments. Further,
the affected issuers may also experience reduced operational efficiency
because of the reduced reliability of financial information available
to management for the purpose of making operating decisions. These
potential effects are supported by a number of studies discussed
above.\613\ Finally, there may be legal and reputational costs
associated with any increase in the risk of fraud, which would
represent deadweight losses, or net costs to society.
---------------------------------------------------------------------------

    \613\ See Section IV.C.3.a. above.
---------------------------------------------------------------------------

    Several commenters expressed the view that eliminating the ICFR
auditor attestation requirement would increase the cost of capital for
certain issuers because of the potential effects of this change on the
reliability of the financial statements of the affected issuers.\614\
The potential issuer-level effect on the cost of capital is difficult
to confirm and to quantify for the affected issuers because the
existing studies may not be generalizable to the affected issuers and
to the current nature of ICFR auditor attestations (i.e., after the
2007 change in the ICFR auditing standard, the 2010 change in risk
assessment auditing standards, and recent PCAOB inspections focused on
these aspects of audits). Further, some of these studies provide mixed
evidence, as discussed in Section IV.C.3.a. above. Moreover, the
methods used in previous studies are difficult to apply to a comparable
sample of low-revenue issuers in more recent years because, for
example, there would only be a small sample of such issuers that
recently switched filing status and because methods of measuring the
implied cost of capital are particularly problematic for such
issuers.\615\ Commenters did not provide us with estimates or data that
could be used to estimate potential effects on the cost of capital.
---------------------------------------------------------------------------

    \614\ See, e.g., letters from BDO and CFA.
    \615\ See note 481 above.
---------------------------------------------------------------------------

    The available evidence supports the qualitative, directional
effects on cost of capital noted above. That is, some of the affected
issuers could experience an increase in their cost of capital. However,
the previous section demonstrated that the potential increase in
material weaknesses in ICFR that we estimate could occur may translate
into a more limited effect on the reliability of disclosures, as
measured, for example, by the rate of restatements, for the affected
issuers. Also, based on our analysis, the financial metrics of these
issuers have lower explanatory power for investors' determination of
their value than in the case of other issuers. These two factors may
mitigate the potential adverse effects on the affected issuers' cost of
capital.
    In addition, some of the costs of extending the exemption from the
ICFR auditor attestation requirement to additional issuers may be
further mitigated by the fact that some issuers, even if exempted, may
voluntarily choose to bear the costs of obtaining such an
attestation.\616\ Affected issuers that expect a lower cost of capital
with an ICFR auditor attestation, such as those with effective
ICFR,\617\ and particularly those that will be raising new debt or
equity capital,\618\ are more likely to voluntarily obtain an ICFR
auditor attestation. We note that low-revenue issuers have less access
to internally-generated capital, as discussed above, so they may be
more reliant on external financing for capital. Consistent with this
argument, commenters suggested that issuers may voluntarily obtain an
ICFR auditor attestation if it were demanded by investors,\619\ not
complying would have a negative impact on investment analysts'
coverage,\620\ or issuers deem it a good use of their capital
resources.\621\ Further, as discussed in Section IV.C.4.d. below, we
note that the benefits and therefore likelihood of voluntarily
obtaining ICFR auditor attestations may be increased by the new check-
box disclosure on annual reports required by the amendments, in that
investors should be more able to readily discern which issuers obtained
an ICFR auditor attestation.\622\ However, it is probably not the case
that issuers would voluntarily obtain an ICFR auditor attestation in
every case in which the total benefits of doing so would exceed the
total costs.\623\
---------------------------------------------------------------------------

    \616\ Studies have associated voluntary compliance with the ICFR
auditor attestation requirement with decreased cost of capital and
value enhancements. See, e.g., Cory Cassell, Linda Myers, & Jian
Zhou, The Effect of Voluntary Internal Control Audits on the Cost of
Capital, Working Paper (2013) (Cassell et al. 2013 Study), available
at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1734300; Todd
Kravet, Sarah McVay, & David Weber, Costs and Benefits of Internal
Control Audits: Evidence from M&A Transactions, Rev. of Acct. Stud.
(forthcoming 2018), available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2958318; and Carnes et al. 2019 Study, note
397 above. We note that the latter two studies are not able to
differentiate between the effects of the ICFR auditor attestation
and of management's assessment of ICFR under SOX Section 404(a).
    \617\ See Brown et al. 2016 Study, note 396 above.
    \618\ See Cassell et al. 2013 Study, note 616 above.
    \619\ See, e.g., letters from BIO and Guaranty.
    \620\ See, e.g., letter from Guaranty.
    \621\ Id.
    \622\ See 2013 GAO Study, note 246 above.
    \623\ There is substantial literature describing the fact that
in certain circumstances the incentives of managers are not
perfectly aligned with those of shareholders. See, e.g., Michael
Jensen & William Meckling, Theory of the Firm: Managerial Behavior,
Agency Costs and Ownership Structure, 3(4) J. of Fin. Econ. 305
(1976). Also, as discussed in Section IV.C.3.a. above, the ICFR
auditor attestation requirement can have important market-level
benefits through network and spillover effects that issuers are
unlikely to internalize. That is, issuers are likely to balance the
issuer-level benefits against the issuer-level costs of voluntary
compliance without considering these externalities.
---------------------------------------------------------------------------

    The available evidence also supports the qualitative, directional
effects on operating performance noted above. That is, some of the
affected issuers could experience lower operating performance due to
reliance on less reliable financial statements in their decision-
making. Like the potential effects on the cost of capital, the
potential effect on issuer operating performance associated with
reported ineffective ICFR is also difficult to estimate and is likely
to be mitigated by the multiple factors discussed above. Further, the
point estimates in one study demonstrate that issuers that remediate
their reported material weaknesses in ICFR might be able to make up a
substantial amount of the previous operating underperformance.\624\
---------------------------------------------------------------------------

    \624\ See Feng et al. 2015 Study, note 484 above, (with point
estimates of a one percent reduction in ROA in years with material
weaknesses in ICFR and a 2.6 percent increase in ROA upon
remediation, though there is significant uncertainty around these
rates).
---------------------------------------------------------------------------

    We do, however, quantify potential effects on operating performance
associated with ICFR misreporting, which are less likely to be
corrected by remediation because the underlying material weaknesses are
likely undetected. We also estimate potential deadweight losses (e.g.,
legal and reputational costs) associated with a possible increase in
the risk of fraud. In total, per Section IV.C.3.d.i. above, we estimate
potential issuer-level costs of $48,000 in reduced earnings plus
$13,000 in losses related to the increased risk of fraud, or roughly
$60,000 in costs per year on average per affected issuer, though we
view this estimate as conservative because it does not fully account
for the mitigating factors specific to low-revenue issuers discussed
above.
    We note that issuers and other market participants may adapt to the
proposed changes in various ways, which may serve to enhance or
mitigate the anticipated issuer-level costs. However, these actions,
and therefore their net effects, are difficult to predict. For

example, it has been posited that issuers reacted to the requirements
of SOX by reducing accruals-based earnings management and, in its
stead, making suboptimal business decisions for the purpose of real
earnings management.\625\ It is therefore possible that newly exempt
issuers could, to some extent, reduce real earnings management in favor
of accruals-based management. Another possibility is that scrutiny from
analysts may provide an alternative source of discipline for some of
the affected issuers, although there is evidence that analysts may stop
covering issuers whose financial statements are deemed to have become
less reliable.\626\
---------------------------------------------------------------------------

    \625\ See Daniel Cohen, Aiyesha Dey, & Thomas Lys, Real and
Accrual-Based Earnings Management in the Pre- and Post-Sarbanes
Oxley Periods, 83(3) Acct. Rev. 757 (2008) (finding that an increase
in real earnings management partially offset the decrease in
accruals-based earnings management that followed SOX). See also
Coates and Srinivasan 2014 Study, note 369 above, at 646-647.
    \626\ See Sarah Clinton, Arianna Pinello, & Hollis Ashbaugh-
Skaife, The Implications of Ineffective Internal Control and SOX 404
Reporting for Financial Analysts,'' 33(4) J. of Acct. and Pub. Pol'y
303 (2013) (finding that the disclosure of internal control
weaknesses is followed by a decline in analyst coverage).
---------------------------------------------------------------------------

    While the preceding analysis considers the average effects across
the affected issuers on the effectiveness of ICFR and the reliability
of financial statements, the potential issuer-level costs of the
proposed extension of the exemption from the ICFR auditor attestation
requirement likely vary across different types of affected issuers. For
example, the effects may vary based on issuers' proclivity to detect
and disclose material weaknesses in ICFR in the absence of an ICFR
auditor attestation requirement and whether the issuers' have
characteristics that the market associates with having such material
weaknesses. We discuss this variation in detail in the Proposing
Release.\627\
---------------------------------------------------------------------------

    \627\ See Section III.C.4.c. of the Proposing Release, note 4
above.
---------------------------------------------------------------------------

    We next consider effects at the market-level. Some of these effects
are associated with the transfers across shareholders that we estimated
in Section IV.C.3.d.i. above. In total, we estimated that there may be
approximately $10,000 of pure transfers across shareholders per year
per affected issuer representing corrections in stock values to reflect
issuers' actual financial positions. These transfers and the associated
mispricing may reduce the efficient allocation of capital at the market
level. Further, to the extent that the reliability of financial
statements is somewhat reduced on average at the issuer level for the
affected issuers, the efficient allocation of capital at the market
level may be negatively affected given a diminished ability to reliably
evaluate different investment alternatives.\628\
---------------------------------------------------------------------------

    \628\ The efficient allocation of capital may be further reduced
to the extent that the potential cost of capital effects discussed
above operate through a reduction in the liquidity of the market for
these issuers' shares, which increases the costs to investors
looking to adjust their investments or redeploy their capital. See
Diamond and Verrecchia 1991 Study, note 477 above.
---------------------------------------------------------------------------

    The reduced reliability of financial statements could also
negatively impact capital formation through a reduction in investor
confidence. Several commenters noted that they expected the amendments
to have a negative effect on investor confidence.\629\ In contrast, one
commenter asserted that there is no correlation between a smaller
company's compliance with the ICFR auditor attestation requirement and
stronger markets in general,\630\ while two others noted that they did
not expect effects on investor confidence with respect to affected
issuers that are banks.\631\
---------------------------------------------------------------------------

    \629\ See, e.g., letters from Better Markets and CII.
    \630\ See letter from BIO.
    \631\ See letters from BSC and SCBA.
---------------------------------------------------------------------------

    Section IV.C.3.a. provides additional discussion of these market-
level factors. While we are unable to directly quantify the market-
level effects on the efficient allocation of capital and on investor
confidence, we anticipate that these effects may be limited due to the
size of the expected effect on the reliability of these issuers'
disclosures and potential transfers across shareholders as well as the
small percentage of the total value of traded securities that is
represented by the affected issuers. In particular, we estimate that
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.\632\
---------------------------------------------------------------------------

    \632\ This statistic is based on staff analysis of data from
Compustat. The total population of issuers used to construct this
estimate are those that have annual reports on Forms 10-K, 20-F, or
40-F in calendar year 2018 and data on market capitalization in
Compustat. See above note 336 for detail on the identification of
affected issuers.
---------------------------------------------------------------------------

4. Potential Benefits and Costs Related to Other Aspects of the
Amendments
    In this section we consider the potential effects of the amendments
with regard to other implications of accelerated filer status,
specifically with respect to the timing of filing deadlines, certain
required disclosures, and the determination of filer status. We also
consider below some incremental effects of the amendments to the
thresholds for exiting accelerated and large accelerated filer status
and the new check-box disclosure required on the cover page of annual
reports on Form 10-K, 20-F, or 40-F.
a. Filing Deadlines
    As discussed in Section IV.B.1. above, non-accelerated filers are
permitted an additional 15 days and five days, respectively, beyond the
deadlines that apply to accelerated filers, to file their annual and
quarterly reports. Extending these later deadlines to the affected
issuers may provide these issuers with additional flexibility in
preparing their disclosures, while modestly decreasing the timeliness
of the data for investors.
    Table 6 in Section IV.B.3. demonstrates that while the filing
deadlines are not a binding constraint for most accelerated filers,
with 63 percent filing their annual reports over five days early in
recent years, some accelerated filers are likely to benefit from the
extended deadline. For example, filing Form NT automatically provides a
grace period of an additional 15 days to file an annual report, and
over the past four years, about four percent of accelerated filers
filed their annual reports within this grace period rather than by the
original deadline. A further five percent of accelerated filers filed
their annual reports after these additional 15 days had passed.
    Even affected issuers that would otherwise have filed by the
accelerated filer deadline may avail themselves of the additional time
provided under the amendments to balance other obligations or to
prepare higher quality disclosures. The 2003 acceleration of filing
deadlines for accelerated filers from 90 to 75 days was associated, at
least initially, with a higher rate of restatements for the affected
issuers.\633\ This finding suggests that a later deadline may allow
some issuers to provide more reliable financial disclosures. While
these issuers could alternatively file Form NT to receive an automatic
extension, studies have found that investors interpret such filings as
a negative signal, resulting in a negative stock price reaction.\634\
Issuers may thus

prefer to meet the original deadline if possible.
---------------------------------------------------------------------------

    \633\ See, e.g., Colleen Boland, Scott Bronson, & Chris Hogan,
Accelerated Filing Deadlines, Internal Controls, and Financial
Statement Quality: The Case of Originating Misstatements, 29(3)
Acct. Horizons 551 (2015) (``Boland et al. 2015 Study''); and Lisa
Bryant-Kutcher, Emma Yan Peng, & David Weber, Regulating the Timing
of Disclosure: Insights from the Acceleration of 10-K Filing
Deadlines, 32(6) J. of Acct. and Pub. Pol'y 475- (2013).
    \634\ See Joost Impink, Martien Lubberink, & Bart van Praag, Did
Accelerated Filing Requirements and SOX Section 404 Affect the
Timeliness of 10-K Filings?, 17(2) Rev. of Acct. Stud. 227 (2012)
and Eli Bartov & Yaniv Konchitchki, SEC Filings, Regulatory
Deadlines, and Capital Market Consequences, 31(4) Acct. Horizons 109
(2017).
---------------------------------------------------------------------------

    On the other hand, allowing the affected issuers to file according
to the later non-accelerated filer deadlines may reduce the timeliness
and therefore usefulness of the disclosures to investors. Studies have
found a reduction in the market reaction to disclosure when the
reporting lag between the end of the period in question and the
disclosure date is lengthy, as more of the information becomes
available through other public channels.\635\ Researchers have also
questioned whether such lags increase information asymmetries, because
some investors are more able to access or process information that
could provide indirect insight into an issuer's financial status or
performance through alternative channels.\636\
---------------------------------------------------------------------------

    \635\ See, e.g., Dan Givoly & Dan Palmon, Timeliness of Annual
Earnings Announcements: Some Empirical Evidence, 57(3) Acct. Rev.
486 (1982).
    \636\ See, e.g., Nils Hakansson, Interim Disclosure and Public
Forecasts: An Economic Analysis and a Framework for Choice, 52(2)
Acct. Rev. 396 (1977) and Baruch Lev, Toward a Theory of Equitable
and Efficient Accounting Policy, 63(1) Acct. Rev. 1 (1988). We note
that Regulation FD generally prohibits public companies from
disclosing nonpublic, material information to selected parties
unless the information is distributed to the public first or
simultaneously. See 17 CFR 243.100 to 17 CFR 243.103.
---------------------------------------------------------------------------

    One study found that the 2003 acceleration of filing deadlines was
associated with a decrease in the market reaction to the disclosure of
annual reports for accelerated filers.\637\ Based on this result and
supplementary tests regarding the change in disclosure quality and
change in timeliness after the acceleration of deadlines, the authors
concluded that the negative effect of the shorter deadline on the
quality of disclosure appeared to dominate the beneficial effect on the
timeliness of the disclosure for these issuers.\638\ While this finding
might not be directly applicable 15 years later, and there is some
evidence that some of these effects were temporary,\639\ in the absence
of other evidence we expect the net effect of the extended filing
deadlines to be beneficial on average but modest overall. One
commenter, citing the complexity of current accounting standards and
the volume of disclosure requirements, agreed that the benefits of the
extended deadlines for the affected issuers were likely to outweigh
their costs.\640\ Other commenters did not opine on the costs and
benefits of the changes in filing deadlines for the affected issuers.
---------------------------------------------------------------------------

    \637\ See Jeffrey Doyle & Matthew Magilke, Decision Usefulness
and Accelerated Filing Deadlines, 51(3) J. of Acct. Res. 549 (2013).
We note that this study found the reverse to be true for large
accelerated filers.
    \638\ Id.
    \639\ See, e.g., Boland et al. 2015 Study, note 633 above.
    \640\ See letter from BDO.
---------------------------------------------------------------------------

b. Disclosures Required of Accelerated Filers
    Non-accelerated filers are not required to provide disclosure
regarding the availability of their filings under Item 101(e)(4) of
Regulation S-K. While some investors may benefit from reduced search
costs due to such disclosures, we do not expect that extending the
exemption from these disclosures to the affected issuers will have
significant economic effects.
    Non-accelerated filers also are not required to provide disclosure
required by Item 1B of Form 10-K or Item 4A of Form 20-F about
unresolved staff comments on their periodic and/or current reports.
Studies have found that the eventual disclosure of staff comments and
related correspondence, as well as interim information about these
comments before they are made public, are value-relevant (in that they
affect the pricing of securities) for investors.\641\ While our
understanding is that Items 1B and 4A disclosures are relatively
uncommon,\642\ extending the exemption from the requirement to disclose
unresolved staff comments to the affected issuers may, in some
circumstances, prevent the timely disclosure of value-relevant
information to public market investors. Moreover, because Item 1B of
Form 10-K and Item 4A of Form 20-F requires unresolved staff comments
to be disclosed if they were made not less than 180 days prior to the
end of that fiscal year, issuers no longer subject to this disclosure
requirement may have a reduced incentive to resolve comments in a
timely manner, which could decrease the quality of reporting for the
period over which comments continue to be unresolved. We did not
receive any comments on these potential effects.
---------------------------------------------------------------------------

    \641\ See, e.g., Patricia Dechow, Alastair Lawrence, & James
Ryans, SEC Comment Letters and Insider Sales, 91(2) Acct. Rev. 401
(2015) and Lauren Cunningham, Roy Schmardebeck, & Wei Wang, SEC
Comment Letters and Bank Lending, Working Paper (2017), available at
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2727860.
    \642\ Based on staff analysis using the Intelligize database,
approximately 20 issuers included Item 1B disclosures in Forms 10-K
filed in 2017.
---------------------------------------------------------------------------

c. Transition Thresholds
    The amendments include revisions to the transition thresholds that
address when an accelerated filer or large accelerated filer can
transition into a different filer status. The amendments will allow
accelerated or large accelerated filers to become non-accelerated
filers if they qualify under the SRC revenue test or meet a revised
public float transition threshold. An issuer whose revenues previously
exceeded the SRC initial revenue threshold of $100 million will not
qualify under the SRC revenue test unless its revenues fall below $80
million. The $80 million transition threshold for the SRC revenue test
is 80 percent of the initial threshold of $100 million in revenue. An
issuer whose public float previously exceeded the $75 million initial
threshold for accelerated filer status will become a non-accelerated
filer if its public float falls below $60 million, or 80 percent of
that initial threshold, as opposed to the current threshold of $50
million. Finally, the amendments also revise the public float
transition threshold for exiting large accelerated filer status and
becoming an accelerated filer from $500 million to $560 million in
public float, or 80 percent of the $700 million entry threshold, to
align with the transition threshold for entering SRC status after
having exceeded $700 million in public float.
    The filer type exit thresholds in Rule 12b-2 are set below the
corresponding entry thresholds to provide some stability in issuer
classification given normal variation in public float and revenues. The
exact placement of these thresholds involves a tradeoff between the
degree of volatility in classification versus the extent to which the
categories persistently include issuers that are below the initial
entry thresholds. The Proposing Release presented a quantitative
analysis of this tradeoff using 20 years of data on the evolution of
market capitalizations (as a proxy for public float) and revenues.\643\
In particular, this analysis demonstrated that a higher exit threshold
is associated with more volatility in classification. For example, exit
thresholds set at 100 percent of the public float entry thresholds
would have led eight to ten percent of new entrants into a filer status
to immediately exit the following year and then re-enter once again the
year after that. Issuers and investors may be confused as a result of
such frequent fluctuations in filer type. They may also bear resulting
costs, such as (for issuers) the cost of frequently revising their
disclosure schedules and continually considering the impact of whether
they are subject to the ICFR auditor attestation requirement from one
year to the next and (for investors) any incremental cost of evaluating
the

reliability of financial disclosures for an issuer that is not
consistently subject to the ICFR auditor attestation requirement.
---------------------------------------------------------------------------

    \643\ See Table 16 of the Proposing Release, note 4 above.
---------------------------------------------------------------------------

    On the other hand, the analysis in the Proposing Release also
illustrated that a lower exit threshold is associated with a greater
number of issuers remaining in a particular category despite falling
below the entry threshold. For example, exit thresholds set at 60
percent of the public float entry thresholds would have prevented four
to six percent of the new entrants into a filer status from exiting
that status despite being below the entry threshold in the next two
years. A low exit threshold can thus risk having a filer status
effectively apply to a broader group of issuers than intended.
    The analysis in the Proposing Release further demonstrated that the
balance between limiting filer status volatility while enabling filer
status mobility provided by an exit threshold of 80 percent is similar
around a $250 million, $75 million, and $700 million market
capitalization. In particular, while five to six percent of the new
entrants into a filer status would be expected to transition out and
back into the status in the following two years, one to two percent of
those entrants would be expected to remain within the same filer status
despite being below the entry threshold for the two following years. We
therefore expect the increase in the public float thresholds to exit
accelerated and large accelerated filer status to $60 and $560 million,
or 80 percent of the entry threshold in each case, to lead to a similar
tradeoff in these factors as the 80 percent public float threshold to
re-enter SRC status.
    One commenter noted that certain of the affected issuers may
recognize revenues unevenly across periods due to certain collaborative
arrangements.\644\ When considering issuers that have empirically
crossed a $100 million revenue entry threshold in the past, the
analysis in the Proposing Release demonstrated that, on average, these
issuers would not be subject to significant volatility in
classification. Thus, while some issuers may be subject to such
volatility,\645\ this does not appear to be a widespread concern. In
fact, the analysis in the Proposing Release demonstrated that revenue
is on average more stable than market capitalization, so the 80 percent
threshold in the revenue test for exiting accelerated and large
accelerated filer status is expected to provide a lower degree of filer
status fluctuations for a comparable degree of filer status mobility.
Overall, we expect the amended transition thresholds to provide a
tradeoff between filer status mobility and volatility that is
consistent with the tradeoff provided by the recently revised SRC
transition provisions.
---------------------------------------------------------------------------

    \644\ See letter from EY.
    \645\ Issuers that expect significant volatility in their
classification could consider voluntarily obtaining an ICFR auditor
attestation in years where one is not required, given that
commenters suggested that there would be no significant cost savings
from obtaining an ICFR auditor attestation every three years as
opposed to annually. See, e.g., letters from Crowe and KPMG.
---------------------------------------------------------------------------

d. Disclosure
    The amendments 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. While filer status is reported prominently on
the cover page of annual reports for most issuers, there is currently
not similarly prominent disclosure of whether an ICFR auditor
attestation is provided. Such disclosure has been recommended by the
GAO,\646\ as well as some commenters.\647\
---------------------------------------------------------------------------

    \646\ See 2013 GAO Study, note 246 above.
    \647\ See, e.g., letters from CAQ, CFA Inst., CII, Grant
Thornton, and KPMG.
---------------------------------------------------------------------------

    Investors can already ascertain whether an ICFR auditor attestation
is included by searching within an issuer's annual report, and
including additional items on the annual report cover page could
marginally decrease the salience of each item already reported there.
However, several commenters noted that it is currently difficult for
investors to easily determine whether an issuer's filing includes an
ICFR auditor attestation.\648\ The cover page check box disclosure
requirement will make it easier for investors to identify issuers that
undergo an ICFR auditor attestation with only minimal additional
disclosure expense for registrants. This may, on the margin, increase
the efficiency of investment decisions and the allocation of capital
across the market. It may also enhance the value to issuers of pursuing
an ICFR auditor attestation, even when one is not required, by making
it more likely that investors recognize that an issuer has obtained an
ICFR auditor attestation and therefore account for this factor in their
investment decisions. While issuers that voluntarily obtain an ICFR
auditor attestation would bear additional costs to do so, we expect
they would voluntarily bear these costs only if they believe that the
associated issuer-level benefits (e.g., a reduced cost of capital)
would more than offset those costs. Thus, to the extent that more
prominent disclosure would enhance these benefits, it may be a positive
factor in the decision of additional firms to voluntarily obtain an
ICFR auditor attestation. Such voluntary action by some of the issuers
for which the requirement will be eliminated could, as discussed above,
mitigate some of the potential negative effects of the amendments,
although it is difficult to predict the frequency with which voluntary
compliance might occur.
---------------------------------------------------------------------------

    \648\ See, e.g., letters from CAQ, CFA Inst., and Grant
Thornton. See also 2013 GAO Study, note 246 above.
---------------------------------------------------------------------------

5. Alternatives to the Amendments
    Below we consider the relative costs and benefits of reasonable
alternatives to the implementation choices in the amendments.
a. Exclude All SRCs From Accelerated Filer Category
    We considered excluding all SRCs from the accelerated filer
definition, consistent with the past alignment of the SRC and non-
accelerated filer categories. This alternative would include SRCs that
meet the revenue test, as under the adopted amendments, as well as
those that have a public float of less than $250 million when initially
determining SRC status. Several commenters supported this
approach.\649\
---------------------------------------------------------------------------

    \649\ See, e.g., letters from ASA, Guaranty, NAM, and Nasdaq.
---------------------------------------------------------------------------

    This alternative would have several benefits, such as promoting
regulatory simplicity and reducing any frictions or confusion caused by
issuers having to make multiple determinations of their filer type.
This alternative would also expand the benefits of the amendments to
additional issuers. We estimate that 268 additional issuers \650\ would
be non-accelerated filers rather than accelerated filers under this
alternative, of which 48 are EGCs and 220 would newly be exempt from
the ICFR auditor attestation requirement under SOX Section 404(b)
(although we estimate that six of these newly exempt filers would still
be subject to the FDIC auditor attestation requirement). In the

Proposing Release,\651\ we performed an analysis of the audit fees of
lower-float issuers of different types and estimated an average
compliance cost savings of $415,000 per year for the additional issuers
that would be affected under this alternative, with some of these
issuers experiencing lesser or greater savings. This likely represents
a significant cost savings for issuers with less than $250 million in
public float and may thus have beneficial economic effects on
competition and capital formation. As discussed above, smaller issuers
generally bear proportionately higher compliance costs than larger
issuers. Reducing these additional issuers' costs would reduce their
overhead expenses and may enhance their ability to compete with larger
issuers. To the extent that the cost savings for the additional
affected issuers enable capital investments that would not otherwise be
made, this alternative would also lead to additional benefits in
capital formation.
---------------------------------------------------------------------------

    \650\ This estimate is based on staff analysis of the number of
accelerated filers in 2018 with public float of at least $60 million
but less than $250 million and prior fiscal year revenues (or, in
the case of BDCs, investment income) of at least $100 million and
that are eligible to be SRCs (i.e., excluding ABS issuers, RICs,
BDCs, subsidiaries of non-SRCs, and FPIs filing on foreign forms or
using IFRS) or are BDCs (though we estimate that there are no BDCs
that meet these criteria). Revenue data is sourced from XBRL
filings, Compustat, and Calcbench. See note 298 above for details on
the identification of the population of accelerated filers. We note
that the incremental number of affected issuers could be higher than
this estimate because there are approximately 65 issuers for which
filer status and/or public float data are not available (and revenue
data is either unavailable or revenues are at least $100 million).
    \651\ See Section III.C.6.a. of the Proposing Release, note 4
above.
---------------------------------------------------------------------------

    However, we expect the costs of this alternative to be greater than
for the amendments, primarily due to the broader application of the
exemption from the ICFR auditor attestation requirement and the
diminished impact of some of the mitigating factors discussed in
Section IV.C.3. above on SRCs that meet the public float test rather
than the revenue test. In particular, we estimated in the Proposing
Release \652\ that extending the exemption from the ICFR auditor
attestation requirement to issuers that are eligible to be SRCs based
on their public float may result in an average increase in the rate of
ineffective ICFR of about 25 percentage points among these issuers,
somewhat higher than our estimate for low-revenue issuers. The analysis
in the Proposing Release \653\ also demonstrated that low public float
issuers restate their financial statements at rates comparable to
higher public float issuers, unlike low-revenue issuers, whose
restatement rates were three to nine percentage points lower than for
higher-revenue issuers of the same filer status. We therefore believe
that the proposition that low-revenue issuers may, on average, be less
susceptible to certain kinds of misstatements may not apply to the same
extent to issuers with low public float. We estimated in the Proposing
Release that the increase in restatement rates for the additional
affected issuers may be comparable to the two percentage points we
estimated for low-revenue issuers, but that, in contrast to the results
for low-revenue issuers, this would likely result in higher restatement
rates for the additional affected issuers than for the higher public
float issuers that would remain accelerated filers.
---------------------------------------------------------------------------

    \652\ Id.
    \653\ Id.
---------------------------------------------------------------------------

    The Proposing Release also tested whether the potential adverse
impact of such a change may be mitigated by a lower empirical relevance
of financial statements for the market valuation of these issuers.
However, we did not find evidence that the market relies on financial
statements to a lesser extent for the valuation of issuers with public
float less than $250 million (as compared to issuers with a larger
public float), and so this further mitigating factor that applies to
low-revenue issuers likely does not apply equally to lower public float
issuers.
    Finally, as in Section IV.C.3., we re-examined responses to the
2008-09 Survey. When asked about the net benefits of complying with SOX
Section 404, 16 percent of respondents at accelerated filers with
public float of less than $250 million claimed that the costs far
outweighed the benefits, in contrast to, as reported above, 30 percent
of respondents at accelerated filers with revenues of less than $100
million.\654\ While this survey data is somewhat dated, it provides an
indication as to the perception by executives at issuers at that time
of the relative costs and benefits of the ICFR auditor attestation
requirement. To the extent that this perception is borne out by the
actual costs and benefits of the ICFR auditor attestation requirement
for issuers that meet the SRC revenue test and for those that would
otherwise be SRCs under the public float test, this data may suggest
that low-revenue issuers would benefit more from qualifying as non-
accelerated filers than would other types of SRCs.
---------------------------------------------------------------------------

    \654\ These estimates are based on staff analysis of data from
the 2008-09 Survey. The analysis considers responses pertaining to
the most recent year for which a given respondent provided a
response. We note that the rate of responses to the question about
net benefits was lower than for other questions. See 2009 SEC Staff
Study, note 304 above, and Alexander et al. 2013 Study, note 401
above, for details on the survey and analysis methodology.
---------------------------------------------------------------------------

    We did not receive any comments on our analysis of the benefits and
costs of extending non-accelerated filer status to all SRCs.
b. Include or Exclude Certain Issuer Types
    Alternatively, we considered approaches that would include or
exclude additional issuer types, or apply different requirements to
particular issuer types. For example, we could extend non-accelerated
filer status to other issuers with between $75 million and $700 million
in public float that meet the SRC revenue test but would not be
eligible to be SRCs because they are majority-owned subsidiaries of
non-SRCs. However, in the Proposing Release, we estimated that only one
majority-owned subsidiary of a non-SRC parent would meet the same
public float and revenue thresholds as the affected issuers. Given the
minimal number of such issuers and the responsibilities of the parent
of any such issuers with respect to the ICFR of their subsidiaries, we
expect the incremental costs and benefits of this alternative to be
minimal.
    As discussed above, 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. We estimate that
approximately 28 BDCs will therefore be affected by the amendments, of
which seven are EGCs and therefore already exempt from the ICFR auditor
attestation requirement.
    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. However, given the small number of BDCs, it is difficult to
assess to what extent our findings with respect to the anticipated
costs and benefits of the amendments for the broader pool of affected
issuers would apply similarly to BDCs as an isolated subset of these
issuers.\655\ We note, however, that one commenter urged that we pursue
the adopted approach, stating that, among other reasons, ``[a]llowing
smaller BDCs to benefit from non-accelerated filer status, and thereby
ease regulatory costs and burdens, could encourage more BDCs to enter
the public markets, creating greater access to capital for small
operating companies and expanding investment opportunities for retail
investors.''.\656\ Given the limited

number of affected issuers that are BDCs, we preliminarily expect the
aggregate incremental costs and benefits of this alternative relative
to the adopted approach to be modest, as compared to the universe of
Form 10-K filers, although they could be significant for any particular
issuer and significant for traded BDCs as a class of Form 10-K filers
as we estimate the total number of traded BDC filers to be 51 (of which
seven have a market capitalization below $75 million and would be
already considered non-accelerated filers).\657\
---------------------------------------------------------------------------

    \655\ While more refined analysis is difficult, we note that,
for the 54 to 75 BDCs for which a management report on ICFR is
available in Audit Analytics for years 2014 through 2017, the rate
of ineffective ICFR reported by management is 9.0 percent, the rate
of restatements is 9.8 percent, and the rate of Item 4.02
restatements is 2.3 percent on average across these years, which are
comparable to the corresponding rates for all accelerated filers
other than EGCs under the baseline. See Section IV.B.4. above.
    \656\ See letter from Proskauer.
    \657\ Nontraded BDCs also file on Form 10-K, but these issuers
are already non-accelerated filers because they do not have public
float.
---------------------------------------------------------------------------

    We also considered alternative thresholds for BDCs, given that BDCs
do not report revenue on their financial statements. The amendments
exclude a BDC 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. Table 16 below provides statistics
from the Proposing Release on other income-related metrics for BDCs
with between $70 million and $700 million in public float.\658\
---------------------------------------------------------------------------

    \658\ This analysis used market capitalization valuations as of
February 2019 to determine the set of potentially affected BDCs
under different alternatives. While this methodology is different
than the approach used by Rule 12b-2, which uses the aggregate
worldwide market value of the voting and non-voting common equity
held by non-affiliates as of the last business day of the issuer's
most recent second fiscal quarter, we do not believe that it would
substantially change our analysis. This analysis did not remove BDCs
who may qualify as non-accelerated filers based on their status as
EGCs. After identifying the set of potentially affected BDCs, our
staff manually reviewed the then-most recent Form 10-K filed on our
EDGAR system for each BDC. The affected parties estimates in Section
IV.C.1. above uses self-identified filer status to identify affected
BDCs (as well as other affected issuers), rather than using market
capitalization data for this purpose. In particular, current status
as an accelerated filer implies that the issuer's Rule 12b-2 public
float does not exceed $700 million. See above note 336. Also, the
public float of the affected BDCs was manually collected for the
purpose of related statistics in Section IV.C.1. See notes 356, 366,
and 367 above.

            Table 16--Characteristics of BDCs With Market Capitalization Between $75 and $700 Million
                                                  [In millions]
----------------------------------------------------------------------------------------------------------------
                                                                                Net increase in
                                                                             Net realized and      net assets
                                            Market       Investment income   unrealized gains    resulting from
                                      capitalization as   for most recent     and losses for     operations for
                                       of February 2019     fiscal year        most recent        most recent
                                                                               fiscal year        fiscal year
----------------------------------------------------------------------------------------------------------------
High................................            $507.91            $108.28             $43.12              60.69
Low.................................              89.69               1.62          (-123.33)         (-$114.28)
Average.............................             255.30              49.37           (-11.15)              $7.70
Median..............................             244.72              47.67            (-4.44)             $13.01
----------------------------------------------------------------------------------------------------------------

    The commenter that supported expanding the proposed amendment to
the definition of accelerated filer and large accelerated filer to
exclude BDCs suggested that we exclude entities 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. Of the 29 BDCs
identified in the Proposing Release with a market capitalization
between $75 million and $700 million, 28 had investment income of below
$100 million and 26 had investment income of below $80 million. We
therefore anticipate that the incremental costs and benefits of a
threshold of $80 million in investment income as compared to the
adopted threshold of $100 million in investment income would be
limited.
    We also considered whether to require or permit BDCs to provide an
independent public accountant's report on internal controls, similar to
the one required by RICs on Form N-CEN, since both RICs and BDCs
prepare financial statements under Article 6 of Regulation S-X, in
place of the auditor attestation required by SOX Section 404(b). We
considered whether such a substitution should be permitted for all BDCs
or only required for those BDCs that would no longer be required to
provide a report under SOX Section 404(b). We do not have any data and
did not receive any public comment, however, regarding the potential
benefits and costs of using a Form N-CEN-type report on internal
controls as compared to the auditor attestation required by SOX Section
404(b).
    We also considered excluding all FPIs, which are included in the
affected issuers to the extent that they meet the required thresholds
and other qualifications, from the amendments. Researchers have found
that the restatement rates of foreign issuers may be artificially
depressed due to a lower likelihood of detection and disclosure of
misstatements for these issuers.\659\ It is therefore possible that
encouraging more effective ICFR through an ICFR auditor attestation
requirement may be particularly important for such issuers. On the
other hand, because low-revenue FPIs may have similar characteristics
to low-revenue domestic issuers, including them in the group of
affected issuers may help to maintain an even playing field for
competition amongst these issuers and avoid discouraging foreign
companies from issuing securities in U.S. public markets. The
amendments attempt to strike a balance between these considerations by
allowing FPIs to avail themselves of the amendments only if they file
on domestic forms and present their financial statements pursuant to
U.S. GAAP, as well as meeting the required thresholds and other
qualifications.\660\ Because of limitations in the availability of data
such as filing status or public float for many FPIs, we are unable to
reliably measure the potential effects for this subset of issuers.
Commenters did not provide data that would allow us to further analyze
the potential effects for these issuers.
---------------------------------------------------------------------------

    \659\ See, e.g., Suraj Srinivasan, Aida Sijamic Wahid, & Gwen
Yu, Admitting Mistakes: Home Country Effect on the Reliability of
Restatement Reporting, 90(3) Acct. Rev. 1201 (2015).
    \660\ While we currently estimate that no FPIs would currently
qualify based on these requirements, we note that there are FPIs
that otherwise meet the required thresholds and other qualifications
and that might choose to file on domestic forms using U.S. GAAP in
order to benefit from the amendments as well as the scaled
disclosure accommodations available to SRCs if these benefits
outweigh the costs of changing their disclosure regime.
---------------------------------------------------------------------------

c. Alternative Threshold
    We considered alternative levels at which a revenue threshold could
be set. A $100 million dollar revenue threshold

was recommended, in conjunction with a public float threshold, for the
accelerated filer definition as well as the SRC definition by the 2017
Small Business Forum and a participant at the September 2017 meeting of
the former Advisory Committee on Small and Emerging Companies
(``ACSEC'').\661\ The $100 million threshold is also aligned with the
SRC revenue test. Empirically, we find no obvious break in the
distribution of revenue or in the results of our analysis. In general,
lowering the revenue threshold would reduce the expected benefits of
the amendments by reducing the number of issuers that would experience
cost savings, while also reducing the expected costs of the amendments
by reducing the potential adverse impact on the reliability of
financial statements. Increasing the threshold would increase the
expected benefits while also increasing the expected costs. We did not
receive comments on the costs or benefits of alternative levels of a
revenue threshold or of alternative metrics that should be used instead
of revenue (except in the case of BDCs, as discussed above).
---------------------------------------------------------------------------

    \661\ See Final Report of the 2017 SEC Government Business Forum
on Small Business Capital Formation (Mar. 2018), available at
https://www.sec.gov/files/gbfor36.pdf; and William J. Newell,
Presentation at the ACSEC Meeting, Sarbanes-Oxley Section 404(b):
Costs of Compliance and Proposed Reforms, (Sept. 13, 2017),
available at https://www.sec.gov/info/smallbus/acsec/william-newell-acsec091317.pdf.
---------------------------------------------------------------------------

V. Paperwork Reduction Act

A. Summary of the Collections of Information

    Certain provisions of our rules and forms that would be affected by
the amendments contain ``collection of information'' requirements
within the meaning of the Paperwork Reduction Act (``PRA''). The
Commission published a notice requesting comment on the collection of
information requirements in the Proposing Release, and submitted the
proposed amendments to the Office of Management and Budget (``OMB'')
for review in accordance with the PRA.\662\ While several commenters
provided comments on the possible costs of the proposed
amendments,\663\ no commenters specifically addressed our PRA analysis.
Where appropriate, we have revised our burden estimates after
considering these comments as well as differences between the proposed
and final rules.
---------------------------------------------------------------------------

    \662\ 44 U.S.C. 3507(d) and 5 CFR 1320.11.
    \663\ See, e.g., letters from Ardelyx Presentation, Cerecor,
CFA, CFA Inst., CII, Concert, Corvus, Guaranty, ICBA, Nasdaq,
Pieris, Prof. Barth et al., Prof. Ge et al., Summit, Syros, and
Terra Tech.
---------------------------------------------------------------------------

    The hours and costs associated with preparing and filing the forms
and reports constitute reporting and cost burdens imposed by each
collection of information. An agency may not conduct or sponsor, and a
person is not required to respond to, a collection of information
requirement unless it displays a currently valid OMB control number.
Compliance with the information collections is mandatory. Responses to
the information collections are not kept confidential and there is no
mandatory retention period for the information disclosed. The titles
for the affected collections of information are:
     ``Form 10-K'' (OMB Control No. 3235-0063); \664\ and
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    \664\ The paperwork burden from 17 CFR 240.12b-1 through
240.12b-37 (``Regulation 12B'') is imposed through the forms that
are subject to the requirements in that regulation and is reflected
in the analyses of those forms. Our estimate for Forms 10-K takes
into account the burden that will be incurred by including the
disclosure in the applicable annual report. After the Proposing
Release, note 4 above, was issued, the Office of Management and
Budget (``OMB'') discontinued the OMB control number for Regulation
12B, so that the PRA inventory would not reflect duplicative
burdens.
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     ``Form 10-Q'' \665\ (OMB Control No. 3235-0070).\666\
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    \665\ 17 CFR 249.308a.
    \666\ The only revision to this form will be changing filing
deadlines, which will neither increase nor decrease the burden hours
necessary to prepare the filing because there will be no change to
the amount of information required in the filing.
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    The regulation and forms listed above were adopted under the
Exchange Act. The regulation and forms set forth the disclosure
requirements for periodic reports filed by registrants to help
investors make informed investment decisions. A description of the
final amendments, including the need for the information and its use,
as well as a description of the likely respondents, can be found in
Section II above, and a discussion of the economic effects of the final
amendments can be found in Section IV above.

B. Burden and Cost Estimates Related to the Final Amendments

    We estimate that the final amendments will result in approximately
527 additional issuers being classified as non-accelerated filers.\667\
Accelerated filers are subject to the ICFR auditor attestation
requirement and shorter deadlines for filing their Exchange Act
periodic reports.\668\ Additionally, accelerated filers must provide
disclosure regarding the availability of their filings and the
disclosure required by Item 1B of Form 10-K and Item 4A of Form 20-F
about unresolved staff comments on their periodic and/or current
reports.\669\
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    \667\ See Section IV.C.1. above. We estimate that there are no
FPIs that file on domestic forms and present their financial
statements pursuant to U.S. GAAP that would meet the required
thresholds and other qualifications of the amendments. However,
there are an estimated 31 FPIs that file on forms only available to
FPIs, but otherwise meet the required thresholds and other
qualifications. In the Proposing Release, note 4 above, we included
FPIs that file the forms available only to FPIs, but otherwise meet
the required thresholds and other qualifications, in the number of
affected issuers. While these issuers could become subject to the
amendments by changing their reporting regime, it is difficult to
predict how many would do so, as a result, we do not include them in
the number of affected issuers in this release. Accordingly, we do
not estimate any effect on the collections of information
corresponding to Forms 20-F or 40-F.
    \668\ See Section II.A. above.
    \669\ See note 25 above.
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1. ICFR Auditor Attestation Requirement
    We believe that expanding the exemption from the ICFR auditor
attestation requirement would reduce the PRA burden for 373 of the 527
affected issuers.\670\ An ICFR auditor attestation is required only in
annual reports. Table 17, below, shows the estimated number of affected
issuers that are subject to the ICFR auditor attestation requirement
that file on each of these forms and the average estimated audit-fee
and non-audit costs, as described above,\671\ to comply with the ICFR
auditor attestation requirement.
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    \670\ We estimate that the remaining 154 of the 527 affected
issuers are EGCs, which are not required to comply with the ICFR
auditor attestation requirement under SOX Section 404(b). See
Section IV.C.1. above. In addition to the 154 EGCs, we estimate that
a further 78 of the 527 affected issuers are currently also subject
to the FDIC's auditor attestation requirement. See Section 18A of
Appendix A to FDIC Rule 363. These issuers would continue to incur
burden hours and costs associated with an auditor attestation
requirement even under the final amendments. However, the FDIC's
auditor attestation requirement is not part of our rules. For
purposes of considering the PRA effects of the final amendments,
therefore, we have reduced the burden hours and costs for these 78
issuers as we would for the other affected issuers that are not
EGCs.
    \671\ See Sections IV.C.3. and IV.C.5. above.

     Table 17--Estimated Annual Costs Per Issuer of ICFR Auditor Attestation Requirement for Specified Forms
----------------------------------------------------------------------------------------------------------------
                                                                  Number of
                          Form type                                affected     Audit-fee costs  Non-audit costs
                                                                   issuers         per issuer       per issuer
----------------------------------------------------------------------------------------------------------------
Form 10-K....................................................             373         $110,000         $100,000
----------------------------------------------------------------------------------------------------------------

    Because these issuers would no longer be subject to the ICFR
auditor attestation requirement under the final amendments, they would
no longer incur these costs. For purposes of the PRA, this reduction in
total burden is to be allocated between a reduction in internal burden
hours and a reduction in outside professional costs. Table 18, below,
sets forth the percentage estimates we typically use for the burden
allocation for each form.

   Table 18--Standard Estimated Burden Allocation for Specified Forms
------------------------------------------------------------------------
                                                             Outside
                Form type                    Internal     professionals
                                               (%)             (%)
------------------------------------------------------------------------
Form 10-K................................          75                25
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    For the $100,000 reduction in annual non-audit costs,\672\ we
allocate the burden based on the percentages in Table 18 above.
However, we believe that 100 percent of the $110,000 annual burden
reduction for audit-fee costs related to the ICFR auditor attestation
requirement should be ascribed to outside professional costs because
that amount is an estimate of fees paid to the independent auditor
conducting the ICFR attestation audit. Table 19, below, shows the
resulting estimated reduction in cost per issuer associated with
outside professionals.
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    \672\ As discussed in Section IV.C.3, above, in deriving this
estimate of the reduction in non-audit costs, we have looked to
outside vendor and internal labor costs, and not to non-labor costs,
because we believe that those non-labor costs (such as software,
hardware, and travel costs) are primarily attributable to
management's ICFR responsibilities under SOX Section 404(a) and thus
would continue to be incurred. To the extent elimination of the
auditor attestation requirement also results in a reduction in
management's time burden, we believe this reduction generally would
be captured by the estimated $100,000 reduction, as this amount
reflects an overall reduction in non-audit costs.

                  Table 19--Estimated Reduction in Outside Professional Costs From Elimination of ICFR Auditor Attestation Requirement
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                                                                                Total outside
                                                                         Outside          Outside        professional                    Total reduction
                                                                       professional     professional      costs per        Number of        in outside
                      Issuer type (form used)                           costs per        costs per       issuer (non-       affected       professional
                                                                       issuer (non-    issuer (audit    audit + audit       issuers           costs
                                                                          audit)           fees)            fees)
[A]                                                                             [B]                [C]            [D]              [E]          (D x E)
                                                                                [F]
--------------------------------------------------------------------------------------------------------------------------------------------------------
Form 10-K..........................................................         $25,000         $110,000         $135,000              373      $50,355,000
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    For PRA purposes, an issuer's internal burden is estimated in
internal burden hours. We are, therefore, converting the internal
portions of the non-audit costs to burden hours. These activities would
mostly be performed by a number of different employees with different
levels of knowledge, expertise, and responsibility. We believe these
internal labor costs will be less than the $400 per hour figure we
typically use for outside professionals retained by the issuer.
Therefore, we use an average rate of $200 per hour to estimate an
issuer's internal non-audit labor costs. Table 20, below, shows the
resulting estimated reduction in internal burden hours from the
elimination of the ICFR auditor attestation requirement.

 Table 20--Estimated Reduction in Internal Burden Hours From Elimination of ICFR Auditor Attestation Requirement
----------------------------------------------------------------------------------------------------------------
                                               Internal cost                       Number of     Total reduction
           Issuer type (form used)            per issuer (non-   Burden hours       affected       in internal
                                                   audit)         per issuer        issuers        burden hours
[A]                                                      [B]         (B/$200)              [D]                (C x D)
                                                                            [C]                             [E]
----------------------------------------------------------------------------------------------------------------
Form 10-K...................................         $75,000              375              373          139,875
----------------------------------------------------------------------------------------------------------------

2. Filing Deadlines, Disclosure Regarding Filing Availability, and
Unresolved Staff Comments
    As the Commission has recognized previously, changing filing
deadlines neither increases nor decreases the burden hours necessary to
prepare the filing because there is no change to the amount of
information required in the

filing.\673\ Therefore, we do not believe that the change to the filing
deadlines will affect an issuer's burden hours or costs for PRA
purposes.
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    \673\ Revisions to Accelerated Filer Definition and Accelerated
Deadlines for Filing Periodic Reports, Release No. 33-8644 (Dec. 21,
2005) [70 FR 76634 (Dec. 27, 2005)].
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    We believe that eliminating the requirements to provide disclosure
regarding the availability of their filings and the disclosure required
by Item 1B of Form 10-K and Item 4A of Form 20-F about unresolved staff
comments on their periodic and/or current reports will reduce their
burden hours and costs, but we do not expect that reduction to be
significant. For purposes of the PRA, we estimate the reduction to be
approximately one hour for each affected issuer.\674\ However, as
opposed to the burden reduction resulting from the elimination of the
ICFR auditor attestation requirement, which would apply only to 373 of
the 527 total affected issuers that are not EGCs, the burden reduction
from eliminating these disclosure requirements will apply to all the
527 affected issuers, including the 154 affected issuers that are EGCs.
That reduction is allocated by form as shown in Table 21, below.
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    \674\ We believe that this one-hour reduction will be solely for
an issuer's internal burden hours.

  Table 21--Estimated Reduction in Internal Burden Hours per Issuer From Elimination of Disclosure Requirements
                           Regarding Filing Availability and Unresolved Staff Comments
----------------------------------------------------------------------------------------------------------------
                                                                                Number of       Reduction in
                          Form type                              Burden hours       affected     internal burden
                                                                  per issuer        issuers           hours
[A]                                                                       [B]                [C]          (B x C)
                                                                                [D]
----------------------------------------------------------------------------------------------------------------
Form 10-K....................................................               1              527              527
----------------------------------------------------------------------------------------------------------------

3. Check Box Disclosure
    In a change from the proposed amendments, the final amendments add
a check box to the cover pages of their annual reports on Forms 10-K,
20-F, and 40-F for issuers to indicate that they included an ICFR
auditor attestation in the filing. In addition, if the issuer is
otherwise required to tag cover page disclosure data using Inline XBRL,
it must also to tag the cover page check box disclosure using Inline
XBRL. Issuers must already determine whether they are subject to the
ICFR auditor attestation requirement, so requiring issuers to add a
check box to the cover pages of their annual reports on Forms 10-K, 20-
F, and 40-F, and check that box if they provide the ICFR auditor
attestation, will not substantively modify existing collection of
information requirements or otherwise affect the overall burden
estimates associated with these forms. Therefore, we are not adjusting
any burden or cost estimates in connection with the check box
requirement in the final amendments
4. Total Burden Reduction
    Table 22, below, shows the total estimated reduction in internal
burden hours and outside professional costs for all aspects of the
final amendments.

                                                                 Table 22--Requested Paperwork Burden Under the Final Amendments
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                                                                Current burden                                                           Burden change
                                                ------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                Change in       Change in
                                                    Current                                       company      company hours                        Change in     Burden hours   Cost burden for
                                                    annual        Current      Current cost     hours from    from disclosure   Total change in    professional   for affected      affected
                                                   responses   burden hours       burden          auditor       requirement      company hours        costs         responses       responses
                                                                                attestation     Elimination
                                                         (A)           (B)                 (C)         (D)               (E)   (F) = (D) + (E)              (G)   (H) = (B) +           (I) = (C) + (G)
                                                                                (F)
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