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

3. Final Amendments
    After considering the comments, we are adopting the final
amendments as proposed. As discussed in greater detail in the Economic
Analysis,\260\ transition thresholds in Rule 12b-2 are lower than entry
thresholds to keep issuers from frequently needing to reclassify their
filer status. The frequent reclassifications that would result without
the transition thresholds may cause confusion for issuers and investors
as to the issuer's status. Also, such frequent reclassifications may
increase issuers' costs because they would frequently need to revise
their disclosure schedules and continually consider the impact of
whether they are subject to the ICFR auditor attestation requirement
from one year to the next, and may increase investors' incremental
costs of evaluating the reliability of the issuer's financial
disclosures. Therefore, we believe a transition threshold is
appropriate. However, we recognize that providing a transition
threshold results in some issuers remaining in their filer status even
though their public float or revenues are below that filer status's
entry threshold.
---------------------------------------------------------------------------

    \260\ See Section IV.C.4.c below.
---------------------------------------------------------------------------

    The final amendments revise the public float transition threshold
for accelerated and large accelerated filers to become a non-
accelerated filer from $50 million to $60 million and revise the public
float transition threshold for a large accelerated filer to lose its
large accelerated filer status from $500 million to $560 million. Prior
to the final amendments, the public float threshold for an accelerated
and large accelerated filer to become a non-accelerated filer was $50
million and the public float transition threshold for a large
accelerated filer to lose its large accelerated filer status was $500
million. We believe these threshold amounts are too low and result in
more issuers than intended being classified as an accelerated or large
accelerated filer. However, we believe there should be some transition
threshold so as to avoid some volatility. The amendments would make the
public float transition thresholds 80 percent of the initial
thresholds, which is consistent with the percentage used in the
transition thresholds for SRC eligibility. We believe this approach
appropriately balances the risk of frequent reclassifications resulting
from a higher percentage threshold against the risk of delaying
appropriate transitions due to a lower threshold. The table below
summarizes how an issuer's filer status will change based on its
subsequent public float determination.

         Table 3--Subsequent Determination of Filer Status Based on Public Float Under Final Amendments
----------------------------------------------------------------------------------------------------------------
                                 Final amendments to the public float thresholds
-----------------------------------------------------------------------------------------------------------------
                                                                Subsequent public float
  Initial public float determination    Resulting filer status        determination       Resulting filer status
----------------------------------------------------------------------------------------------------------------
$700 million or more.................  Large Accelerated Filer  $560 million or more...  Large Accelerated
                                                                                Filer.
                                                                Less than $560 million   Accelerated Filer.
                                                                 but $60 million or
                                                                 more.
                                                                Less than $60 million..  Non-Accelerated Filer.
Less than $700 million but $75         Accelerated Filer......  Less than $700 million   Accelerated Filer.
 million or more.                                                but $60 million or
                                                                 more.
                                                                Less than $60 million..  Non-Accelerated Filer.
----------------------------------------------------------------------------------------------------------------

    The final amendments also add the SRC revenue test to the
transition threshold for accelerated and large accelerated filers. As
we noted in the Proposing Release, if we do not add the SRC revenue
test to the accelerated filer and large accelerated filer transition
provisions, an issuer's annual revenues would never factor into
determining whether an accelerated filer could become a non-accelerated
filer, or whether a large accelerated filer could become an accelerated
or non-accelerated filer. We note that one commenter stated that the
manner in which issuers may recognize revenue could cause them to
frequently lose and gain non-accelerated filer status.\261\ We believe
that providing transition thresholds should mitigate any such concern.
---------------------------------------------------------------------------

    \261\ See letter from EY.
---------------------------------------------------------------------------

    Under the final amendments, an accelerated filer with revenues of
$100 million or more that is eligible to be an SRC based on the public
float test contained in paragraphs (1) and (3)(iii)(A) of the SRC
definition can transition to non-accelerated filer status in a
subsequent year if it has revenues of less than $100 million. For
example, an issuer with a December 31 fiscal year end that did not
exceed the public float threshold in the prior year and that has a
public float, as of June 30, 2020, of $230 million and annual revenues
for the fiscal year ended December 31, 2019 of $101 million will be
eligible to be an SRC under the public float test; however, because the
issuer would not be eligible to be an SRC under the SRC revenue test,
it will be an accelerated filer (assuming the other conditions
described in Table 1 are also met). At the next determination date
(June 30, 2021), if its public float, as of June 30, 2020, remains at
$230 million and its annual revenues for the fiscal year ended December
31, 2019 are less than $100 million, the issuer will be eligible to be
an SRC under the SRC revenue test (in addition to the public float
test) and thus it will become a non-accelerated filer.
    On the other hand, an issuer with a December 31 fiscal year end
that has a public float, as of June 30, 2020, of $400 million and
annual revenues for the fiscal year ended December 31, 2019 of $101
million will not be eligible to be an SRC under either the public float
test or the SRC revenue test and will be an accelerated filer (assuming
the other conditions described in Table 1 also are met). At the next
determination date (June 30, 2021), if its public float, as of June 30,
2021, remains at $400 million, that issuer will not be eligible to be
an SRC under the SRC revenue test unless its annual revenues for the
fiscal year ended December 31, 2020 are less than $80 million, at which
point it will be eligible to be an SRC under the SRC revenue test and
to become a non-accelerated filer.

D. Transition Issues

    The final amendments will become effective 30 days after they are
published in the Federal Register. The final amendments will apply to
an annual report filing due on or after the effective date. Even if
that annual report is for a fiscal year ending before the effective
date, the issuer may apply the final amendments to determine its status
as a non-accelerated, accelerated, or large accelerated filer. For
example, an issuer that has a March 31, 2020 fiscal year end and that
is due to file its annual report after the effective date of the
amendments may apply the final amendments to determine its filing
status even though its fiscal year end date precedes the effective
date. An issuer that determines it is eligible to be a non-accelerated
filer under the final amendments will not be subject to the ICFR
auditor attestation requirement for its annual report due and submitted
after the effective date of the amendments and may comply with the
filing deadlines that apply, and other accommodations available, to
non-accelerated filers.

III. Other Matters

    If any of the provisions of these amendments, or the application of
these provisions to any person or circumstance, is held to be invalid,
such invalidity shall not affect other provisions or application of
such provisions to other persons or circumstances that can be given
effect without the invalid provision or application. Pursuant to the
Congressional Review Act,\262\ the Office of Information and Regulatory
Affairs has designated these amendments as not ``a major rule,'' as
defined by 5 U.S.C. 804(2).
---------------------------------------------------------------------------

    \262\ 5 U.S.C. 801 et seq.
---------------------------------------------------------------------------

IV. Economic Analysis

    We are mindful of the costs and benefits of the amendments. The
discussion below addresses the economic effects of the amendments,
including their anticipated costs and benefits, as well as the likely
effects of the amendments on efficiency, competition, and capital
formation.\263\ We also analyze the potential costs and benefits of
reasonable alternatives to the amendments. Where practicable, we have
attempted to quantify the economic effects of the amendments; however,
in certain cases, we are unable to do so because either the necessary
data are unavailable or certain effects are not quantifiable. In these
cases, we provide a qualitative assessment of the likely economic
effects.
---------------------------------------------------------------------------

    \263\ Section 2(b), 15 U.S.C. 77b(b), and Section 3(f) of the
Exchange Act, 15 U.S.C. 78c(f), directs the Commission, when
engaging in rulemaking where it is required to consider or determine
whether an action is necessary or appropriate in the public
interest, to consider, in addition to the protection of investors,
whether the action will promote efficiency, competition, and capital
formation. Further, Section 23(a)(2) of the Exchange Act, 15 U.S.C.
78w(a)(2), requires the Commission, when making rules under the
Exchange Act, to consider the impact that the rules would have on
competition, and prohibits the Commission from adopting any rule
that would impose a burden on competition not necessary or
appropriate in furtherance of the purposes of the Exchange Act.
---------------------------------------------------------------------------

A. Introduction

    As discussed above, we are adopting amendments to the definitions
of ``accelerated filer'' and ``large accelerated filer'' that will
generally extend non-accelerated filer status to issuers with up to
$700 million in public float if they are eligible to be SRCs and their
revenues are less than $100 million. As non-accelerated filers, among
other things, these issuers will not be required to obtain an ICFR
auditor attestation pursuant to SOX Section 404(b). The amendments are
intended to reduce compliance costs for these issuers while maintaining
investor protections by more appropriately tailoring the types of
issuers that are included in the categories of accelerated and large
accelerated filers.
    In the Proposing Release, we presented evidence that the imposition
of the ICFR auditor attestation requirement has been associated with
benefits to issuers and investors, such as reduced rates of ineffective
ICFR and more reliable financial statements.\264\ However, as explained
in the Proposing Release, the affected issuers may find the costs of
this requirement to be particularly burdensome given certain fixed
costs that may not scale with size. Importantly, because these issuers
have limited access to internally-generated capital, savings on
compliance costs may be more likely to be applied to additional
investment, research, or hiring.
---------------------------------------------------------------------------

    \264\ See Section III.C.4.a. of the Proposing Release, note 4
above,. See also Section IV.C.3.a. below.
---------------------------------------------------------------------------

    We acknowledged, in the Proposing Release, that exempting these
low-revenue issuers from the ICFR auditor attestation requirement may
result in adverse effects such as an increased prevalence of
ineffective ICFR and

restatements, and we estimated the potential effects on the rates of
such issues among the affected issuers. At the same time, we provided
evidence in support of two mitigating factors specific to the affected
issuers.\265\ First, we documented that low-revenue issuers have
relatively low rates of restatement, which could mean that the affected
issuers may, on average, be less susceptible to the risk of certain
kinds of misstatements. Next, we provided evidence that the market
value of the low-revenue issuers was not as associated with
contemporary financial statements as for higher-revenue issuers, which
could imply that their valuations are driven to a greater degree by
their future prospects.
---------------------------------------------------------------------------

    \265\ We also noted in the Proposing Release, note 4 above, that
issuers exempted from this requirement may choose to voluntarily
obtain an ICFR auditor attestation if investors demand it or the
issuers otherwise deem it, from their perspective, to be the best
use of their resources.
---------------------------------------------------------------------------

    Commenters raised a number of concerns with our analysis and
conclusions in the Proposing Release. We carefully reviewed all of the
comments received and in a few instances, conducted supplemental
analysis in response to the issues and questions raised by those
comments. Overall, based on our analysis of the available evidence and
data, our primary conclusions have not substantively changed. While we
address the comments in detail in the body of the Economic Analysis
below, we highlight certain of our findings in relation to some
commenter concerns here.
    One concern raised by commenters is that rather than targeting
issuers where there may be relatively fewer benefits of the ICFR
auditor attestation requirement, the amendments will remove this
requirement for exactly those issuers where the benefits may be
greatest.\266\ These commenters supported this assertion by, for
example, claiming that investors react more strongly to news of
restatements or material weaknesses in ICFR--and thus care more about
the benefits of an ICFR auditor attestation--at small or low-revenue
issuers as compared to other issuers.\267\ In response to these
comments, we have conducted additional analyses of the investor
response to ICFR disclosures and restatement announcements. We do not
find any evidence that investors react more negatively to restatements
or to auditors reporting material weaknesses in ICFR at low-revenue
issuers than at higher-revenue issuers. Further, based on the
suggestions of a commenter,\268\ we have refined our analysis of the
extent to which financial statement variables are associated with the
valuation of different types of issuers. We continue to find that
financial statement variables explain a greater amount of the variation
in stock prices and returns for higher-revenue issuers than for low-
revenue issuers, even when we focus on more seasoned issuers similar to
those that would be affected by the amendments or when we expand the
set of variables that we consider. Overall, our analysis does not
provide support for the assertion that investors care more about the
information produced by the ICFR auditor attestation requirement at
low-revenue issuers than at other issuers.
---------------------------------------------------------------------------

    \266\ See, e.g., letters from CFA, CFA Inst., and CII. See also
Commissioner Jackson's Statement.
    \267\ Id.
    \268\ See letter from Crowe.
---------------------------------------------------------------------------

    A few commenters asserted that the costs of the amendments will
significantly outweigh any benefits.\269\ We have conducted
supplemental analysis and quantification of the potential costs of the
amendments and do not find evidence to support the views of these
commenters. We carefully considered the cost estimates provided by
commenters and found them useful in refining our own analysis. However,
we found some of these estimates to be overstated. For example, some
estimates applied costs associated with a small fraction of issuers to
all of the affected issuers or implicitly compared aggregate estimates
of costs over multiple years to the estimated savings for a single
year.\270\ Others identified investor harms that occurred despite the
ICFR auditor attestation requirement being in place, which may
demonstrate the limitations of the ICFR auditor attestation requirement
rather than informing us of the risks of removing the requirement.\271\
---------------------------------------------------------------------------

    \269\ See, e.g., letters from Better Markets and Prof. Barth et
al.
    \270\ See letter from Prof. Barth et al. (with respect to
quantified benefits of ICFR audit for the average company).
    \271\ See letters from Better Markets and Prof. Barth et al.
(with respect to estimates of income and stock market impact of
restatements).
---------------------------------------------------------------------------

    Some commenters stated that the Proposing Release did not provide
sufficient quantification of the costs of the amendments.\272\ In
response to those comments, as additional context for our consideration
of the possible effects of the final amendments, we conducted
supplemental analysis of the expected frequency, type, and magnitude of
potential adverse effects. We consider effects resulting from potential
misreporting about the effectiveness of ICFR as well as those driven by
potential changes in the actual effectiveness of ICFR. Where possible,
we estimate dollar costs as well as dollar transfers across
shareholders, which represent costs to some shareholders and benefits
to other shareholders. We note that these cost estimates do not fully
adjust for the mitigating factors that we find to be associated with
low-revenue issuers and may therefore be inflated. Also, we caution
against attempts to over-interpret the relation between our
quantitative estimates of monetized benefits and monetized costs
because we are not able to place dollar values on all of the potential
costs and benefits of the amendments.
---------------------------------------------------------------------------

    \272\ See, e.g., letters from Better Markets, CFA Inst., CII,
Prof. Barth et al., and Prof. Ge et al.
---------------------------------------------------------------------------

    Several commenters argued that the expected cost savings are too
small to be economically meaningful,\273\ and that the amendments are
unlikely to have capital formation benefits.\274\ We acknowledge that,
while the amendments could be a positive factor in the decision of
additional companies to enter public markets, it may not be the
decisive factor, and the direct impact of the amendments on the number
of public companies may be limited to the extent that companies may be
more focused on other factors associated with the decision to go
public. However, we continue to believe that the expected savings is
likely, in many cases, to represent a meaningful cost savings for the
affected issuers.\275\ In particular, while the average annual cost
savings may represent a small percentage of the average affected
issuers' revenues and market capitalizations, it is still likely to be
meaningful given that the net income and operating cash flows of the
affected issuers are typically negative.\276\ These savings may thus
have beneficial economic effects on net capital formation through the
productive use of

this preserved capital towards, for example, new investments.
---------------------------------------------------------------------------

    \273\ See, e.g., letters from CFA, CFA Inst., CII, and Prof.
Barth et al.
    \274\ See, e.g., letters from Better Markets, CII, CFA, CFA
Inst., and Prof. Ge et al.
    \275\ One commenter requested that we replicate, with recent
data, the analysis in a previous study that found a ``bunching'' of
firms below the public float threshold for entering accelerated
filer status, in order to explore whether the costs of the ICFR
auditor attestation requirement remain as high as previously
documented. See letter from Prof. Honigsberg, et al. See also
Commissioner Jackson's Statement. As discussed in more detail below,
we provide this analysis and find that there may be some such
``bunching,'' but we note that our conclusion that the cost savings
may be meaningful to the affected issuers does not rely on this
analysis or the related study.
    \276\ See note 362 below.
---------------------------------------------------------------------------

    Some commenters indicated that the Proposing Release did not
adequately consider the risk of fraud,\277\ or that the risks of
fraudulent financial reporting may be particularly high for low-revenue
issuers.\278\ We acknowledge the argument that incentives to engage in
misconduct could be different for low-revenue issuers and, in response
to these comments, we conducted supplemental analysis concerning the
risk of fraud. In particular, we conducted an analysis to investigate
this risk and did not find evidence based on the available data that
low-revenue issuers that, like the affected issuers, are not within
five years of their IPO (``seasoned'' issuers), are more highly
represented in the set of seasoned issuers associated with financial
misconduct or financial reporting fraud than they are in the overall
population of seasoned issuers.We also estimated the extent to which
expanding the exemption from the ICFR auditor attestation requirement
could affect the likelihood of the affected issuers engaging in such
activities and include a quantification of the associated costs of this
risk in our overall assessment of the potential costs of the
amendments. Overall, this supplemental analysis does not cause us to
change our primary conclusions regarding the potential effects of the
amendments.
---------------------------------------------------------------------------

    \277\ See, e.g., letters from CFA Inst., CII, and Prof. Barth et
al.
    \278\ See, e.g., letter from CFA, CFA Inst., CII and Prof. Barth
et al.
---------------------------------------------------------------------------

    The economic analysis also considers other changes associated with
the amendments. For example, the affected issuers will be permitted an
additional 15 days and five days, respectively, after the end of each
period to file their annual and quarterly reports, relative to the
deadlines that apply to accelerated filers.\279\ The amendments also
revise the transition provisions for accelerated and large accelerated
filer status, including increasing the public float thresholds to exit
accelerated and large accelerated filer status from $50 million and
$500 million in public float to $60 million and $560 million in public
float. Additionally, the amendments introduce a new check-box
disclosure on the cover page of annual reports on Forms 10-K, 20-F, and
40-F to indicate whether an ICFR auditor attestation is included in the
filing.
---------------------------------------------------------------------------

    \279\ Non-accelerated filers also are not required to provide
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 or disclosure required by Item 101(e)(4) of Regulation S-K
about whether they make filings available on or through their
internet websites.
---------------------------------------------------------------------------

    The discussion that follows examines the potential benefits and
costs of the amendments in detail. As part of our analysis, we consider
both the comments received on the Proposing Release and the likelihood
that the effects of the ICFR auditor attestation have changed over time
with changes in auditing standards and other market conditions.

B. Baseline

    To assess the economic impact of the amendments, we are using as
our baseline the current state of the market under the existing
definition of ``accelerated filer.'' This section discusses the current
regulatory requirements and market practices. It also provides
statistics characterizing accelerated filers, the timing of filings,
disclosures about ineffective ICFR, and restatement rates under the
baseline.
1. Regulatory Baseline
    Our baseline includes existing statutes and Commission rules that
govern the responsibilities of issuers with respect to financial
reporting, as well as PCAOB auditing standards and market standards
related to the implementation of these responsibilities.
    In particular, accelerated and large accelerated filers are subject
to accelerated filing deadlines for their periodic reports relative to
non-accelerated filers. These deadlines are summarized in Table 4
below. All registrants can file Form 12b-25 (``Form NT'') to avail
themselves of an additional 15 calendar days to file an annual report,
or an additional five calendar days to file a quarterly report, and
still have their report deemed to have been timely filed.

             Table 4--Filing Deadlines for Periodic Reports
------------------------------------------------------------------------
                                                    Calendar days after
                                                        period end
                Category of filer                -----------------------
                                                    Annual     Quarterly
------------------------------------------------------------------------
Non-Accelerated Filer...........................          90          45
Accelerated Filer...............................          75          40
Large Accelerated Filer.........................          60          40
------------------------------------------------------------------------

    The Proposing Release discusses in detail the issuer and auditor
responsibilities with respect to disclosure controls and procedures and
ICFR for issuers of different filer types.\280\ These responsibilities
derive from the FCPA requirements with respect to internal accounting
controls as well as a number of different changes to financial
reporting that were introduced by SOX.
---------------------------------------------------------------------------

    \280\ See Sections II.B. and III.B.1. of the Proposing Release,
note 4 above.
---------------------------------------------------------------------------

    In particular, all issuers \281\ are required to devise and
maintain an adequate system of internal accounting controls \282\ and
to have their corporate officers assess the effectiveness of the
issuer's disclosure controls and procedures \283\ and disclose the
conclusions of their assessments, typically on a quarterly basis.\284\
In addition, all issuers are required to have their corporate officers
certify in each of their periodic reports that the information in the
report fairly presents, in all material respects, the issuer's
financial condition and results of operations.\285\ All issuers other
than RICs and asset-backed securities (``ABS'') issuers \286\ are also
required to include management's assessment of the effectiveness of
their ICFR in their annual reports.\287\ Further, all issuers are
required to have the financial statements in their annual reports
examined and reported on by an independent auditor, who, even if not
engaged to provide an ICFR auditor attestation, is responsible for
considering ICFR in the performance of the financial statement
audit.\288\ Also, an auditor engaged in a financial statement only
audit may test the operating effectiveness of some internal controls in
order to reduce the extent of substantive testing performed in the
audit. Importantly, all of these responsibilities with respect to
financial reporting and ICFR apply equally to

non-accelerated as well as accelerated and large accelerated filers.
Finally, all issuers listed on national exchanges are required to have
an audit committee that is composed solely of independent directors and
is directly responsible for the appointment, compensation, retention
and oversight of the issuer's independent auditors.\289\ The amendments
do not change any of these requirements, including the requirements of
a financial statement audit.
---------------------------------------------------------------------------

    \281\ Specifically, the requirements apply to all issuers that
file reports pursuant to Section 13(a) or 15(d) of the Exchange Act.
    \282\ See Section 13(b)(2)(B) of the Exchange Act.
    \283\ See note 209 above.
    \284\ See note 210 above.
    \285\ See 17 CFR 240.13a-14(b) and 17 CFR 240.15d-14(b).
    \286\ See 17 CFR 240.13a-15 and 17 CFR 240.15d-15. A newly
public issuer is also not required to provide a SOX Section 404(a)
management report on ICFR until its second annual report filed with
the Commission. See Instructions to Item 308 of Regulation S-K.
    \287\ See Management's Report on Internal Control Over Financial
Reporting and Certification of Disclosure in Exchange Act Periodic
Reports, Release No. 33-8238 (June 5, 2003) [68 FR 36635 (June 18,
2003)]. These evaluations of ICFR, as well as any associated ICFR
auditor attestations, should be based on a suitable, recognized
control framework. The most widely used framework for this purpose
is the one set forth in a report of the Committee of Sponsoring
Organizations of the Treadway Commission (``COSO'').
    \288\ See PCAOB AS 2110, note 187 above. See also the discussion
below in this section about this auditing standard.
    \289\ See 17 CFR 240.10A-3. In the absence of an ICFR auditor
attestation requirement, we note that the audit committee is
responsible for approving whether to voluntarily obtain an ICFR
auditor attestation, and would be alerted by the auditor engaged in
a financial statement only audit if the auditor becomes aware of a
significant deficiency or material weakness in ICFR.
---------------------------------------------------------------------------

    Beyond these requirements, accelerated filers and large accelerated
filers other than EGCs, RICs, and ABS issuers are required under SOX
Section 404(b) and related rules to include an ICFR auditor attestation
in their annual reports. In addition, certain banks, even if they are
non-accelerated filers, are required under Federal Deposit Insurance
Corporation (``FDIC'') rules to have their auditor attest to, and
report on, management's assessment of the effectiveness of the bank's
ICFR (the ``FDIC auditor attestation requirement'').\290\
---------------------------------------------------------------------------

    \290\ Part 363 of the FDIC regulations requires that the auditor
of an insured depository institution with consolidated total assets
of $1 billion or more (as of the beginning of the fiscal year)
examine, attest to, and report separately on the assertion of
management concerning the effectiveness of the institution's
internal control structure and procedures for financial reporting.
---------------------------------------------------------------------------

    One commenter raised questions about the nature of the FDIC auditor
attestation requirement and how it compares to the ICFR auditor
attestation requirement.\291\ For banks that are subject to the ICFR
auditor attestation requirement, the FDIC regulations require ICFR
attestation engagements to be performed according to the same standards
as the ICFR auditor attestation requirement under SOX Section 404(b)
(i.e., AS 2201,\292\ as discussed below).\293\ For other banks, the
FDIC allows ICFR attestations to be performed either according to AS
2201 or according to the American Institute of Certified Public
Accountants (``AICPA'') attestation standard.\294\ In 2015, the
Auditing Standards Board of the AICPA issued Statement on Auditing
Standards (``SAS'') No. 130, revising their attestation standard with
the intention of adhering as closely as possible to AS 2201 while
aligning with their generally accepted auditing standards and avoiding
unintended consequences in practice.\295\ The FDIC also requires that
the attestation reports be made available for public inspection (at the
bank's main and branch offices or, alternatively, by mail to anyone who
requests it).\296\ Per Section IV.B.4 below, material weaknesses
reported in SOX Section 404(a) reports and the corresponding SOX
Section 404(b) reports typically mirror each other, so material
weaknesses identified by the FDIC auditor attestation may also become
publicly known via corresponding SOX Section 404(a) management reports.
Finally, we note that FDIC and Federal Reserve examiners may also
independently review and assess the adequacy of ICFR of banks.
---------------------------------------------------------------------------

    \291\ See letter from CFA Inst.
    \292\ See AS 2201, An Audit of Internal Control Over Financial
Reporting That Is Integrated with An Audit of Financial Statements
(``AS 2201'').
    \293\ See Section 18A of Appendix A to Part 363 of the FDIC
regulations.
    \294\ Id.
    \295\ See Executive Summary to SAS 130 (October 2015), available
at https://www.aicpa.org/Research/Standards/AuditAttest/DownloadableDocuments/SAS_130_Summary.pdf.
    \296\ See Section 363.4 of Part 363 of the FDIC regulations.
---------------------------------------------------------------------------

    Some issuers that are not required to comply with SOX Section
404(b) voluntarily obtain an ICFR auditor attestation.\297\ Estimates
of the number of issuers of each filer type are provided in Table 5
below.\298\
---------------------------------------------------------------------------

    \297\ Up to about seven percent of exempt issuers voluntarily
provided an ICFR auditor attestation from 2005 through 2011. See
2013 GAO Study, note 246 above. We find similar results when
examining data for non-accelerated filers and EGCs in calendar years
2014 through 2018 from Ives Group Audit Analytics to identify, among
issuers of these types that have a SOX Section 404(a) management
report, how many also have an ICFR auditor attestation report
available in the database. See note 298 below regarding the
identification of filer types.
    \298\ The estimates in this table are based on staff analysis of
self-identified filer status for issuers filing annual reports on
Forms 10-K, 20-F, or 40-F in calendar year 2018, excluding any such
filings that pertain to fiscal years prior to 2017. Staff extracted
filer status from filings using a computer program supplemented with
hand collection and compared the results for robustness with data
from XBRL filings, Ives Group Audit Analytics, and Calcbench. FPIs
represent those filing on Forms 20-F or 40-F and do not include FPIs
that choose to file on Form 10-K. EGC issuers are identified by
using data from Ives Group Audit Analytics and/or by using a
computer program to search issuer filings, including filings other
than annual reports, for a statement regarding EGC status. The
estimates generally exclude RICs because these issuers do not file
on the annual report types considered. This table also excludes 143
issuers, mostly Canadian MJDS issuers filing on Form 40-F (which
does not require disclosure of filer status or public float), for
which filer type is unavailable.

                         Table 5--Filer Status for Issuers Filing Annual Reports in 2018
----------------------------------------------------------------------------------------------------------------
                                                                       Non-                            Large
                                                                   accelerated *    Accelerated     accelerated
----------------------------------------------------------------------------------------------------------------
FPI.............................................................             265             137             264
EGC.............................................................           1,097             333               0
                                                                 -----------------------------------------------
    Total.......................................................           3,900           1,416           2,266
----------------------------------------------------------------------------------------------------------------
* The estimated number of non-accelerated filers includes approximately 621 ABS issuers, which are not required
  to comply with SOX Section 404. Staff estimates that very few, if any, ABS issuers are accelerated or large
  accelerated filers. ABS issuers are identified as issuers that made distributions reported via Form 10-D.

    Audits of ICFR and the associated ICFR auditor attestation reports
are made in accordance with AS 2201,\299\ previously known as Auditing
Standard Number 5 (``AS No. 5'').\300\ This standard, which replaced
Auditing Standard Number 2 (``AS No. 2'') in 2007, was intended to
focus auditors on the most important matters in the audit of ICFR and
eliminate procedures that the PCAOB believed were unnecessary to an
effective audit of ICFR.\301\ Among other things, the 2007 standard
facilitates the scaling of the evaluation of ICFR for smaller, less
complex issuers by, for example, encouraging auditors to use top-down
risk-based approaches and to use the work of others in the attestation
process.\302\ It was accompanied by Commission guidance similarly
facilitating the scaling of SOX Section 404(a) management evaluations
of ICFR.\303\
---------------------------------------------------------------------------

    \299\ See note 292 above.
    \300\ AS No. 5 was renumbered as AS 2201, note 292 above,
effective Dec. 31, 2016. See Reorganization of PCAOB Auditing
Standards and Related Amendments to PCAOB Standards and Rules, PCAOB
Release No. 2015-002 (Mar. 31, 2015).
    \301\ See Auditing Standard No. 5, An Audit of Internal Control
Over Financial Reporting That Is Integrated with An Audit of
Financial Statements, and Related Independence Rule and Conforming
Amendments, PCAOB Release No. 2007-005A (June 12, 2007). See also
Public Company Accounting Oversight Board; Order Approving Proposed
Auditing Standard No. 5, An Audit of Internal Control Over Financial
Reporting that is Integrated with an Audit of Financial Statements,
a Related Independence Rule, and Conforming Amendments, Release No.
34-56152, File No. PCAOB 2007-02 (July 27, 2007) [72 FR 42141 (Aug.
1, 2007)].
    \302\ Id.
    \303\ See Commission Guidance Regarding Management's Report on
Internal Control Over Financial Reporting Under Section 13(a) or
15(d) of the Securities Exchange Act of 1934, Release No. 33-8810
(June 20, 2007) [72 FR 35323 (June 27, 2007)]. See also Amendments
to Rules Regarding Management's Report on Internal Control Over
Financial Reporting, Release No. 33-8810 (June 20, 2007) [72 FR
35309 (June 27, 2007)].
---------------------------------------------------------------------------

    The adoption of AS 2201 in 2007 has been found to have lowered
audit fees.\304\ However, several studies have provided evidence that,
at least initially, after the adoption of AS 2201, the quality of ICFR
of issuers subject to the ICFR auditor attestation requirement
decreased relative to that of other issuers.\305\ Around 2010, PCAOB
inspections of auditors began to include a heightened focus on whether
auditing firms had obtained sufficient evidence to support their
opinions on the effectiveness of ICFR.\306\ There is some evidence that
these inspections have led to an improvement in the reliability of ICFR
auditor attestations,\307\ but also concerns that audit fees also
increased around the same time.\308\
---------------------------------------------------------------------------

    \304\ See, e.g., Study of the Sarbanes-Oxley Act of 2002 Section
404 Internal Control over Financial Reporting Requirements (Sept.
2009) (``2009 SEC Staff Study''), available at https://www.sec.gov/news/studies/2009/sox-404_study.pdf; Rajib Doogar, Padmakumar
Sivadasan, & Ira Solomon, 48(4) J. of Acct. Res. 795 (2010).
    \305\ See, e.g., Joseph Schroeder & Marcy Shepardson, Do SOX 404
Control Audits and Management Assessments Improve Overall Internal
Control System Quality?, 91(5) Acct. Rev. 1513 (2016) (``Schroeder
and Shepardson 2016 Study''); Lori Bhaskar, Joseph Schroeder, &
Marcy Shepardson, Integration of Internal Control and Financial
Statement Audits: Are Two Audits Better than One? Acct. Rev.
(forthcoming 2018) (``Bhaskar et al. 2018 Study''), available at
http://aaajournals.org/doi/abs/10.2308/accr-52197. See Section
IV.C.3.a. and notes 464 and 474 below for more information on these
studies.
    \306\ See Jeanette Franzel, Board Member, PCAOB, Speech by PCAOB
board member at the American Accounting Association Annual Meeting,
Current Issues, Trends, and Open Questions in Audits of Internal
Control over Financial Reporting (2015), available at https://pcaobus.org/News/Speech/Pages/08102015_Franzel.aspx.
    \307\ See Mark Defond & Clive Lennox, Do PCAOB Inspections
Improve the Quality of Internal Control Audits?, 55(3) J. OF ACCT.
RES. 591 (2017) (``Defond and Lennox 2017 Study'').
    \308\ See, e.g., Tammy Whitehouse, Audit Inspections:
Improvement? Maybe. Costs? Yes, Compliance Week (April 14, 2015),
available at https://www.complianceweek.com/news/news-article/audit-inspections-improvement-maybe-costs-yes#.W5LW7mlpCEd; and Jennifer
McCallen, Roy Schmardebeck, Jonathan Shipman, & Robert Whited, Have
the Costs and Benefits of SOX Section 404(b) Compliance Changed Over
Time?, Working Paper (Nov. 2019), available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3420787 (``McCallen et
al. 2019 study'').
---------------------------------------------------------------------------

    In 2010, the PCAOB adopted enhanced auditing standards related to
the auditor's assessment of and response to risk.\309\ The enhanced
risk assessment standards have likely reduced, to some extent, the
degree of difference between a financial statement only audit and an
integrated audit (which includes an audit of ICFR) because the
standards clarify and augment the extent to which internal controls are
to be considered even in a financial statement only audit. In
particular, the risk assessment standards applying to both types of
audits require auditors, in either case, to evaluate the design of
certain controls, including whether the controls are implemented.\310\
---------------------------------------------------------------------------

    \309\ See PCAOB Release No. 2010-004 and PCAOB Release No. 2010-
01, note 193 above.
    \310\ See AS 2110, paragraphs .18-.40, note 187 above.
---------------------------------------------------------------------------

    Based on the results of inspections in the several years after the
adoption of the new risk assessment auditing standards, the PCAOB
expressed concern about the number and significance of deficiencies in
auditing firm compliance with these standards, but also noted promising
improvements in the application of these standards.\311\ While the risk
assessment standards may reduce the degree of difference between a
financial statement only audit and an integrated audit, there remain
important differences in the requirements of these audits as they
relate to controls. For example, in an integrated audit, but not a
financial statement only audit, the auditor is required to identify
likely sources of misstatements in considering the evaluation of
ICFR.\312\ Also, the extent of the procedures necessary to obtain the
required understanding of controls generally will be greater in an
integrated audit due to the different objectives of such an audit as
compared to a financial statement only audit.\313\
---------------------------------------------------------------------------

    \311\ See PCAOB Release No. 2015-007, note 195 above.
    \312\ See PCAOB Release No. 2010-004, note 309 above, at 7 and
A10-41. As discussed above, even in a financial statement only
audit, if the auditor becomes aware of a significant deficiency or
material weakness in ICFR, it is required to inform management and
the audit committee of this finding and has the responsibility to
review management's disclosure for any misstatement of facts, such
as a statement that ICFR is effective when there is a known material
weakness. See notes 190 to 191 above and the accompanying text.
    \313\ See Proposed Auditing Standards Related to the Auditor's
Assessment of and Response to Risk and Conforming Amendments to
PCAOB Standards, PCAOB Release No. 2008-006 A9-8 (Oct. 21, 2008).
---------------------------------------------------------------------------

    The Commission recently settled charges against four public
companies for failing to maintain effective ICFR for seven to 10
consecutive annual reporting periods.\314\ These enforcement cases may
have a deterrent effect among issuers failing to remediate material
weaknesses, which might reduce the overall rate of persistence of
material weaknesses in ICFR.
---------------------------------------------------------------------------

    \314\ See SEC Press Release, note 196 above.
---------------------------------------------------------------------------

    We also note that there have been some recent changes in accounting
and auditing that are part of our baseline and could increase the
uncertainty of our analysis due to their effects on factors such as
audit fees, restatements, and ICFR. For example, three new reporting
standards have been issued recently by FASB, on the topics of revenue
recognition, leases, and credit losses, which could temporarily
increase audit fees as issuers and auditors adjust to the new
standards.\315\ Recent changes in technology, such as the potential for
management to use automated controls testing and process
automation,\316\ may result in improvements in ICFR regardless of the
ICFR auditor attestation requirement if their increased application
results in more robust financial reporting processes with fewer
opportunities for deficiencies and/or in an increase by

management in control testing and related improvements. Such automation
could also reduce audit fees, including the costs of an audit of ICFR,
but at least one report suggests that the uptake of these technologies
has been slow.\317\ Finally, auditors have had many years of experience
with integrated audits, as well as risk assessment standards that
require the consideration of ICFR even in the absence of an ICFR
auditor attestation. This experience may affect their execution of
financial statement only audits of issuers for whom the ICFR auditor
attestation requirement is eliminated. For example, given their
experience, auditors may be more likely to detect control deficiencies
or to increase their auditing efficiency by reducing substantive
testing in favor of testing some related controls even when an ICFR
auditor attestation is not required.\318\
---------------------------------------------------------------------------

    \315\ Information on these and other FASB Accounting Standards
updates is available at https://www.fasb.org/jsp/FASB/Page/SectionPage&cid=1176156316498.
    \316\ See, e.g., Robotic Process Automation, note 197 above.
    \317\ See, e.g., Protiviti survey results, Benchmarking SOX
Costs, Hours and Controls (2018) (``Protiviti 2018 Report'').
    \318\ 2011 SEC Staff Study, note 198 above, (stating that ``. .
. once effective controls are in place at the issuer, the auditor is
more likely to continue to test them even if [it is] not issuing an
auditor attestation during a particular year in order to rely on
them for purposes of reducing substantive testing in the audit of
the financial statements, particularly for issuers that are larger
and more complex'').
---------------------------------------------------------------------------

2. Characteristics of Accelerated Filer Population
    Per Table 5, there were approximately 1,400 accelerated filers in
total in 2018. Figure 2 \319\ presents the distribution of public float
across these issuers.\320\
---------------------------------------------------------------------------

    \319\ The estimates in the figure are based on staff analysis of
data from XBRL filings. See note 298 above for details on the
identification of the population of accelerated filers.
    \320\ Because of the accelerated filer transition provisions,
some accelerated filers have float below $75 million. The public
float of these issuers would previously have exceeded $75 million,
causing them to enter accelerated filer status, but has not dropped
below the $50 million public float level required to exit
accelerated filer status.
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BILLING CODE 8011-01-P
[GRAPHIC] [TIFF OMITTED] TR26MR20.001

BILLING CODE 8011-01-C
    The distribution of public float among accelerated filers is skewed
towards lower levels of float, but higher levels of float are also
significantly represented.
    Figure 3 \321\ presents the distribution of revenues across those
accelerated filers that have less than $1 billion in revenues. While
the full population of accelerated filers has revenues of up to over
$20 billion, about 90 percent of accelerated filers have less than $1
billion in revenues. We restrict the figure to this subset in order to
more clearly display the distribution in this range.
---------------------------------------------------------------------------

    \321\ The estimates of revenues are based on staff analysis of
data from XBRL filings, Compustat, and Calcbench. The revenue data
used is from the last fiscal year prior to the annual report in
calendar year 2018, because the SRC revenue test is based on the
prior year's revenues. See note 298 above for details on the
identification of the population of accelerated filers.

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

[GRAPHIC] [TIFF OMITTED] TR26MR20.002

    The distribution of revenues for accelerated filers is heavily
skewed towards lower levels of revenue, with roughly three-quarters of
accelerated filers having revenues of less than $500 million and more
than a third having revenues of less than $100 million. Other than a
clustering of issuers with zero or near zero revenues, there are no
obvious breaks in the distribution.
    While a large range of industries are represented among accelerated
filers, a small number of industries account for the majority of these
issuers. The ``Banking'' industry accounts for about 14.1 percent of
accelerated filers, followed by ``Pharmaceutical Products'' (13.9
percent) ``Financial Trading'' (8.0 percent), ``Business Services''
(5.7 percent), ``Petroleum and Natural Gas'' (4.8 percent), ``Computer
Software'' (4.4 percent), ``Retail'' (4.4 percent), ``Transportation''
(4.2 percent), and ``Electronic Equipment'' (4.1 percent).\322\
---------------------------------------------------------------------------

    \322\ These estimates are based on staff analysis of data
including SIC codes from XBRL filings and Ives Group Audit
Analytics, using the Fama-French 49-industry classification system.
See http://mba.tuck.dartmouth.edu/pages/faculty/ken.french/Data_Library/det_49_ind_port.html. See note 298 above for details on
identification of population of accelerated filers.
---------------------------------------------------------------------------

3. Timing of Filings
    As discussed above, non-accelerated, accelerated, and large
accelerated filers face different filing deadlines for their periodic
reports. In Table 6, we present the timing in recent years of annual
report filings by these different groups of issuers relative to their
corresponding deadlines.\323\
---------------------------------------------------------------------------

    \323\ The estimates in this table are based on staff analysis of
EDGAR filings. These statistics include all annual reports on Forms
10-K, 20-F, and 40-F filed in calendar years 2014 through 2018 other
than amendments. If multiple annual reports (excluding amendments)
are filed in the same calendar year, the analysis considers only the
latest such filing. Given the effect of weekends and holidays,
filings are considered to be on time if within two calendar days
after the original deadline. The ``5 days early'' and ``over 15 days
after'' categories are similarly adjusted to account for the
possible effect of weekends and holidays. See note 298 above for
details on the identification of filer type.

              Table 6--Filing Timing for Annual Reports in Years 2014 Through 2018, by Filer Status
----------------------------------------------------------------------------------------------------------------
                                        Non-accelerated              Accelerated           Large  accelerated
----------------------------------------------------------------------------------------------------------------
Annual report filing deadline....  90 days..................  75 days.................  60 days.
Average days to file.............  101 days.................  70 days.................  56 days.
Percentage filed:
    By deadline..................  72%......................  91%.....................  94%.
    Over 5 days early............  44%......................  63%.....................  61%.
    After deadline...............  28%......................  9%......................  6%.
    Over 15 days after deadline..  13%......................  5%......................  4%.
----------------------------------------------------------------------------------------------------------------

    Table 6 documents that accelerated and large accelerated filers
file their annual reports, on average, four or five days before the
applicable deadline. Nine percent and six percent, respectively, of
accelerated and large accelerated filers submit their annual reports
after the initial deadline, with roughly half of these filers
surpassing the 15-day grace period that is obtained by filing Form NT.
Non-accelerated filers are less likely to meet their initial deadline
or extended deadline, with the average non-accelerated filer submitting
its annual report 11 days after the initial deadline and 13 percent of
non-accelerated filers filing after the 15-day grace period obtained by
filing Form NT.
4. Internal Controls and Restatements
    We next consider the current rates of ineffective ICFR and
restatements \324\ among issuers that are accelerated filers under the
baseline relative to other filer types. The data for all years of the
analysis has been updated relative to the analysis in the Proposing
Release.\325\ Throughout our analysis, we use the term restatement to
refer to a restatement that is associated with some type of
misstatement. As discussed above, non-accelerated filers and EGCs are
statutorily exempted from the ICFR auditor attestation requirement.
Table 7 presents the percentage of issuers reporting ineffective ICFR
in recent years by filer type.\326\
---------------------------------------------------------------------------

    \324\ Unless otherwise specified, statistics and analysis
regarding restatements are not restricted to those restatements
requiring Form 8-K Item 4.02 disclosure.
    \325\ Previous years of data may be revised due to, for example,
newly disclosed restatements that reflect misstatements in these
earlier years, restated internal control reports that relate to
previous fiscal years, previously incomplete data that was later
populated, or other updates or database changes.
    \326\ The estimates in this table are based on staff analysis of
Ives Group Audit Analytics data. ICFR effectiveness is based on the
last amended management or auditor attestation report for the fiscal
year. Percentages are computed out of all issuers of a given filer
type with the specified type of report available in the Ives Group
Audit Analytics database. See note 298 above for details on the
identification of filer type.

                            Table 7--Percentage of Issuers Reporting Ineffective ICFR
----------------------------------------------------------------------------------------------------------------
                                                                       Non-                            Large
                Ineffective ICFR year reported in                   accelerated     Accelerated     accelerated
                                                                        (%)             (%)             (%)
----------------------------------------------------------------------------------------------------------------
Management Report:
    2014........................................................            40.1             7.8             3.2
    2015........................................................            41.2             9.2             3.8
    2016........................................................            38.3             9.5             4.6
    2017........................................................            40.2             9.2             5.0
    2018........................................................            40.3             8.9             3.8
        Average/year............................................            40.0             8.9             4.1
Auditor Attestation:
    2014........................................................             n/a             8.0             3.3
    2015........................................................             n/a             9.1             3.8
    2016........................................................             n/a             9.0             4.6
    2017........................................................             n/a             9.4             4.9
    2018........................................................             n/a             8.7             3.8
        Average/year............................................             n/a             8.8             4.1
----------------------------------------------------------------------------------------------------------------

    Based on management's SOX Section 404(a) reports on ICFR from
recent years, on average, about nine percent of accelerated filers
reported at least one material weakness in ICFR in a given year.\327\
This represents a moderately higher rate than that among large
accelerated filers, approximately four percent, on average, of which
reported ineffective ICFR,\328\ and a substantially lower rate than
that among non-accelerated filers, more than a third of which reported
ineffective ICFR each year.\329\ For issuers subject to the ICFR
auditor attestation requirement, the rates of ineffective ICFR reported
by management and by auditors are similar.\330\ This may not be
surprising, as management will be made aware of any material weaknesses
discovered by the auditor and vice versa.
---------------------------------------------------------------------------

    \327\ Per the second column of the first panel of Table 7, the
rate of ineffective ICFR among accelerated filers has ranged from
7.8 to 9.5 percent for the years 2014 through 2018, for an average
per year of 8.9 percent.
    \328\ Per the third column of the first panel of Table 7, the
rate of ineffective ICFR among large accelerated filers has ranged
from 3.2 to 5.0 percent for the years 2014 through 2018, for an
average per year of 4.1 percent.
    \329\ Per the first column of the first panel of Table 7, the
rate of ineffective ICFR among non-accelerated filers has ranged
from 38.3 to 41.2 percent for the years 2014 through 2018, for an
average per year of 40.0 percent.
    \330\ Per the second column of Table 7, the average rate of
ineffective ICFR for accelerated filers across years 2014 through
2018 was 8.9 percent as reported in management reports and 8.8
percent as reported in auditor reports. Similarly, per the third
column of Table 7, the average rate of ineffective ICFR for large
accelerated filers across years 2014 through 2018 was 4.1 percent as
reported in management reports and 4.1 percent as reported in
auditor reports.
---------------------------------------------------------------------------

    We next consider the persistence of material weaknesses across
these issuer categories. Table 8 \331\ presents the percentage of
issuers that reported two, three, or four consecutive years of
ineffective ICFR culminating in 2018, by filer type.\332\
---------------------------------------------------------------------------

    \331\ The estimates in this table are based on staff analysis of
Ives Group Audit Analytics data. ICFR effectiveness is based on the
last amended management report for the fiscal year. Percentages in
the first panel are computed out of all issuers of a given filer
type in 2018 with SOX Section 404(a) management reports available in
Ives Group Audit Analytics database, while percentages in the second
panel are computed out of issuers of a given filer type reporting
ineffective ICFR in their SOX Section 404(a) management report for
2018. See fourth row of Table 7 and note 298 above for details on
the identification of filer type.
    \332\ One commenter noted that the Proposing Release, note 4
above, indicated that over 68 percent of non-accelerated filers have
reported two consecutive years of ineffective ICFR and over 38
percent have reported four consecutive years of ineffective ICFR in
their annual reports. See letter from Better Markets. To clarify, we
note that these statistics, like those reported in the second panel
of Table 8 below, reflect percentages out of the issuers in each
category that maintained ineffective ICFR in the last year of the
analysis, not percentages of all issuers in each category.

  Table 8--Percentage of Issuers Reporting Consecutive Years of Ineffective ICFR in Management Report, by 2018
                                                  Filer Status
----------------------------------------------------------------------------------------------------------------
                                                                       Non-                            Large
                     Ineffective ICFR years                         accelerated     Accelerated     accelerated
                                                                        (%)             (%)             (%)
----------------------------------------------------------------------------------------------------------------
Issuers with persistent ineffective ICFR/All issuers:
    2017-2018 (at least 2 years)................................            28.4             3.5             1.4
    2016-2018 (at least 3 years)................................            20.8             2.0             0.5
    2015-2018 (4 years).........................................            16.1             1.0             0.3
Issuers with persistent ineffective ICFR/Issuers with 2018
 ineffective ICFR:
    2017-2018 (at least 2 years)................................            70.4            39.2            36.4
    2016-2018 (at least 3 years)................................            51.6            22.4            14.1
    2015-2018 (4 years).........................................            39.9            11.3             7.2
----------------------------------------------------------------------------------------------------------------

    The first panel of Table 8 is intended to demonstrate the overall
rate of persistently ineffective ICFR among issuers of different types,
while the second panel is intended to demonstrate the degree of
persistence of ineffective ICFR among the subset of issuers of each
type that report ineffective ICFR in 2018. Compared to non-accelerated
filers, we find that a smaller percentage of accelerated and large
accelerated filers report material weaknesses that persist for multiple
years, with about one percent of accelerated filers and about 0.3
percent of large accelerated filers reporting ineffective ICFR for four
consecutive years (per the third row of the table), representing about
11 percent of the accelerated filers and about seven percent of the
large accelerated filers that reported ineffective ICFR in 2018 (per
the last row of the table). A larger percentage of non-accelerated
filers persistently report material weaknesses, with about 16 percent
of these issuers (per the third row of the table), or about 40 percent
of those reporting ineffective ICFR in 2018 (per the last row of the
table), having reported material weaknesses for four consecutive years.
As discussed above, it is possible that recent Commission enforcement
actions might lead to a reduction in the persistence of material
weaknesses in ICFR to the extent that they change issuers' awareness of
the risks of longstanding ICFR failures.
    Table 9 presents the rate of restatements among each of these filer
types, excluding EGCs, and for EGCs separately. For each year, we
consider the percentage of issuers that eventually restated the
financial statements for that year. The reporting lag before
restatements are filed results in a lower observed rate in the later
years of our sample, particularly for 2017 (and even more so for 2018,
which we do not report for this reason), as issuers may yet restate
their results from recent years.\333\

                  Table 9--Percentage of Issuers Issuing Restatements by Year of Restated Data
----------------------------------------------------------------------------------------------------------------
                                                       Non-
                                                    accelerated     Accelerated        Large
                    Restated                        (ex. EGCs)      (ex. EGCs)      accelerated      EGC  (%)
                                                        (%)             (%)             (%)
----------------------------------------------------------------------------------------------------------------
Total Restatements:
    2014........................................            10.9            11.9            14.5            17.7
    2015........................................             9.2            12.5            12.7            16.0
    2016........................................             6.8             9.6             8.9             9.3
    2017........................................             6.9             7.5             6.3             8.3
        Average/year............................             8.5            10.4            10.6            12.8
8-K Item 4.02 Restatements:
    2014........................................             3.9             3.6             2.4             5.0
    2015........................................             3.1             3.6             1.8             4.7
    2016........................................             2.4             2.7             1.3             3.0
    2017........................................             2.3             2.0             0.7             3.1
        Average/year............................             2.9             2.9             1.6             3.9
----------------------------------------------------------------------------------------------------------------

    The first panel of Table 9 presents the percentage of issuers that
make at least one restatement, of any type, while the second panel
presents those that make at least one restatement requiring Form 8-K
Item 4.02 disclosure. The latter type of restatement (``Item 4.02
restatements'') reflects material misstatements, while other
restatements deal with misstatements that are considered immaterial. We
find that EGCs, which are not subject to the ICFR auditor attestation
requirement and generally are also younger issuers than those in the
other groups, restate their financial statements at higher rates than
other issuers, whether we consider all restatements or only Item 4.02
restatements. For non-accelerated filers, which also are not subject to
the ICFR auditor attestation requirement, we find that the percentage
of issuers reporting Item 4.02 restatements is similar to, and the rate
of all restatements slightly lower than, that for accelerated filers
who are subject to the ICFR auditor attestation requirement. We note
that there is a greater proportion of low-revenue issuers in the non-
accelerated filer category than in other categories, and that, in the
Proposing Release, we found such issuers to have lower rates of
restatement than other issuers.\334\ When, in the Proposing Release, we

separately considered issuers with revenues below $100 million, we
found that the accelerated filers in this category are less likely to
restate their financial statements than non-accelerated filers in the
same revenue category.\335\
---------------------------------------------------------------------------

    \333\ The estimates in this table are based on staff analysis of
Ives Group Audit Analytics data. Percentages are computed out of all
issuers of a given filer type with a SOX Section 404(a) management
report available in the Ives Group Audit Analytics database.
Accelerated and non-accelerated categories exclude EGCs that are in
these filer categories. See note 298 above for details on the
identification of filer type.
    \334\ See Table 14 in the Proposing Release, note 4 above.
    \335\ Id.
---------------------------------------------------------------------------

C. Discussion of Economic Effects

    The costs and benefits of the amendments, including impacts on
efficiency, competition, and capital formation, are discussed below. We
first address the population and characteristics of issuers that will
newly qualify as non-accelerated filers under the amendments, and then
introduce certain categories of issuers that are used for comparison
purposes. We next discuss the anticipated costs and benefits associated
with the proposed change in applicability of the ICFR auditor
attestation requirement. Following this discussion, we consider the
costs and benefits associated with the proposed changes with respect to
filing deadlines, exit thresholds, and other required disclosures.
Finally, we consider the relative benefits and costs of the principal
reasonable alternatives to the amendments.
1. Affected Issuers
    We estimate that the amendments will result in 527 additional
issuers being classified as non-accelerated filers, and therefore no
longer subject to the filing deadlines and ICFR auditor attestation
requirement applicable to accelerated filers.\336\ Of these, an
estimated 154 issuers are EGCs and are thereby already exempt from the
ICFR auditor attestation requirement.\337\ Among the total 527 affected
issuers, an estimated 492 issuers are accelerated filers (or large
accelerated filers that have public float of less than $560 million)
that will be newly classified as non-accelerated filers because they
have annual revenues of less than $100 million and are eligible to be
SRCs.\338\ An additional 28 issuers are BDCs that will be newly
classified as non-accelerated filers because they are currently
accelerated filers (and therefore have public float of less than $700
million) and have annual investment income of less than $100
million.\339\ The remaining seven affected issuers are accelerated
filers that will be newly classified as non-accelerated filers despite
having revenues of at least $100 million because they have a public
float of at least $50 million but less than $60 million.\340\ Our
estimate of the number of affected issuers excludes issuers for which
we were unable to determine filer classification or revenues, which
could represent up to approximately an additional 30 affected issuers.
---------------------------------------------------------------------------

    \336\ The number of affected issuers is based on staff estimates
of: (i) The number of accelerated filers in 2018 that have prior
fiscal year revenues of less than $100 million and 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 with prior year investment income of less than $100 million;
(ii) the number of large accelerated filers in 2018 that have a
public float of less than $560 million and prior fiscal year
revenues of less than $100 million and are eligible to be SRCs; and
(iii) the number of accelerated filers in 2018 that have a public
float of at least $50 million but less than $60 million. The
estimate of the number of affected issuers does not include large
accelerated filers that have a public float of at least $560 million
but less than $700 million even though such issuers could become
non-accelerated filers under the amendments if they became eligible
to be SRCs under the SRC revenue test in the first year the SRC
amendments became effective due to the limited horizon of this
accommodation. See note 252 above (describing the accommodation
provided in the SRC Adopting Release). Revenue data is sourced from
XBRL filings, Compustat, and Calcbench. Public float data is from
XBRL. See note 298 above for details on the identification of the
population of accelerated and large accelerated filers and other
filer types.
    \337\ Id.
    \338\ Id.
    \339\ Id.
    \340\ Id.
---------------------------------------------------------------------------

    Our estimate of the number of affected issuers does not include any
FPIs. We estimate that there are no FPIs that file on domestic forms
and present their financial statements pursuant to U.S. GAAP, and that
also meet the required thresholds and other qualifications to be an
affected issuer under the amendments. However, there are an estimated
31 FPIs that file on foreign forms, but otherwise meet the required
thresholds and other qualifications. There are also FPIs filing on
foreign forms for which we were unable to determine filer
classification or revenues, which could represent up to approximately
an additional 90 FPIs that file on foreign forms but that may meet the
required thresholds and other qualifications.\341\ While we do not
include these issuers in our counts of the number of affected
issuers,\342\ some of these 30 to 120 additional issuers might choose
to file on domestic forms using U.S. GAAP in order to benefit from the
amendments if these benefits, together with other benefits of such a
choice (such as the ability to rely on the scaled disclosure
accommodations available to SRCs) outweigh the costs of changing their
disclosure regime. However, many factors are involved in the choice of
a reporting regime, and it is difficult to predict how many of these
issuers are likely to change their reporting practices due to the
amendments.
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    \341\ The majority of these potential additional issuers are
Canadian MJDS filers that are not required to disclose filer type or
public float. See note 298 above.
    \342\ In the Proposing Release, note 4 above, we included FPIs
that file on foreign forms, 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 and therefore, to be conservative, we do not
include them in the number of affected issuers in this release.
---------------------------------------------------------------------------

    As noted above, the total number of affected issuers includes an
estimated 154 EGCs (including 152 EGCs with annual revenues or, in the
case of BDCs, investment income of less than $100 million and two EGCs
that will be affected because they have a public float of at least $50
million but less than $60 million).\343\ It also includes an estimated
78 banks with $1 billion or more in total assets that are not
EGCs.\344\ The estimated 154 EGCs are not required to comply with the
ICFR auditor attestation requirement under SOX Section 404(b). We
estimate that the remaining 373 affected issuers will, including 21
BDCs, be newly exempt from this requirement.\345\ Two commenters
provided estimates of 382 affected issuers and 385 affected issuers,
respectively, as the number of issuers that would be newly exempt from
the ICFR auditor attestation requirement under the proposal.\346\ While
these estimates are largely consistent with our estimate, we note that
the commenters' estimates apply some simplifications and use different
underlying data sources than our estimate.\347\
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    \343\ See note 336 above.
    \344\ Banks are identified as issuers with SIC codes of 6020
(commercial banks), 6021 (national commercial banks), 6022 (state
commercial banks), 6029 (NEC commercial banks), 6035 (savings
institutions, federally-chartered) or 6036 (savings institutions,
not federally-chartered).
    \345\ Of these 373 issuers, 368 had less than $100 million in
revenues (or, in the case of BDCs, investment income) in their last
fiscal year, while the remaining five would be affected despite
having greater revenues because of the revised transition provisions
(i.e., because their public float is at least $50 million but less
than $60 million).
    \346\ See letters from CFA Inst. and Prof. Barth et al. See also
letter from Nasdaq, estimating that at least 399 Nasdaq-listed
companies may be affected by the amendments.
    \347\ For example, neither commenter excludes from its estimate
issuers that are not eligible to be SRCs or adjusts for the effect
of the revised transition thresholds as described in note 336 above
and note 151 of the Proposing Release, note 4 above. The letter from
CFA Inst. appears to rely on a footnote in the Proposing Release
that, while citing to the correct definitions of EGC in our rules,
incorrectly stated that an EGC is an issuer that has total annual
gross revenues of ``less than $1.07 million'' during its most
recently completed fiscal year (rather than the correct threshold of
``less than $1.07 billion'') and did not identify the other
requirements to be an EGC (such as not having reached the last day
of the fiscal year following the fifth anniversary of the date of
the first sale of common equity securities of the issuer under an
effective Securities Act registration statement as an EGC). See
footnote 47 of the Proposing Release, note 4 above. The estimate in
the letter from CFA Inst. also excluded all 10-K filers with the SIC
code 6200 (``Security & Commodity Brokers, Dealers, Exchanges &
Services''), which we do not believe is appropriate. While the
letter correctly indicates that the ICFR auditor attestation
requirement does not apply to audits of brokers and dealers
performed pursuant to SEC Rule 17a-5, these audits apply to the
reports required by Rule 17a-5, which are distinct from a Form 10-K
filing. Issuers filing Form 10-Ks that have a subsidiary that is a
broker or dealer are not treated differently from other issuers with
respect to the ICFR auditor attestation requirement.

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

    Of the 373 issuers that will be newly exempt from the ICFR auditor
attestation requirement, we estimate that the 78 banks identified above
will be subject to the FDIC auditor attestation requirement,\348\ while
the remaining 295 issuers will not be subject to any such auditor
attestation requirement.\349\ For the banks that will be newly exempt
from the ICFR auditor attestation requirement but will remain subject
to the FDIC auditor attestation requirement, the benefits and costs of
expanding the exemption from the ICFR auditor attestation requirement
are both expected to be limited. As discussed in Section IV.B.1. above,
the FDIC auditor attestation requirement is substantively similar to
the ICFR auditor attestation requirement, and is thus expected to
require similar expenditures and have similar financial reporting
benefits as the ICFR auditor attestation.
---------------------------------------------------------------------------

    \348\ If these banks are no longer subject to the SOX Section
404(b) auditor attestation requirement, their auditors may follow
the AICPA's auditing standards in lieu of the PCAOB's auditing
standards for the FDIC auditor attestation. See Section 18A of
Appendix A to FDIC Rule 363 and the AICPA's AU-C Section 940. See
also Section III.B.1. above.
    \349\ Of these 274 issuers, 269 are accelerated filers (or large
accelerated filers that have public float of less than $560 million)
that will be newly classified as non-accelerated filers because they
have annual revenues of less than $100 million and are eligible to
be SRCs, while the remaining five will be newly classified as non-
accelerated filers despite having revenues of at least $100 million
because they have a public float of at least $50 million but less
than $60 million.
---------------------------------------------------------------------------

    We estimate that approximately 90 percent of the affected issuers
(whether including or excluding EGCs) have securities that are listed
on national exchanges.\350\ The representation in public markets of
issuers similar to the affected issuers has decreased relative to the
years before SOX. In particular, over the past two decades, the number
of issuers listed on major exchanges has decreased by about 40
percent,\351\ but the decline has been concentrated among smaller size
issuers. Specifically, the number of listed issuers with market
capitalization below $700 million has decreased by about 65
percent,\352\ and the number of listed issuers with less than $100
million in revenue has decreased by about 60 percent.\353\ One
commenter noted that these statistics do not establish that the costs
of the ICFR auditor attestation materially contributed to the decline
in listed issuers, and that there are a number of other factors that
are likely implicated in the decline of listings.\354\ We cite these
statistics to characterize the affected issuers, not to attribute the
decline in listings to any particular cause. As noted below, the
amendments could be a positive factor in the decision of additional
companies to enter public markets, but it may not be the decisive
factor, and the direct impact of the amendments on the number of public
companies may be limited to the extent that companies may be more
focused on other factors associated with the decision to go
public.\355\
---------------------------------------------------------------------------

    \350\ Staff extracted information regarding whether issuers
reported having securities registered under Section 12(b) of the
Exchange Act from the cover page of annual report filings using a
computer program supplemented with hand collection. See note 336
above for details on the identification of the population of
affected issuers.
    \351\ This estimate is based on staff analysis of data from the
Center for Research in Security Prices database for December 1998
versus December 2018. The estimate excludes RICs and issuers of
ADRs.
    \352\ Id.
    \353\ This estimate is based on staff analysis of data from
Standard & Poor's Compustat and Center for Research in Security
Prices databases for fiscal year 1998 versus fiscal year 2017. The
estimate excludes RICs and issuers of ADRs.
    \354\ See letter from CFA.
    \355\ See Section IV.C.2.d. below.
---------------------------------------------------------------------------

    Figure 4 \356\ presents the distribution of public float across the
full sample of affected issuers.\357\
---------------------------------------------------------------------------

    \356\ The estimates in this figure are based on staff analysis
of data from XBRL filings. We corrected the public float data based
on hand-collection from Form 10-K filings for five affected issuers
whose public float reported in XBRL format was 1,000 times the
public float reported on the cover page of the corresponding Form
10-K filing, resulting in values of over $50 billion in public float
reported in XBRL. See note 336 above for details on the
identification of the population of affected issuers.
    \357\ Because of the accelerated filer transition provisions,
some of the affected issuers have public float of at least $50
million but below $75 million. See note 320 above.
---------------------------------------------------------------------------

BILLING CODE 8011-01-P

[GRAPHIC] [TIFF OMITTED] TR26MR20.003

    Relative to the distribution for all accelerated filers presented
in Figure 2, the sample of affected issuers is more strongly skewed
toward lower levels of public float, with higher levels of public float
only thinly represented. However, some of the affected issuers do have
public float approaching the top of the range for accelerated filers.
    Figure 5 presents the distribution of revenues across the 520
accelerated filers (or large accelerated filers with public float of
less than $560 million) that will be newly classified as non-
accelerated filers because they have revenues (or, in the case of BDCs,
investment income) of less than $100 million.\358\
---------------------------------------------------------------------------

    \358\ The estimates in this figure are based on staff analysis
of data from XBRL filings, Compustat, and Calcbench. The revenue
data used is from the last fiscal year prior to the annual report in
calendar year 2018, because the SRC revenue test is based on the
prior year's revenues. See note 336 above for details on the
identification of the population of affected issuers.

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

[GRAPHIC] [TIFF OMITTED] TR26MR20.004

BILLING CODE 8011-01-C
    Other than a concentration of issuers with zero or near zero
revenues,\359\ these affected issuers are fairly evenly distributed
over different levels of revenue up to $100 million in revenues. The
additional seven affected issuers with revenues of at least $100
million but a public float of less than $60 million have revenues
ranging from $119 million to $2.1 billion, with a mean of about $770
million in revenues.
---------------------------------------------------------------------------

    \359\ Approximately 13 percent of the estimated 520 affected
issuers with revenues of less than $100 million and approximately 11
percent of the estimated 290 affected issuers with revenues of less
than $100 million that would be newly exempt from all ICFR auditor
attestation requirements (i.e., those that are not EGCs and are not
banks subject to the FDIC auditor attestation requirement) have zero
revenues.
---------------------------------------------------------------------------

    The affected issuers are estimated to have median total assets of
about $185 million, a median number of employees of about 115, and a
median age of about 12 years.\360\ For those issuers that will be newly
exempt from all ICFR auditor attestation requirements (i.e., those that
are not EGCs and are not banks subject to the FDIC auditor attestation
requirement), the median total assets and median number of employees
are somewhat lower at about $125 million and 85 employees, and the
median issuer age is slightly higher at about 19 years.\361\ The
majority of the affected issuers have negative net income and negative
net cash flows from operations.\362\
---------------------------------------------------------------------------

    \360\ These estimates are based on staff analysis of data from
Compustat. See note 336 above for details on the identification of
the population of affected issuers.
    \361\ Id.
    \362\ Id. For the 295 affected issuers that would be newly
exempt from all ICFR auditor attestation requirements (i.e., those
that are not EGCs and are not banks subject to the FDIC auditor
attestation requirement), the median net income is approximately
negative $6 million and the median net cash flows from operations is
approximately negative $6 million.
---------------------------------------------------------------------------

    The affected issuers are heavily concentrated, based on the number
of issuers, in the ``Pharmaceutical Products'' (29.1 percent),
``Banking'' (22.4 percent),\363\ ``Financial Trading'' (16.0 percent),
``Medical Equipment'' (4.4 percent), and ``Electronic Equipment'' (3.8
percent) industries.\364\ If the distribution of eligible issuers does
not change over time, the amendments could lead to a noticeable
decrease in the presence of ``Pharmaceutical Products'' and ``Banking''
issuers in the pool of accelerated filers.
---------------------------------------------------------------------------

    \363\ For the 295 affected issuers that would be newly exempt
from all ICFR auditor attestation requirements (i.e., those that are
not EGCs and are not banks subject to the FDIC auditor attestation
requirement), the proportion of ``Banking'' issuers drops to 7.8
percent. By contrast, the proportion in other industries does not
change by more than a few percentage points.
    \364\ These estimates are based on staff analysis of data
including SIC codes from XBRL filings and Ives Group Audit
Analytics, using the Fama-French 49-industry classification system.
BDCs are manually-classified as members of the ``Financial Trading''
industry under this system as SIC codes were unavailable from our
sources for the vast majority of these issuers. See http://mba.tuck.dartmouth.edu/pages/faculty/ken.french/Data_Library/det_49_ind_port.html. See note 336 above for details on the
identification of the population of affected issuers.
---------------------------------------------------------------------------

    One commenter noted they sought to understand the industry
concentration of the affected issuers based on measures such as their
public float,

revenues, and total assets.\365\ Based on their public float relative
to the aggregate public float of the affected issuers, the affected
issuers are heavily concentrated in the ``Pharmaceutical Products''
(33.5 percent), ``Banking'' (20.0 percent), ``Financial Trading'' (17.0
percent), and ``Medical Equipment'' (5.0 percent) industries.\366\
Because revenues and total assets may be less comparable across
industries of different types, we do not present the fraction of the
aggregate revenue and assets of the affected issuers represented by
each industry. As an alternative that we believe may be more
informative, we present, in Table 10, the estimated proportion of all
of the accelerated filers in each industry that will be affected by the
amendments (i.e., become non-accelerated), calculated based on several
different measures of the size of the affected issuer pool in a given
industry.\367\ We focus this table on non-EGCs, and present affected
issuers in the ``Banking'' industry both including and excluding those
that will remain subject to the FDIC auditor attestation requirement,
in order to highlight the disproportionate effects by industry in terms
of the issuers that will newly be exempt from the ICFR auditor
attestation requirement.
---------------------------------------------------------------------------

    \365\ See letter from CFA Inst.
    \366\ These estimates are based on staff analysis of data
including SIC codes from XBRL filings and Ives Group Audit
Analytics, using the Fama-French 49-industry classification system.
See note 364 above for more details. We corrected the public float
data based on hand-collection from Form 10-K filings for five
affected issuers whose public float reported in XBRL format was
1,000 times the public float reported on the cover page of the
corresponding Form 10-K filing, resulting in values of over $50
billion in public float reported in XBRL. For the 295 affected
issuers that would be newly exempt from all ICFR auditor attestation
requirements (i.e., those that are not EGCs and are not banks
subject to the FDIC auditor attestation requirement), the
proportions are ``Pharmaceutical Products'' (27.9 percent),
``Financial Trading'' (22.5 percent), ``Real Estate'' (7.6 percent),
``Medical Equipment'' (7.5 percent), and ``Banking'' (5.4 percent).
    \367\ The estimates in Table 10 are based on staff analysis of
data including data on total assets from Compustat and SIC codes
from XBRL filings and Ives Group Audit Analytics, using the Fama-
French 49-industry classification system. See note 364 above for
more details. Both the numerators (related to the affected issuers)
and denominators (related to accelerated filers) exclude EGCs. We
corrected the public float data based on hand-collection from Form
10-K filings for five affected issuers and six unaffected issuers
whose public float reported in XBRL format was about 1,000 times (in
one case, about 1,000,000 times) the public float reported on the
cover page of the corresponding Form 10-K filing, resulting in
values of over $50 billion in public float reported in XBRL. See
note 336 above for details on the source of revenue and public float
data and on the identification of the affected issuers. See note 298
above for details on the identification of filer type.

    Table 10--Percentage of Accelerated Filers in Each Industry That Will Be Affected Issuers, Excluding EGCs
----------------------------------------------------------------------------------------------------------------
                                                   Percentage of accelerated filers (ex. EGCs) that are affected
                                                                 (ex. EGCs), calculated based on:
                   Industry *                    ---------------------------------------------------------------
                                                     Number of     Total assets                    Public float
                                                    issuers (%)         (%)         Revenue (%)         (%)
----------------------------------------------------------------------------------------------------------------
Pharmaceutical Products.........................            77.9            54.4            36.8            78.7
Banking.........................................            63.5            37.6            33.2            43.1
Banking (ex. issuers subject to FDIC att.                   14.5             5.2            10.9            17.5
 requirement)...................................
Medical Equipment...............................            59.3            28.9            22.4            60.9
Financial Trading...............................            58.5            22.5             5.0            61.6
Electronic Equipment............................            32.7             7.4             4.3            33.1
Other...........................................            16.0             4.0             1.8            11.8
----------------------------------------------------------------------------------------------------------------
* Excluding EGCs, we estimate that there are 74 affected issuers in the ``Pharmaceutical Products'' industry,
  101 in ``Banking'' (23 after excluding issuers that would be subject to the FDIC attestation requirement), 62
  in ``Financial Trading,'' 16 in ``Medical Equipment,'' and 16 in ``Electronic Equipment.'' The table excludes
  two affected issuers for which an industry classification was unavailable.

    Amongst the industries in which the affected issuers are most
greatly concentrated, issuers in the ``Pharmaceutical Products''
industry are the most disproportionately affected based on the number,
total assets, revenues, and public float of the affected issuers (other
than EGCs) relative to the representation of this industry among
accelerated filers (other than EGCs). While a substantial fraction of
accelerated filers other than EGCs in the ``Banking'' industry are also
affected issuers, consistent with one commenter's finding that
``Banking'' is the industry most affected by the amendments,\368\ the
proportion of this industry that is affected is significantly reduced
once we exclude banks that would be subject to the FDIC auditor
attestation requirement and are therefore expected to experience
limited benefits and costs as a result of the amendments.
---------------------------------------------------------------------------

    \368\ See letter from CFA Inst.
---------------------------------------------------------------------------

2. Potential Benefits of Expanding the Exemption From the ICFR Auditor
Attestation Requirement for Affected Issuers
    The ICFR auditor attestation requirement has been associated with
increased audit fees and other compliance costs. Exempting the affected
issuers from this requirement therefore is likely to have the benefit
of reducing compliance costs for these issuers. Given the
disproportionate burden that the fixed component of compliance costs
imposes on smaller issuers, as well as the likelihood that many of the
affected issuers face financing constraints, these costs savings may
enhance capital formation and competition. The discussion below
explores the anticipated cost savings and their potential implications
in detail. This discussion is focused on affected issuers that are not
expected to be subject to the FDIC auditor attestation requirement.
    We begin by summarizing evidence on the indirect costs and net
costs of the ICFR auditor attestation requirement. We then estimate the
anticipated effects on audit fees and on other compliance costs of
expanding the exemption from this requirement for the affected issuers,
using reported audit fees, survey data, and existing studies. Finally,
we discuss the implications of the cost savings and other potential
benefits.
a. Evidence on Possible Indirect Costs of the ICFR Auditor Attestation
Requirement
    The ICFR auditor attestation requirement may impose costs on
issuers and investors beyond the direct costs of compliance. For
example, an increased focus on ICFR as a result of

the ICFR auditor attestation requirement could have negative effects on
issuer performance, if it creates a distraction from operational
matters or reduces investment or risk-taking.\369\ One issuer noted in
its comments that its managers' attention was diverted away from its
operating performance in its first year complying with the ICFR auditor
attestation requirement, and that, without this requirement, its
managers' time could have been more productively spent focusing on
opportunities to grow the company.\370\ Broader evidence of the
indirect costs of the ICFR auditor attestation requirement is
inconclusive. Studies have documented a decrease in investment and
risk-taking by U.S. companies compared to companies in other countries
around the passage of SOX.\371\ However, others have demonstrated that
these findings are merely the continuation of a trend that began many
years before the passage of SOX \372\ and that they do not appear to be
driven by the applicability of the ICFR auditor attestation or SOX
Section 404(a) management ICFR reporting requirements.\373\ Another
study associates the SOX Section 404 requirements with a decrease in
patents and patent citations, but the findings are limited to the early
years of implementation of these requirements and the study is not able
to distinguish to what extent the effects are attributable to the SOX
Section 404(a) management ICFR reporting requirements versus the SOX
Section 404(b) ICFR auditor attestation requirement.\374\ We are unable
to quantify the potential indirect cost savings resulting from the
amendments due to the lack of reliable evidence and data that would
allow us to quantitatively identify such effects.
---------------------------------------------------------------------------

    \369\ See John Coates & Suraj Srinivasan, SOX after Ten Years: A
Multidisciplinary Review, 28(3) Acct. Horizons 627 at 643-645 (2014)
(``Coates and Srinivasan 2014 Study'') (discussing these possible
effects and summarizing related studies).
    \370\ See letter from Guaranty.
    \371\ See Coates and Srinivasan 2014 Study, note 369 above
(summarizing these studies).
    \372\ Id.
    \373\ See Ana Albuquerque & Julie Zhu (2018), Has Section 404 of
the Sarbanes-Oxley Act Discouraged Corporate Risk-Taking? New
Evidence from a Natural Experiment, Mgmt. Sci. (forthcoming) (using
the staggered implementation of SOX Section 404 to better identify
its effects on smaller issuers, with public float of less than $150
million, and finding no evidence of a decrease in the investment and
risk-taking activities for issuers that were subject to SOX Section
404 versus those that were not), available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3049232.
    \374\ See Huasheng Gao & Jin Zhang, SOX Section 404 and
Corporate Innovation,'' J. of Fin. and Quantitative Analysis (2018)
(forthcoming), available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3130588.
---------------------------------------------------------------------------

b. Evidence on Net Costs of the ICFR Auditor Attestation Requirement
    While we are unable to quantify the extent to which the expected
cost savings exceed any loss of benefits associated with the ICFR
auditor attestation requirement,\375\ we note that certain studies have
attempted to estimate such ``net costs'' of the requirement in specific
contexts.
---------------------------------------------------------------------------

    \375\ While we quantify both anticipated costs and benefits of
the amendments, there are many costs and benefits that we cannot
quantify, so we are unable to quantify the net benefit or net cost
of the amendments. See Section IV.C.3.d. for further discussion of
this point.
---------------------------------------------------------------------------

i. Studies Involving Avoidance Behavior
    Some studies have provided evidence that non-accelerated filers may
seek to avoid crossing the $75 million public float threshold and
becoming accelerated filers.\376\ Related studies have also found that
issuers near or below this threshold are more likely than comparable
issuers to take actions that may reduce or avoid an increase in their
public float, such as disclosing more negative news in the second
fiscal quarter (when public float is measured), increasing payouts to
shareholders, reducing investment in property, plant, equipment,
intangibles and acquisitions, and increasing the number of shares held
by insiders.\377\ One study uses this avoidance behavior to estimate
the net costs of compliance with the ICFR auditor attestation
requirement for issuers close to the $75 million public float
threshold.\378\ The study concludes that the overall costs, net of any
benefits, of the ICFR auditor attestation requirement for these issuers
is roughly $1 million to $2 million per year, but we note that the
methodology used to translate the avoidance behavior into a dollar cost
may be unreliable.\379\
---------------------------------------------------------------------------

    \376\ See, e.g., Peter Iliev, The Effect of SOX Section 404:
Costs, Earnings Quality, and Stock Prices, 45 J. of Fin. 1163 (2010)
(``Iliev 2010 Study'') (finding that a disproportionate number of
issuers had a public float of just under $75 million in 2004, when
ICFR auditor attestations and management ICFR reports were first
required for accelerated filers, but not in earlier years); Dhammika
Dharmapala, Estimating the Compliance Costs of Securities
Regulation: A Bunching Analysis of Sarbanes-Oxley Section 404(b),
Working Paper (2016), available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2885849 (``Dharmapala 2016 study''); and
McCallen et al. 2019 study, note 308 above.
    \377\ See F. Gao, J.S. Wu & J. Zimmerman, Unintended
Consequences of Granting Small Firms Exemptions from Securities
Regulation: Evidence from the Sarbanes[hyphen]Oxley Act, 47(2) J. of
Acct. Res. 459 (2009) and M. E. Nondorf, Z. Singer, & H. You, A
Study of Firms Surrounding the Threshold of Sarbanes[hyphen]Oxley
Section 404 Compliance, 28(1) Advances in Acct. 96 (2012). See also
F. Gao, To Comply or Not to Comply: Understanding the Discretion in
Reporting Public Float and SEC Regulations, 33(3) Contemporary Acct.
Res. 1075 (2016) (presenting evidence that companies that expected
higher compliance costs may have used discretion in defining
affiliates in order to report lower float).
    \378\ See Dharmapala 2016 study, note 376 above.
    \379\ Id. This paper estimates a net cost of compliance for
companies near the threshold of $4 million to $6 million for a few
years of compliance (i.e., $1 million to $2 million per year). The
analysis leading to this estimate relies on the relation between
public float and market capitalization for other companies to
approximate the stock market value forgone by those that are
estimated to be manipulating their public float downwards. However,
we note that the ratio of market capitalization to public float for
other companies may simply reflect their propensity towards having
affiliated ownership rather than being a reliable basis with which
to measure the cost incurred by manipulating public float.
---------------------------------------------------------------------------

    Avoidance of the $75 million public float threshold would be
consistent with smaller issuers finding the net costs associated with
the ICFR auditor attestation requirement to be significant, though
there could be other reasons for avoiding the threshold. For example,
as one commenter argued, such avoidance may reflect managers who would
like to avoid the scrutiny of an audit of ICFR because they are
engaging in opportunistic behavior,\380\ although we are unaware of
direct evidence supporting this hypothesis. One commenter, representing
48 accounting and law professors, requested that we confirm whether the
``bunching'' of companies below the $75 million public float threshold
remains present in today's markets.\381\ The commenter noted that such
an analysis could help provide confidence that the costs of the ICFR
auditor attestation requirement remain as high as previously
documented.\382\ In response to this comment, our staff conducted
supplemental analysis, presented in Figure 6.\383\ However, as
discussed below, the conclusions in this Economic Analysis do not rely
on this analysis.
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    \380\ See letter from Prof. Barth et al.
    \381\ See letter from Prof. Honigsberg et al.
    \382\ Id.
    \383\ The estimates in this figure are based on staff analysis
of data from XBRL filings associated with annual reports filed in
calendar year 2018. The figure includes all issuers with an annual
report on Form 10-K, 20-F or 40-F in calendar year 2018 and with
public float data available in XBRL, excluding banks, ABS issuers,
and RICs (although we note there were no instances of the latter two
types of issuers in this sample before these filters were applied).
Banks are identified as issuers with SIC codes of 6020 (commercial
banks), 6021 (national commercial banks), 6022 (state commercial
banks), 6029 (NEC commercial banks), 6035 (savings institutions,
federally-chartered) or 6036 (savings institutions, not federally-
chartered).

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[GRAPHIC] [TIFF OMITTED] TR26MR20.005

    Figure 6 presents the distribution of public float across issuers
other than banks, ABS issuers, and RICs. We exclude ABS issuers and
RICs because they are unlikely to be sensitive to the public float
threshold as they would not be subject to the ICFR auditor attestation
requirement (or able to avail themselves of the disclosure
accommodations for SRCs) regardless of their public float. We exclude
banks because they may be subject to the FDIC auditor attestation
requirement, which, as discussed above, is comparable to the ICFR
auditor attestation requirement, regardless of their public float.
While EGCs would not be subject to the ICFR auditor attestation
requirement regardless of their public float, we nevertheless include
them in Figure 6 because it is a temporary exemption and such issuers
may already consider the implications of their public float in advance
of graduating from this status. However, we obtain similar results when
we include or exclude any of these categories of issuers.
    The pattern in Figure 6 demonstrates that there may be some
``bunching'' of public floats below the $75 million threshold in 2018.
The pattern is similar to that presented in two recent studies that
find a discontinuity in public float at the $75 million threshold when
considering data across the 12 or 13 year period ending in 2015.\384\
Our findings for 2018 also are consistent with a year-by-year analysis
in one of these studies that suggests that this behavior does not
appear to change significantly over the time period studied.\385\
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    \384\ See McCallen et al. 2019 study, note 308 above, and
Dharmapala 2016 study, note 376 above.
    \385\ See McCallen et al. 2019 study, note 308 above.
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    Our findings are less consistent with another analysis of public
float, which failed to find evidence of ``bunching'' in 2017.\386\ This
analysis was cited in a submission to the comment file.\387\ When we
examine the data underlying this analysis,\388\ we find that, although
we obtain public float data from different sources,\389\ our public
float values are over 90 percent correlated with those used in tthis
analysis. We note, however, that the analysis applies sample selection
filters that exclude, among other issuers, issuers that would become
newly subject to an ICFR auditor attestation requirement (and, during
this time period, lose the disclosure accommodations for SRCs) upon
crossing the $75 million public float threshold. The exclusions result
in a sample size that is approximately half as large as that in our
analysis.\390\ For

example, we understand that the other analysis excludes all financial
institutions and issuers with a market capitalization of greater than
$150 million.\391\ This difference, we find, accounts for the bulk of
the difference in our figures. Thus, our analysis reflects a
significantly larger and more representative sample of issuers and may
therefore be more reliable.
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    \386\ See Commissioner Jackson's Statement. While we provide
results for 2018 in Figure 6 in order to present the most recent and
reliable available data, we obtain very similar results when running
the same analysis for 2017.
    \387\ See letter from Prof. Barth et al., citing an analysis in
Commissioner Jackson's Statement that finds no evidence of bunching
in 2017.
    \388\ See ``Public Float Data (2017)'' available at https://www.sec.gov/news/public-statement/jackson-statement-proposed-amendments-accelerated-filer-definition.
    \389\ The data underlying the analysis cited by a commenter is
generated by using a computer program to extract text from annual
reports, applying computer algorithms and filters to isolate public
float numbers, and then manually checking the results. See
Commissioner Jackson's Statement. The data underlying our analysis
is based on XBRL filings.
    \390\ The figure in the other analysis reflects 388 issuers,
compared to 731, or almost twice as many issuers, in our analysis.
    \391\ Financial institutions are issuers with SIC codes between
6000 and 6999 and include issuers that are not banks. Other filters
applied in that analysis include requiring that market
capitalization data be available and that the reported public float
be at least 10%, but no more than three times, the market
capitalization.
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    As discussed above, if issuers seek to avoid crossing the $75
million public float threshold, such behavior could reflect a high net
cost of the ICFR auditor attestation requirement but could also reflect
a self-serving desire to avoid scrutiny. Any such behavior could also
be influenced by other requirements associated with this public float
threshold during this time period, such as the loss of scaled
disclosure accommodations available to SRCs.\392\ Thus, though we have
considered the studies, evidence, and comments received regarding this
avoidance behavior, the conclusions in this Economic Analysis do not
rely on these findings.
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    \392\ The analysis presented in Figure 6 is based on annual
reports filed in calendar year 2018, which generally pertain to 2017
fiscal years. The amendments to the SRC definition were effective on
September 10, 2018. See SRC Adopting Release, note 12 above.
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ii. Studies Based on Comparative Analysis or Market Reactions
    We have also considered studies that have used other methodologies
to attempt to quantify the net costs or benefits of the ICFR auditor
attestation requirement. One study attempts to quantify and compare
certain costs and benefits of exempting non-accelerated filers from the
ICFR auditor attestation requirement, focusing on those costs and
benefits that the study deems to be measurable, and finds that the cost
savings associated with exempting these issuers (an estimated $388
million in aggregate audit fee savings) have been less than the lost
benefits (e.g., an aggregate $719 million in lower earnings) in
aggregate present value terms.\393\ Studies have also used stock market
reactions to changes in the applicability of the ICFR auditor
attestation requirement to estimate its net costs or benefits, because
the stock market valuation should incorporate both expected costs and
expected benefits from a shareholder's perspective. We focus on studies
that consider events that allow the effects of the ICFR auditor
attestation requirement to be isolated from those of the other
requirements that were imposed by SOX, as many early studies did not
isolate the effects of the ICFR auditor attestation requirement from
other changes required by the same legislation, such as the audit
committee requirements of SOX Section 301 \394\ and the certifications
required pursuant to SOX Section 302. Regardless, the results of the
studies we focus on have been mixed, perhaps due in part to changes
over time in how the ICFR auditor attestation requirement has been
implemented. For example, a study analyzing the response to
announcements of initial delays in the application of the requirements
to some issuers in order to identify the stock market reaction
associated with the ICFR auditor attestation requirement found that
this requirement was associated with a net reduction in stock market
valuation for foreign issuers.\395\ On the other hand, a study of the
response to the later permanent exemption from the ICFR auditor
attestation requirement for some issuers found that this requirement
was associated with a net increase in stock market valuation for
smaller issuers.\396\ The latter finding is consistent with studies
that conclude that the requirement is value-enhancing based on a
negative stock market reaction to issuers excluding acquired operations
from management's assessment of ICFR and the ICFR auditor attestation,
though these studies do not determine the extent to which this effect
is attributable to the ICFR auditor attestation.\397\ Similarly, a
study of smaller issuers that switched regimes over time found that
being subject to the ICFR auditor attestation requirement was
associated with an increase in stock market valuation for these
issuers.\398\
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    \393\ We note that the estimates in this study rely on a number
of critical assumptions and estimations. See Weili Ge, Allison
Koester, & Sarah McVay, Benefits and Costs of Sarbanes-Oxley Section
404(b) Exemption: Evidence from Small Firms' Internal Control
Disclosures, 63 J. of Acct. and Econ. 358 (2017) (``Ge et al. 2017
Study'') (estimating the effect on audit fees by comparing the audit
fees of non-accelerated filers to those of accelerated filers with
market capitalization of $300 million or less; and estimating the
effect on earnings by estimating the percentage of non-accelerated
filers that may newly disclose ineffective ICFR upon entering an
ICFR auditor attestation requirement, based on changes in the rate
of disclosure of ineffective ICFR by issuers that transition into
accelerated filer status, and applying to this estimate a further
estimate of the difference in return on assets that could be
associated with such disclosure and any related remediation, based
on the results of a multivariate regression relating issuers' change
in return on assets to a number of factors, including whether or not
they disclosed and remediated ineffective ICFR). 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.
    \394\ 15 U.S.C. 78j-1.
    \395\ See Iliev 2010 Study, note 376 above. This study also
finds a net reduction in value for small domestic issuers from the
SOX Section 404 requirements, but is not able, for these issuers, to
isolate the effect attributable to the ICFR auditor attestation
requirement versus the SOX Section 404(a) management ICFR reporting
requirement.
    \396\ See Kareen Brown, Fayez Elayan, Jingyu Li, Emad Mohammad,
Parunchana Pacharn, & Zhefeng Frank Liu, To Exempt or not to Exempt
Non-Accelerated Filers from Compliance with the Auditor Attestation
Requirement of Section 404(b) of the Sarbanes-Oxley Act, 28(2) Res.
in Acct. Reg. 86 (2016) (``Brown et al. 2016 Study''). See also
Christina Leuz & Peter Wysocki, The Economics of Disclosure and
Financial Reporting Regulation: Evidence and Suggestions for Future
Research, 54(2) J. of Acct. Res. 525 at 566-569 (2016) (``Leuz and
Wysocki 2016 Study'') (summarizing mixed evidence from earlier event
studies related to SOX that were unable to differentiate the effects
of the ICFR auditor attestation requirement from other requirements
imposed by SOX).
    \397\ See, e.g., Robert Carnes, Dane Christensen, & Phillip
Lamoreaux, Investor Demand for Internal Control Audits of Large U.S.
Companies: Evidence from a Regulatory Exemption for M&A
Transactions, 94(1) The Acct. Rev. 71 (2019) (``Carnes et al. 2019
Study'').
    \398\ See Hongmei Jia, Hong Xie, & David Ziebart, An Analysis of
the Costs and Benefits of Auditor Attestation of Internal Control
over Financial Reporting, Working Paper (2014) (``Jia et al. 2014
study''), available at https://www.lsu.edu/business/accounting/files/researchseries/20141027JXZ.PDF.
---------------------------------------------------------------------------

iii. Other Evidence on Net Costs
    The rate of exempt issuers voluntarily obtaining an ICFR auditor
attestation has generally been low.\399\ Consistent with this finding,
a commenter indicated that small biotechnology companies are rarely
asked by investors to voluntarily obtain an ICFR auditor
attestation.\400\ This may indicate that exempt issuers, when
considering their own net cost or benefit of compliance, including how
investors would react to their decisions, have typically deemed it to
be more beneficial to expend these resources on other uses. However, as
discussed in Section IV.C.3.d. below, it is probably not the case that
issuers would voluntarily obtain an ICFR auditor attestation in every
case in which, from the market or an investor's perspective, the total
benefits of doing so would exceed the total costs.
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    \399\ See note 297 above.
    \400\ See letter from BIO. See also letter from Ardelyx
Presentation, referencing similar statements in the BIO Study, note
69 above, (which states that ``the low rate of voluntary compliance
by [biotechnology EGCs] suggests that investors do not demand or
value costly Section 404(b) auditor attestations'').
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    When considering the net tradeoff between costs and benefits for
accelerated filers with low revenues in particular, we also re-examined
data

from the SEC-sponsored survey of financial executives conducted during
December 2008 and January 2009 (``2008-09 Survey'').\401\ While the
results of this survey might not be directly applicable a decade later,
particularly given the changes over time discussed in Section IV.B.1.
above, they provide some suggestive evidence that low-revenue issuers
are more likely than other accelerated filers to believe that the costs
of complying with SOX Section 404 substantially outweigh the benefits.
In particular, when asked about the net costs or benefits of complying
with SOX Section 404, 30 percent of respondents at an accelerated filer
with revenues below $100 million indicated that the costs far
outweighed the benefits, in contrast to 14 percent of respondents at an
accelerated filer with greater revenues.\402\ However, as noted by a
commenter, these survey findings represent the views of issuers and may
not be reflective of the views of investors.\403\
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    \401\ See 2009 SEC Staff Study, note 304 above, and Cindy
Alexander, Scott Bauguess, Gennaro Bernile, Alex Lee, & Jennifer
Marietta-Westberg, The Economic Effects of SOX Section 404
Compliance: A Corporate Insider Perspective, 56 J. of Acct and Econ.
267 (2013) (``Alexander et al. 2013 Study'').
    \402\ 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 the 2009 SEC
Staff Study, note 304 above, and Alexander et al. 2013 Study, note
401 above, for details on the survey and analysis methodology.
    \403\ See letter from Crowe.
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c. Potential Reduction in Audit Fees
    While issuers disclose their total audit fees, they are not
required to disclose the portion of these fees that is attributable to
the ICFR auditor attestation requirement. Studies of the initial
implementation of the ICFR auditor attestation requirement found that
it was associated with a roughly 100 percent increase in audit fees for
small accelerated filers.\404\ However, these early estimates likely
include some initial start-up costs, which were found to diminish over
time.\405\ Further, these estimates do not incorporate the effect of
later developments such as the adoption of AS 2201, which was expected
to reduce compliance costs for smaller issuers, and the adoption of the
new risk assessment auditing standards, which may reduce the
incremental cost of an integrated audit over a financial-statement only
audit.
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    \404\ See, e.g., William Kinney & Marcy Shepardson, Do Control
Effectiveness Disclosures Require SOX 404(b) Internal Control
Audits? A Natural Experiment with Small U.S. Public Companies, 49(2)
J. of Acct. Res. 413 (2011) (``Kinney and Shepardson 2011 Study'')
(considering those accelerated filers that have newly crossed the
$75 million public float threshold in a given year); Iliev 2010
Study, note 376 above (considering those accelerated filers with
between $75 million and $100 million in public float); Michael
Ettredge, Matthew Sherwood, & Lili Sun, Effects of SOX 404(b)
Implementation on Audit Fees by SEC Filer Size Category, 37 (1) J.
of Acct. and Pub. Pol'y 21 (2017) (considering accelerated filers as
a category, as opposed to large accelerated filers, but also finding
a contemporaneous 42.7 percent increase in audit fees for non-
accelerated filers even though were not subject to the ICFR auditor
attestation requirement); and Susan Elridge & Burch Kealey, SOX
Costs: Auditor Attestation under Section 404, Working Paper (2005),
available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=743285 (considering accelerated filers in the
lowest quintile of total assets).