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Speech by SEC Chairman:
Statement at Open Meeting Regarding Extension of Section 404 Compliance Date for Smaller Companies and Amendments to Accelerated Filing Requirements


Chairman Christopher Cox

U.S. Securities and Exchange Commission

Washington, D.C.
September 21, 2005

Good morning and welcome. I am hardly accustomed to convening a hearing without a gavel, but this is such a civilized group, one is not necessary apparently. Although we have now had several closed meetings focused on enforcement matters since Commissioner Nazareth and I were sworn in to office, this is the first Open Meeting for both of us, and I know I speak for both of us when I say we are pleased to be here.

This is also just the second public meeting in our new quarters here at Station Place. For all of those in attendance, I extend formal notice and opportunity to comment on the suitability of your surroundings. If you have questions or suggestions, send them to www.sec.gov.

The first two items on this morning's agenda are recommendations from the Division of Corporation Finance.

The first concerns the question whether to extend the current grace period for smaller public companies to comply with Section 404 of the Sarbanes-Oxley law. Last December, former Chairman Donaldson set up an advisory committee to examine the impact that this and other regulatory requirements have on smaller public companies. The purpose of continuing the grace period for another twelve months would be to consider the information that would be provided from the Advisory Committee on Smaller Public Companies and from other sources to the Commission.

The second item concerns the deadlines for public companies filing periodic reports with the Commission. The Division of Corporation Finance will recommend that large public companies file their annual reports to shareholders faster. Medium sized, and small companies, will stay the same as they are now.

The story of both of the Corporation Finance Division's recommendations begins with the string of corporate scandals that began to come to light in 2001 and 2002 and triggered a crisis in investor confidence. These events led to the enactment of a broad set of sweeping reforms in the Sarbanes-Oxley Act.

In response to Sarbanes-Oxley, and as directed by the Congress, the Commission swiftly implemented new rules that were true to the Act's intent. These rules have done their job. But the requirements regarding internal control over financial reporting under Section 404 of Sarbanes-Oxley probably have posed the single biggest challenge to companies under the Act and have imposed the greatest costs.

When we first adopted these requirements in 2003, the Commission knew that companies would need a significant amount of time to prepare to comply with them. The Commission approved a lengthy transition period for larger public companies, instead of the customary 30 day period. And we provided an even longer transition period for smaller companies. In the intervening months since initial adoption of these requirements, we have adjusted the compliance dates on two occasions. Today we will consider continuing the grace period for smaller companies.

At the same time as the implementation of Sarbanes-Oxley, the Commission was seeking faster reporting by larger companies, known as "accelerated filers." Larger companies were hit with a bit of a double-whammy - at the same time companies had to comply with new audit procedures and add a significant amount of new disclosure to their quarterly and annual reports, accelerated filers also had to file these reports faster.

Despite their increased audit and disclosure obligations, almost all accelerated filers have been able to file their periodic reports on time under the accelerated filing deadlines as they exist today. While we recognize it has not been easy, periodic and current reporting has become more extensive and is provided more quickly. Today we will consider the final step of the phase-in of the filing deadlines for accelerated filers.

The Division of Corporation Finance is presenting both of the releases to further investor protection in a thoughtful manner.

In the case of compliance deadlines for non-accelerated filers under Section 404 of Sarbanes-Oxley, earlier this year, accelerated filers began to file reports on internal controls over financial reporting for the first time. Filers currently required to comply with the internal control requirements comprise approximately 99% of the market capitalization of U.S. public companies. There is no question in my mind but that the application of the requirements of Section 404 to larger companies has tightened internal controls, improved the quality of financial reporting and benefited investors.

At the same time, when it comes to smaller companies in particular, the Commission and its staff have received and continue to receive comments and additional information regarding the framework for evaluation of internal control for smaller companies and the cost of implementation, in particular information that was not available to the Commission during its earlier consideration of these requirements.

Also, at the staff's request, a task force of the Committee of Sponsoring Organizations, known as COSO, is working on a project that is intended to provide further guidance as to the framework for internal control for smaller companies. It is expected to produce an exposure draft shortly. And the Commission's Advisory Committee on Smaller Public Companies has recommended a delay in implementation and is evaluating the Section 404 internal control requirements for smaller companies.

All of these developments together have raised issues regarding the framework for evaluation of internal control for smaller companies, particularly non-accelerated filers - those issuers that comprise the remaining 1% of the market capitalization of U.S. public companies. Under our current compliance deadline non-accelerated filers are at, or past, the point of beginning to incur costs to comply. The goal of investor protection would not be well served if we impose Section 404 requirements for non-accelerated filers when there are issues as to the best way to implement these requirements for those companies and where costs and burdens may outweigh benefits.

Being attentive to the different circumstances of certain companies, however, does not mean failing to apply the law. The question is how to apply it. The challenge is to achieve the law's objective of sound internal controls, highly accurate financial statements, and quality audits while at the same time making compliance consistent with best practices and overall sound management of shareholder dollars. The Division is recommending deferral of the implementation of the Section 404 requirements for smaller companies for twelve months to provide us with more time to get it right.

The Division is also recommending that we take this opportunity to formally solicit public comment on a number of issues concerning smaller public companies' compliance with the internal control requirements. The staff believes these comments would assist us in our ongoing consideration of the application of Section 404 to smaller companies and in any future proposals regarding our rules under Section 404 that we might make after providing formal notice and an additional opportunity for public comment.

In the case of the proposed adjustments to the filing deadlines for annual and quarterly reports for accelerated filers, an appropriate balancing of the need for information to be provided rapidly to markets and investors against the need that companies be given sufficient time to ensure that the information is accurately prepared and adequately reviewed suggests that in some cases the current filing deadlines not be further accelerated. Therefore the Division is recommending that the filing deadline for quarterly reports for all accelerated filers be maintained at 40 days after quarter-end, rather than being reduced to 35 days. In addition, the Division is recommending that the filing deadline for annual reports for a new class of large accelerated filers be reduced to the next step of 60 days after year-end, while the deadline for other accelerated filers be maintained at 75 days after year-end.

The Commission's willingness to consider these measured actions in no way reflects any desire to back away from either the letter or the spirit of the Sarbanes-Oxley requirements or any of the other important enhancements made to the Exchange Act disclosure requirements in recent years. Many of these enhancements strengthened the foundation for the recently adopted securities offering reform amendments. More broadly, they have helped to strengthen the U.S. securities markets. Our consideration of these matters today reflects our willingness to continually monitor the impact of our rules.

I would like to thank the staff in the Division of Corporation Finance for their hard work on these proposals, particularly Alan Beller, Paula Dubberly, Betsy Murphy, Sean Harrison, and Katherine Hsu, as well as their colleagues in the Offices of Chief Accountant, General Counsel, and Economic Analysis, who provided such valuable assistance.


Modified: 09/23/2005