From: Mike Natale
To the SEC Advisory Committee on Small Public Companies:
It is welcome news to see the Advisory Committee on Small Public Companies take a step in the right direction with their proposed recommendations to modify the requirements of Section 404 of the Sarbanes-Oxley Act (SOX).
FirstService Corporation is one of approximately 150 Canadian companies that are inter-listed on the New York and NASDAQ stock exchanges and, as foreign private issuers, are subject to the requirements of Section 404 of SOX. Although we are one of the smaller of these companies with a market capitalization of about $750 million, these Canadian companies do represent many of the larger publicly traded companies in Canada. Within the past several weeks, the Canadian Securities Administrators have also released a revision to their original draft version of SOX for fiscal years commencing in 2007. Although there remains a requirement for the CEO and CFO to certify that they have evaluated the effectiveness of their company's internal control over financial reporting, this new Canadian regulation does not require external auditor attestation for any Canadian companies, regardless of size. Instead, the approach is similar to including financial reporting controls certification within the current SOX Section 302 certification.
This Canadian approach recognizes the definite benefits derived from a company's evaluation and certification of its financial reporting controls without having them incur the added significant costs associated with obtaining external auditor attestation. Now, a much more risk based and company level control approach can be taken by Canadian companies in order to comply with Canadian SOX. This approach also recognizes the direction being taken by the SEC Advisory Committee since many of the publicly traded companies in Canada can be considered small cap companies.
Given the foregoing, it is important for the SEC to recognize that there will now be a number of Canadian companies larger than FirstService Corporation and other inter-listed Canadian companies that will not be subject to the external auditor attestation requirements of CEO and CFO controls certification regulations. This places the inter-listed Canadian companies at a distinct disadvantage to their Canadian listed only counter-parts, due to the additional burden of internal and external audit costs of complying with US regulations.
In light of these new Canadian regulations, we ask the Advisory Committee and the SEC to re-consider setting the market capitalization threshold for mid cap companies at a high enough level, more than what is currently being proposed ($1.5 billion), in order to take into consideration the regulatory environments of foreign capital markets in which the inter-listed (foreign) companies operate, particularly that of Canada. In addition, we recommend that the revenue thresholds being proposed be eliminated altogether and not be used in determining company size for purposes of defining micro and small cap companies. In many instances, annual revenue does not bear any relation to a company's market capitalization, the latter being the only relevant factor to consider when assessing shareholder or capital markets risk - which SOX is meant to address.
Thank you for your consideration.