The SEC released a study that was under Section 989G(b) of the Dodd-Frank Wall Street Reform and Consumer Protection Act.  The Dodd Frank Act required the SEC to conduct a study to determine how the SEC could reduce the burden of complying with Section 404(b) of the Sarbanes-Oxley Act of 2002 for companies whose market capitalization is between $75 and $250 million, while maintaining investor protections for such companies.  Section 989G(b) also provides that the study must consider whether any methods of reducing the compliance burden or a complete exemption for such companies from Section 404(b) compliance would encourage companies to list on exchanges in the United States in their initial public offerings.

The study addressed the auditor attestation requirement with respect to an issuer’s internal control over financial reporting, or ICFR, pursuant to Section 404(b) as required by Section 989G(b) of the Dodd-Frank Act.  It did not address management’s responsibility for reporting on the effectiveness of ICFR pursuant to Section 404(a) of the Sarbanes-Oxley Act.

The SEC Staff believes that the existing investor protections for accelerated filers to comply with the auditor attestation provisions of Section 404(b) should be maintained (i.e., no new exemptions). There is strong evidence that the auditor‘s role in auditing the effectiveness of ICFR improves the reliability of internal control disclosures and financial reporting overall and is useful to investors. The Staff did not find any specific evidence that such potential savings would justify the loss of investor protections and benefits to issuers subject to the study, given the auditor’s obligations to perform procedures to evaluate internal controls even when the auditor is not performing an integrated audit.  

The Staff also concluded that  while the research regarding the reasons for listing decisions is inconclusive, the evidence does not suggest that granting an exemption to issuers that would expect to have $75-$250 million in public float following an IPO would, by itself, encourage companies in the United States or abroad to list their IPOs in the United States.  The Staff acknowledged that the reasons a company may choose to undertake an IPO are varied and complex. The reasons are often specific to the company, with each company making the decision as to whether and where to go public based on its own situation and the market factors present at the time. The costs associated with conducting an IPO and becoming a public company no doubt factor into the decisions and may be particularly challenging for smaller companies.   However, the Dodd-Frank Act already exempted approximately 60% of reporting issuers from Section 404(b), and the Staff does not recommend further extending this exemption.

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