The other day I pondered whether the improbable ascendancy of Sen. Scott Brown, R-Mass., might delay or otherwise thwart Democrats' plans to overhaul financial regulation. Let's not forget one other niche of corporate compliance where Brown's arrival as the 41st Republican senator might have serious consequences.
He might allow the dreaded Section 404(b) of Sarbanes-Oxley to take effect on small filers, at long last.
Think about it: Last fall the Securities and Exchange Commission gave non-accelerated filers a final warning that compliance with Section 404(b), which requires public companies to get an outside auditor's review of internal controls, must start with annual reports filed for fiscal years ending on or after June 15, 2010, period. The House of Representatives then passed its massive regulatory overhaul bill in December, specifically exempting non-accelerated filers from Section 404(b) permanently. For that exemption to become law, however, it must be included in regulatory overhaul legislation approved by the Senate—and Brown's arrival has just made passage of Senate legislation much less likely.
The Senate's reform legislation nominally exists as a draft bill circulated by Christopher Dodd, chairman of the Senate Banking Committee. That bill doesn't even include a Section 404(b) exemption, and it's been pretty much dead since Dodd unveiled it in November anyway. All indicators are that the Senate will spend its time bickering over curbs to the power of the Federal Reserve and whether to include creation of a Consumer Financial Protection Agency in the bill, not a Section 404(b) exemption. With Brown giving the Republicans the power to filibuster any final bill, and Dodd able to stand his ground since he's not seeking re-election, we can all expect that bickering to take lots of time.
Like, say, beyond the June 15 compliance deadline set by the SEC that's still tick-tocking away. At the Securities Regulation Institute annual conference I've been attending this week, several speakers guessed that reform legislation might not happen this year at all.
After all, even if a Section 404(b) exemption gets inserted into the bill, and Republicans settle their differences with Dodd, and the Senate reconciles its bill with the House bill, and the 404(b) exemption survives that process, and both chambers then vote in favor of the full bill, and the president signs it into law—all this assumes Washington doesn't have other demands on its time, like starting over with healthcare legislation, or cutting the deficit, or running for re-election.
This makes me wonder whether the SEC might end up granting another extension on compliance after all. Yes, that would be a huge turnaround from its previous statements; Chairman Mary Schapiro clearly wants to extend Section 404(b) to all filers and move on with life, as do her two fellow Democratic appointees to the Commission. But consider a world where non-accelerated filers must cough up auditors' attestations about internal controls for some reporting periods (which they'll flunk anyway, since none of them have been preparing for it), and then that requirement goes away after Congress finally does pass an exemption. How do investors determine that disclosed weaknesses in internal controls were ever resolved?
Let's take it one step further. What if a permanent exemption arrives on Oct. 1, say, and some filers have made 404(b) disclosures but others dodged the bullet? Could that latter group ever compare itself to companies in the former, since they now have different standards of scrutiny over their internal controls? What if there's a restatement, and the lawsuits start flying? I'd welcome any guesses from securities lawyers out there who think about these things.
Of course, this might all be much ado about nothing, if the Senate moves forward on reform promptly. But as Republicans have been gleefully noting these last two days, now that Scott Brown is with them, they can stop anything from moving forward at all.
- Thought Leadership