Drama! Intrigue! Congress and Section 404!

Section 404 of the Sarbanes-Oxley Act has been in the legislative whirlwind this week.

Two amendments to delay or even rescind Section 404 for many companies came before the House Financial Services Committee on Wednesday, a surprise move that left investor advocates fulminating to anyone who would listen. One amendment to postpone Section 404(b) until 2011 for non-accelerated filers did pass on a voice vote, and will come before the full committee for a roll-call vote on Nov. 4.

The amendment, offered by Rep. Carolyn Maloney, D-N.Y., would require separate studies by the Government Accountability Office and the Securities and Exchange Commission to evaluate the costs and benefits of complying with Section 404(b) on issuers who aren't accelerated or large accelerated filers—that is, the non-accelerated filers who have been excused from compliance for years already. Those studies would include recommendations, administrative reforms, and legislative proposals to reduce compliance burdens on those issuers and to determine the success of the SEC's measures to limit the cost of compliance on smaller issuers.

The Maloney amendment would require separate reports by both agencies to Congress by June 1, 2010. Section 404(b) wouldn't become effective for non-accelerated filers before the results of the report are delivered, and in no case before June 1, 2011.

A separate amendment, offered by Rep. John Adler, D-N.J., would have gone even further: exempting all companies with less than $700 million in market capitalization from Section 404(b), which would include many filers already complying with it. That idea, however, failed on a voice vote on Wednesday, although it too will come to a roll-call vote next week as a formality.

The moves to provide more SOX relief come on the heels of the SEC's Oct. 2 announcement that it would delay Section 404(b) for small companies until fiscal years ending on or after June 15, 2010. That delay—which the SEC has firmly said will be the last—came at the same time the SEC published its study on the costs of Section 404 compliance.

Both amendments were slipped into legislative work the Financial Services Committee was doing to mark up the Investor Protection Act, HR 3817. Work on that bill is scheduled to resume Nov. 4.

Investor groups quickly voiced their opposition to the amendments in an Oct. 26 letter to several key members of Congress. Signed by leaders from the Council of Institutional Investors, the Consumer Federation of America, the American Association of Individual Investors, and the CFA Centre for Financial Market Integrity, the letter opposes any effort to further defer or exempt any public companies from the internal control requirements of Section 404, which they say "would do a grave disservice to investors whose trust in the markets is an essential ingredient in any financial recovery."

"It is our view that the Section 404(b) requirements under SOX provide significant benefits to investors, are valuable regardless of a company's size and represent an appropriate use of a company's resources given the importance a strong system of internal controls has in producing reliable financial reporting," the letter states.

Meanwhile, as Compliance Week previously reported, a separate bill, introduced this month by Rep. Scott Garrett (R-N.J.) dubbed the "Small Business SOX Compliance Relief Act" would permanently exempt non-accelerated filers from the reporting requirements of Section 404(b).