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Senate Continues Debate on SOX Rollback Legislation

Compliance Week | March 19, 2012

The Senate will continue debate this week on whether to roll back corporate governance obligations for a large swath of companies planning to go public, despite criticism from investor advocates that the measures will undo a decade's worth of progress to improve financial reporting.

Senate Majority Leader Harry Reid scheduled further debate on Monday for H.R. 3606, the legislation passed by the House earlier this month that exempts many newly public companies from all manner of compliance obligations under the Sarbanes-Oxley and Dodd-Frank acts. The Senate had been moving to pass idential legislation last week before outcry prompted opponents of the bill to file amendments that would narrow the group of companies eligible for the exemptions—although most the exemptions themselves remain intact, and seem likely to become law in some form.

Whether those narrowing amendments will survive into the final bill, and when the Senate might vote on the final bill itself, remain an open question.

The legislation orginally passed in the House created a new class of public issuer, the emerging growth company, that would be exempt from compliance obligations such as shareholder advisory votes on executive pay packages, the external auditor's review of internal controls as stipulated under Section 404(b) of SOX, and similar checks on corporate misconduct. Emerging growth companies would be defined as any company with less than $1 billion in revenue and less than $700 million in market capitalization, and they would maintain their “EGC” status for five years after filing an initial public offering.

The Senate had been planning to pass an identical version of the legislation, sponsored by Sen. Charles Schumer, D-NY, until investor advocates raised alarms in Washington. Sen. Carl Levin, D-Mich., proposed amendments last Thursday cutting the threshold for EGCs to $350 million in revenue, and that is where the palace intrigue stands as of now.

The governance rollback legislation has to the usual lobbyist voices in Washington taking their usual stances, such as the U.S. Chamber of Commerce praising the bill and the Consumer Federation of America opposing it. Mary Schapiro, chairman of the Securities and Exchange Commission, has also waded into the fray, sending a letter to the heads of the Senate Banking Committee asking them to add Section 404(b) compliance back into the bill and lowering the $1 billion threshold.