The Securities and Exchange Commission on May 9 voted to propose amendments to the accelerated filer and large accelerated filer definitions.

The proposed amendments, according to the Commission, would “reduce costs for certain lower-revenue companies by more appropriately tailoring the types of companies that are categorized as accelerated and large accelerated filers while maintaining effective investor protections.”

As a result of the proposed amendments, smaller reporting companies with less than $100 million in revenues would not be required to obtain an attestation of their internal control over financial reporting (ICFR) from an independent outside auditor.

The proposed amendments, however, would not change key protections from the Sarbanes-Oxley Act of 2002, such as independent audit committee requirements, CEO and CFO certifications of financial reports, or the requirement that companies continue to establish, maintain, and assess the effectiveness of their ICFR.

“The proposed rules build on the JOBS Act of 2012 and are aimed at a subset of smaller companies where the additional requirement of an ICFR auditor attestation may not be an efficient way of benefiting and protecting investors,” SEC Chairman Jay Clayton said in a statement. “Investors in these lower-revenue companies will benefit from more tailored control requirements. Many of these smaller companies—including biotech and health care companies—will be able to redirect the savings into growing their companies by investing in research and human capital.”

The following is from an SEC “fact sheet” regarding the rule:

  • The SEC proposed amendments to Exchange Act Rule 12b-2 that would revise the “accelerated filer” and “large accelerated filer” definitions.
  • On June 28, 2018, the Commission adopted amendments to the smaller reporting company definition to expand the number of companies that benefit from scaled disclosure requirements. Prior to these amendments, the reporting regimes for SRCs and non-accelerated filers were aligned.
  • As a result of the amendments, however, some issuers are now categorized as both SRCs and accelerated or large accelerated filers. These SRCs, among other things, are required to comply with the requirement that an outside independent auditor attest to the effectiveness of their internal control over financial reporting.
  • When the Commission revised the SRC definition, the Chairman directed the staff to formulate recommendations to the Commission for possible rule amendments that, if adopted, would appropriately redefine the issuers that are designated as accelerated filers and thereby promote capital formation.
  • As part of the staff’s consideration, the Chairman directed the staff to consider, among other things, the historical and current relationship between the SRC and accelerated filer definitions as well as how the rule change could reduce compliance costs for certain registrants, while maintaining appropriate investor protections.

Proposed amendments

The proposed amendments would:

  • Exclude from the accelerated and large accelerated filer definitions an issuer that is eligible to be an SRC and had no revenues or annual revenues of less than $100 million in the most recent fiscal year for which audited financial statements are available;
  • Increase the transition thresholds for accelerated and large accelerated filers becoming a non-accelerated filer from $50 million to $60 million and for exiting large accelerated filer status from $500 million to $560 million; and
  • Add a revenue test to the transition thresholds for exiting both accelerated and large accelerated filer status.

The proposal will be subject to a 60-day public comment period.

Among those weighing in on the proposal is the Center for Audit Quality and Executive Director Julie Bell Lindsay.

“U.S capital markets are the largest and most attractive in the world, and this success is thanks in large part to effective and robust investor protections,” she says. “Numerous studies and surveys have shown that the Sarbanes-Oxley Act’s provisions on ICFR bolster investor confidence, support capital formation, and strengthen our financial markets.”

CAQ refers to these studies in a new version of its Guide to Internal Control over Financial Reporting, released last week.

“Given the importance of ICFR in our system of investor protection, all stakeholders in our financial reporting system should have a strong understanding of how ICFR works, different ICFR roles and responsibilities, and how ICFR benefits companies, shareholders, capital markets, and the overall economy,” Lindsay says.