Yesterday’s bicameral introduction of a bill to exempt small companies from auditing requirements in the Sarbanes-Oxley corporate-governance law was long in the works, but Republicans looking to put pressure on the Securities and Exchange Commission have now secured bipartisan support.
Rep. Gregory Meeks (D-N.Y.) joined Reps. Tom Feeney (R-Fla.), Pete Sessions (R-Texas) and Candice Miller (R-Mich.) to roll out their plan for giving smaller public companies relief. Business groups have lobbied for easing Sarbanes-Oxley’s Section 404, which requires outside auditors to approve internal financial controls at all companies, since the law passed in 2002 as a reaction to the Enron and WorldCom scandals.
“We are not gutting Sarbanes-Oxley,” said Meeks, who added that he approached the tweaking of Section 404 “not as a Democrat or Republican, but as an American.”
Meeks’s party affiliation nonetheless will help Feeney and his co-sponsors attract regulatory momentum for their legislation, which the lawmakers acknowledged is intended as much to push the SEC as it is to pass Congress. The commission last month received the long-awaited report of its advisory committee on smaller public companies, wrapping up months of testimony from businesses of all sizes that have struggled with the high costs of compliance.
“We should not be running off and looking at every single audit trail or every single thing that might be done in a company,” Miller said. To that end, the new bill would allow companies with less than $700 million of market capitalization, less than $125 million of product revenue or fewer than 1,500 shareholders to opt out of Section 404 rules.
The House members and Senate sponsors of a counterpart bill, including Sens. Jim DeMint (R-S.C.), Mel Martinez (R-Fla.) and John Ensign (R-Nev.), pointed to statistics showing that the cost of completing a Section 404 audit has chilled market growth and led new public companies to list on overseas stock exchanges rather than in the United States.
“Companies midsize or smaller need to have a choice,” Feeney said. “Corporations that want to brag about being 404-compliant can do that” under the bill by electing to participate. Those businesses that opt in will face fewer external audits after their first year of submitting to 404, according to the House bill, though that provision is not in the Senate version.
Feeney and his co-sponsors were open about their desire to push the SEC toward quicker exemptions for smaller companies, many of which have been granted a temporary reprieve from 404 since Sarbanes-Oxley took effect.
The SEC declined to comment on the nature or future of Sarbanes-Oxley. According to its panel on smaller public companies, exempting companies with less than $787 million in market capitalization — a level slightly higher than yesterday’s plan — would affect more than 78 percent of all publicly traded U.S. companies.
Another hurdle for the bill could be the vested interest of Sarbanes-Oxley’s two powerful namesakes, Senate Banking Committee ranking member Sen. Paul Sarbanes (D-Md.) and House Financial Services Committee Chairman Michael Oxley (R-Ohio). While Oxley has acknowledged the cost burden of Section 404, he has called for a regulatory rather than legislative solution, and Sarbanes has dismissed businesses’ calls for relief.
Despite calls to hold off until next year, when both Sarbanes and Oxley will have retired, one financial-services lobbyist looking forward to yesterday’s bill said the time is ripe.
“It probably won’t happen until next year, but Congress moves slowly so you’ve got to start the dialogue now,” the lobbyist said. “Feeney has great respect for Oxley, but why not? It’s a burden now, it’s a cost now, so let’s start discussing it now.”
Oxley’s office did not return a request for comment by press time.
Trade associations from a variety of industry sectors are eagerly backing yesterday’s bill. The Mortgage Bankers Association, Biotechnology Industry Association, Financial Services Forum, Independent Community Bankers of America, and America’s Community Bankers already have sent letters of support to Feeney, DeMint and their allies.
At a Financial Services Committee hearing this month, Cox appeared sympathetic to Section 404’s critics but offered few hints as to how the commission would act on last month’s recommendations from its smaller public companies panel. Such action, he said, would likely come in the next few months.
Cox called Section 404 “a very important provision. We aim to apply it in a sensible way that squeezes out the maximum amount of shareholder benefit and investor protection at the lowest possible price.”