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SEC Chairman Clayton Comments on Proposed Amendments to Sarbanes-Oxley

Good morning. This is an open meeting of the U.S. Securities and Exchange Commission, under the Government in the Sunshine Act. Our only item on the agenda today is a recommendation from the Division of Corporation Finance to propose amendments to the definitions of “accelerated filer” and “large accelerated filer.”

Once again, the measured, thoughtful work of the Division of Corporation Finance shines through.

The matter before us today can be fairly characterized as a retrospective review of one component of the Sarbanes-Oxley Act of 2002. In this regard, I’ll take a step back and note that there are many components of Sarbanes-Oxley. And, with the benefit of hindsight, it is clear many of the legislation’s key elements, like the independent audit committee and enhanced auditor independence requirements, have made our markets what they are today—a place where Main Street investors have a high degree of confidence in the quality of the financial statements and other financial disclosures they receive from our public companies.

Today, we are considering the breadth of application of Section 404(b) of Sarbanes-Oxley. In particular, we are considering the extent to which 404(b) should apply to a subset of our smaller reporting companies.

Here, I note that we are not considering any change to the Sarbanes-Oxley’s requirements that apply to our smaller reporting companies with respect to independent audit committees, CEO and CFO certifications of financial reporting, or the requirement that they continue to establish, maintain, and assess the effectiveness of their internal control over financial reporting (ICFR).

Again, no changes.

In particular, our proposed rules are aimed at that subset of issuers where the added step of an ICFR auditor attestation is likely to add significant costs and is unlikely to enhance financial reporting or investor protection. The proposed amendments are intended to reduce costs without harming investors for certain smaller public companies and, importantly, encourage more companies to enter our public markets.

As Director Hinman and I have often noted, companies that enter our public markets—and adopt our rigorous governance and reporting requirements, including those requirements I mentioned previously—become better companies and offer our Main Street investors a broader array of investment opportunities.

The proposed amendments would tailor the types of companies subject to the accelerated and large accelerated filer definitions by excluding a company that is eligible to be a “smaller reporting company” and had annual revenues of less than $100 million in the most recent fiscal year. This is a very tailored approach. As a result of the amendments, these lower-revenue companies, that often are seasoned companies with relatively straightforward business models, would not be required to have their ICFR attested to by an outside independent auditor.

Adding some additional perspective, I note that retrospective review in this area is not new and, in fact, it has in the past provided benefits for our public capital markets and our Main Street investors. Ten years after Sarbanes-Oxley, Congress determined that it was appropriate to tailor the application of Section 404(b) of Sarbanes-Oxley. Congress created a new category of companies, “emerging growth companies” or EGCs, and determined that EGCs should not be required to have their ICFR attested to by an independent auditor.[1] That is, Congress, itself engaging in retrospective review, recognized that the compliance costs of certain aspects of Sarbanes-Oxley requirements do not scale with the size of the business, and those incremental and recurring costs can deter smaller companies from accessing our public capital markets.

Today’s proposed amendments build on the guidance and experience Congress has provided us with EGCs over the last six years. Our work today also benefits from other measures that have strengthened financial reporting since Sarbanes-Oxley, including, in addition to the measures I noted previously, stronger audit standards for financial statement audits.

The proposed amendments are thoughtful and tailored in their scope. Notably, they encompass the types of companies whose representation in our public markets has disproportionally decreased over the years.[2] The lower-revenue companies affected by the proposed amendments generally have simpler financial statements. In fact, our economists do not expect that exempting these companies from the ICFR auditor attestation requirement would weaken the effectiveness of the ICFR or increase restatement rates compared to those companies that would remain accelerated filers.[3]

To be clear, from the investor perspective, the proposed amendments would also benefit our Main Street investors in these smaller, lower-revenue companies. As I noted previously, the incremental costs of the ICFR auditor attestation have a disproportionate impact on lower-revenue companies. Investors in these companies will benefit from tailored requirements that will save costs that companies would be able to re-direct into growing their companies by investing in productive areas such as research and human capital.

I want to commend the staff for their work on this proposal. Before I turn it over to Bill Hinman, the Director of the Division of Corporation Finance, for the staff’s presentation of the recommendation, I would like to thank my fellow Commissioners and their counsels for their efforts on these amendments. Also, I would like to acknowledge members of the staff that contributed to this effort:

  • From the Division of Corporation Finance: Bill Hinman, Betsy Murphy, Felicia Kung, John Fieldsend, Jennifer Zepralka, Amy Reischauer, Jenny Riegel, Michael Seaman, Kyle Moffatt, Craig Olinger, Lindsay McCord, Kathy Hsu, and Pearl Crawley.
  • From the Division of Economic and Risk Analysis: S.P. Kothari, Chyhe Becker, Tara Bhandari, Mariesa Ho, Cindy Alexander, and Bridget Farrell.
  • From the Office of the General Counsel: Bob Stebbins, Bryant Morris, Dorothy McCuaig, and Shehzad Niazi.
  • From the Office of the Chief Accountant: Wes Bricker, Marc Panucci, Giles Cohen, Duc Dang, Ying Compton, Louis Collins, Ryan Wolfe, and Emily Fitts.
  • From the Division of Investment Management: Brian Johnson, Mark Uyeda, Jenson Wayne, and Alison Staloch.

Now I will turn it over to Bill Hinman for the staff’s recommendation.

ENDNOTES

[1] Jumpstart Our Business Startups (“JOBS”) Act of 2012, Pub. L. No. 112-106, Sec. 103, 126 Stat. 306 (2012). Title I of the JOBS Act amended Sarbanes-Oxley Act Section 404(b) to exempt EGCs from the ICFR auditor attestation requirement.

[2] The number of companies listed on major exchanges with market capitalizations below $700 million decreased by about 65%, and the number of companies with less than $100 million in revenue decreased by about 60% from 1998 to 2017.

[3] Certain banks, even if they are not accelerated or large accelerated filers, are required under banking regulations to have their auditor attest to, and report on, management’s assessment of the effectiveness of the bank’s ICFR and reporting procedures. Our proposed amendments would not impact those requirements.

This statement was delivered on May 9, 2019, by Jay Clayton, chairman of the U.S. Securities and Exchange Commission, at the Open Meeting on Proposed Amendments to Sarbanes Oxley 404(b) Accelerated Filer Definition.