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SEC considers SOX delay for SMBs

The U.S. Securities and Exchange Commission will consider recommendations that would push compliance into 2007 for smaller public companies.

Smaller publicly traded companies will get their first shot at an extended deadline for Sarbanes-Oxley compliance Wednesday, when the U.S. Securities and Exchange Commission decides whether it will consider proposals both to expand the definition of a "small" company and to push back the compliance deadline for smaller public companies by one year, to July 15, 2007.

The Sarbanes-Oxley Act of 2002, or SOX, requires public companies to document their financial controls and prove they are reliable and accurate. It is aimed at preventing corporate fraud. However, many companies have complained the costs of compliance outweigh the benefits of increased transparency.

The proposal to change the definition of a small company would increase it from one with a market capitalization of $75 million to one with a market cap of $700 million. In essence, the proposed change would exempt the smallest 80% of U.S. public companies from SOX compliance and its associated costs, while keeping $93 out of every $100 invested in the stock market under the protection of SOX regulations.

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If the SEC approves the proposals for further consideration, they will be posted for public comment for roughly 40 to 60 days and voted on by the commission at a later date.

SEC spokesman John Nester said the commission is considering the deadline extension because of the uncertain cost of compliance. "The cost for smaller companies is not yet known and [it's much less unknown] whether it would be effective for investor protection," Nester said. "Until those costs and their effectiveness are known, it makes sense to delay implementation."

The Financial Executives International (FEI), an association of 15,000 financial officers based in Florham Park, N.J., has calculated that it costs a company with revenue of $25 million to $99 million more than $800,000 to comply with SOX. The FEI has also calculated that these companies on average spend a higher percentage of sales revenue on compliance, thus incurring a greater hardship given their staffing and resources. "The real reason for the additional year, instead of July 15, 2006, to July 15, 2007, is that we think that the rules will change," said Garry Lowenthal, a CFO at New Hope, Minn.-based Viper PowerSports Inc. and an executive committee member of FEI, which lobbied the SEC for the delay.

Lowenthal was referring to new SEC chairman Christopher Cox and speculation that Cox may relax some SEC regulations. Lowenthal said he believes easing some regulations is appropriate to serve shareholders, who would rather see that $800,000 spent on building the business.

"[Their attitude is,] 'Do what you have to do for internal auditing and controls, but we'd rather have that money spent for growing the company,'" Lowenthal said. The proposals before the SEC are staff recommendations based on resolutions submitted by the SEC's Advisory Committee on Smaller Public Companies, a group of 21 executives from publicly traded SMBs and auditing companies.

In August, that committee solicited public comment on the impact of securities regulations on smaller companies through a 29-question survey. The committee has also received testimony from small public company experts and executives. David Bochnowski, chairman and CEO of $480 million Munster, Ind.-based NorthWest Indiana Bancorp and a representative of America's Community Bankers, a trade association for more than 1,200 community banks, provided a typical example of the testimony. He told the committee that compliance costs for Section 404 of SOX have caused his bank to consider giving up its SEC registration, according to an SEC transcript of his Aug. 9 testimony.

The advisory committee is urging Cox to move quickly on their recommendations."The committee believes that prompt commission action is advisable to prevent a significant misuse of funds by smaller public companies in the immediate future," according to an Aug. 18 letter the committee addressed to Cox.

Cal Braunstein, CEO and executive director of research for Westport, Conn.-based research firm Robert Frances Group, said a postponement would be helpful for smaller businesses, but that they shouldn't count on changed regulations. "The feedback I'm getting from most clients is that's not what's happening today," Braunstein said. With the first year of SOX compliance for larger companies already past, he said, "the bar is being raised."

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