SEC Gives Smaller Companies An Extra Year To Comply With Internal Control Rules

Tuesday, November 1, 2005 - 01:00

The U.S. Securities and Exchange Commission has given certain companies with a public float of less than US$75 million an extra year to comply with the internal control rules under section 404 of the Sarbanes-Oxley Act of 2002 (S-Ox). Section 404 of S-Ox requires companies to include in their annual reports filed with the SEC ( a ) an internal control report prepared by management, and ( b ) a corresponding audit report issued by the independent auditor. Depending on a company's size and SEC reporting history, it must meet one of three deadlines for complying with the internal control reporting rules.

1. Accelerated Filers

U.S. companies that are "accelerated filers" are already filing internal control reports. They became subject to the rules beginning with fiscal years ending on or after November 15, 2004, and the SEC's latest extension does not affect them. An accelerated filer is a company that, as at the end of its last fiscal year, met the following three criteria:

( a ) it had a public float of US$75 million or more;

( b ) it had been subject to the SEC's reporting requirements for 12 months; and

( c ) it had filed at least one annual report under the Securities Exchange Act of 1934.

2. Foreign Private Issuers

Foreign private issuers must file internal control reports beginning with fiscal years ending on or after July 15, 2006 if they meet the three criteria listed above as at the end of their last fiscal year.

3. Non-Accelerated Filers And Other Foreign Private Issuers

U.S. companies that are not accelerated filers, as well as foreign private issuers that do not meet the three-pronged test, must file internal control reports beginning with fiscal years ending on or after July 15, 2007.

Application Of Sarbanes-Oxley's Internal Control Rules In Canada

A recently proposed Canadian rule would, if adopted, essentially import the internal control rules of S-Ox into Canada. The Canadian compliance dates would be phased in on the basis of a company's market capitalization. Canadian cross-border companies will become subject to the U.S. rules first, as Canadian securities regulators recently stated that Canada's rules will not be effective for fiscal years ending before June 30, 2007.

For more information, contact Andrew J. Beck at abeck@torys.com or Joshua Goldstein at jgoldstein@torys.com. Mr. Beck is a Partner in the Corporate Department of Torys LLP in New York. His practice focuses on public and private financing, corporate governance, and mergers and acquisitions. Mr. Goldstein is an Associate in the Corporate Department of Torys LLP in New York. His practice focuses on securities offerings and complex corporate transactions.