[Federal Register Volume 73, Number 128 (Wednesday, July 2, 2008)]
[Rules and Regulations]
[Pages 38094-38100]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E8-14942]



[[Page 38093]]

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Part IV





Securities and Exchange Commission





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17 CFR Parts 210, 228, 229 and 249



Internal Control Over Financial Reporting in Exchange Act Periodic 
Reports of Non-Accelerated Filers; Final Rule

  Federal Register / Vol. 73, No. 128 / Wednesday, July 2, 2008 / Rules 
and Regulations  

[[Page 38094]]


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SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 210, 228, 229 and 249

[Release Nos. 33-8934; 34-58028; File No. S7-06-03]
RIN 3235-AJ64


Internal Control Over Financial Reporting in Exchange Act 
Periodic Reports of Non-Accelerated Filers

AGENCY: Securities and Exchange Commission.

ACTION: Final rules.

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SUMMARY: We are adopting amendments to temporary rules that were 
published on December 21, 2006, in Release No. 33-8760 [71 FR 76580]. 
Those temporary rules require companies that are non-accelerated filers 
to include in their annual reports, pursuant to rules implementing 
section 404(b) of the Sarbanes-Oxley Act of 2002, an attestation report 
of their independent auditors on internal control over financial 
reporting for fiscal years ending on or after December 15, 2008. Under 
the amendments, a non-accelerated filer will be required to file the 
auditor's attestation report on internal control over financial 
reporting when it files an annual report for a fiscal year ending on or 
after December 15, 2009.

DATES: Effective Dates: The amendments are effective September 2, 2008, 
except Form 10-QSB will be effective from September 2, 2008 to October 
31, 2008; Sec.  228.308T and Form 10-KSB will be effective from 
September 2, 2008 to March 15, 2009; and Sec. Sec.  210.2-02T and 
229.308T, Form 20-F, Form 40-F, Form 10-Q, and Form 10-K will be 
effective from September 2, 2008 to June 30, 2010.

FOR FURTHER INFORMATION CONTACT: Sean Harrison, Special Counsel, Office 
of Rulemaking, Division of Corporation Finance, at (202) 551-3430, U.S. 
Securities and Exchange Commission, 100 F Street, NE., Washington, DC 
20549-3628.

SUPPLEMENTARY INFORMATION: We are adopting amendments to the following 
forms and temporary rules: Rule 2-02T of Regulation S-X,\1\ Item 308T 
of Regulations S-K\2\ and S-B,\3\ Item 4T of Form 10-Q,\4\ Item 3A(T) 
of Form 10-QSB,\5\ Item 9A(T) of Form 10-K,\6\ Item 8A(T) of Form 10-
KSB,\7\ Item 15T of Form 20-F,\8\ and Instruction 3T of General 
Instruction B.(6) of Form 40-F.\9\
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    \1\ 17 CFR 210-2.02T.
    \2\ 17 CFR 229.308T.
    \3\ 17 CFR 228.310T.
    \4\ 17 CFR 249.308a.
    \5\ 17 CFR 249.308b.
    \6\ 17 CFR 249.310.
    \7\ 17 CFR 249.310b.
    \8\ 17 CFR 249.220f.
    \9\ 17 CFR 249.240f.
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I. Background

    In February 2008,\10\ we proposed an extension of the section 
404(b) auditor attestation requirement for non-accelerated filers.\11\ 
This proposal followed an action we took in December 2006\12\ to extend 
the dates by which non-accelerated filers must begin to comply with the 
internal control over financial reporting (``ICFR'') requirements 
mandated by Section 404 of the Sarbanes-Oxley Act of 2002.\13\ 
Specifically, we postponed for five months, from fiscal years ending on 
or after July 15, 2007, to fiscal years ending on or after December 15, 
2007, the date by which non-accelerated filers must begin to comply 
with the management report requirement in Item 308(a) of Regulation S-
K.\14\ We also postponed to fiscal years ending on or after December 
15, 2008, the date by which non-accelerated filers must begin to comply 
with the auditor attestation report requirement in Item 308(b) of 
Regulation S-K.\15\ We indicated that we would consider further 
postponing the auditor attestation report compliance date after 
considering the anticipated revisions to the Public Company Accounting 
Oversight Board's (``PCAOB'') Auditing Standard No. 2 (``AS No. 2'').
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    \10\ See Release No. 33-8889 (February 1, 2008) [73 FR 7450].
    \11\ Although the term ``non-accelerated filer'' is not defined 
in our rules, we use it throughout this release to refer to an 
Exchange Act reporting company that does not meet the Rule 12b-2 
definition of either an ``accelerated filer'' or a ``large 
accelerated filer.''
    \12\ See Release No. 33-8760 (December 15, 2006) [71 FR 76580] 
(the ``2006 Release'').
    \13\ 15 U.S.C. 7262.
    \14\ 17 CFR 229.308(a). We effected the postponement, in part, 
by adding temporary Item 308T to Regulation S-K. We similarly added 
temporary Item 308T to Regulation S-B, but the Commission recently 
adopted amendments that will eliminate Regulation S-B effective 
March 15, 2009. See Release No. 33-8876 (December 19, 2007) [73 FR 
934].
    \15\ 17 CFR 229.308(b).
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    In the 2006 Release, we cited two primary reasons for deferring 
implementation of the auditor attestation report requirement for an 
additional year after implementation of the management report 
requirement. First, we stated that the deferred implementation would 
afford non-accelerated filers and their auditors the benefit of 
anticipated changes by the PCAOB to AS No. 2, subject to Commission 
approval, as well as any implementation guidance that the PCAOB issued 
for auditors of smaller public companies.
    Second, we expected a deferred implementation of the auditor 
attestation requirement to save non-accelerated filers the full 
potential costs associated with the auditor's initial attestation to, 
and report on, management's assessment of ICFR during the period that 
changes to AS No. 2 were being considered and implemented, and the 
PCAOB was formulating guidance specifically for auditors of smaller 
public companies. Public commenters previously have asserted that the 
ICFR compliance costs are likely to be disproportionately higher for 
smaller public companies than larger ones, and that the auditor's fee 
represents a large percentage of those costs.\16\
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    \16\ See, for example, letters of American Electronics 
Association, International Association of Small Broker-Dealers and 
Advisers, Small Business Entrepreneurship Council, and the Silicon 
Valley Leadership Group, Committee on Capital Markets Regulation on 
Release No. 33-8762 (December 20, 2006) [71 FR 77635], File No. S7-
24-06.
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    On June 20, 2007, we approved the issuance of interpretive guidance 
regarding management's report on ICFR\17\ and adopted rule 
amendments\18\ to help public companies strengthen their ICFR 
evaluations while reducing unnecessary costs. The interpretive release 
provided guidance for management on how to conduct an evaluation of the 
effectiveness of a company's ICFR. The guidance sets forth an approach 
by which management can conduct a top-down, risk-based evaluation of 
ICFR.
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    \17\ Release No. 33-8810 (Jun. 20, 2007) [72 FR 35324].
    \18\ Release No. 33-8809 (Jun. 20, 2007) [72 FR 35310]. The rule 
amendments, among other things, provided that an evaluation that 
complies with our interpretive guidance is one way to satisfy the 
annual ICFR evaluation requirement in Exchange Act Rules 13a-15(c) 
and 15d-15(c) [17 CFR 240.13a-15(c) and 240.15d-15(c)].
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    In addition, on July 25, 2007, we approved the PCAOB's Auditing 
Standard No. 5 (``AS No. 5''), which replaced AS No. 2. The new 
standard sets forth the professional standards and related performance 
guidance for independent auditors to attest to, and report on, 
management's assessment of the effectiveness of ICFR. Our management 
guidance, in combination with AS No. 5, is intended to make evaluations 
of ICFR and ICFR audits more effective and efficient by being risk-
based and scalable to a company's size and complexity.
    On February 1, 2008, we proposed a one-year extension of the 
Section 404(b)

[[Page 38095]]

auditor attestation requirement for non-accelerated filers in view of 
the fact that there were still some additional actions that the 
Commission and PCAOB intended to take with respect to implementation of 
the section 404 requirements, and of concerns expressed by some about 
the orderly and efficient implementation of the ICFR requirements.\19\
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    \19\ See, for example, the May 8, 2007, letter to Chairman 
Christopher Cox and Chairman Mark Olson from Senator John Kerry, 
Chairman, Senate Committee on Small Business and Entrepreneurship, 
and Senator Olympia Snowe, Ranking Member, Senate Committee on Small 
Business and Entrepreneurship, available at http://sbc.senate.gov/lettersout/070508-SEC-PCAOB-HearingFollowUp.pdf; hearing on 
``Sarbanes-Oxley Section 404: New Evidence on the Costs for Small 
Businesses,'' House Committee on Small Business (December 12, 2007); 
and the July 12, 2007, letter from Sharon Haeger, America's 
Community Bankers, on Release No. 34-55876 [72 FR 32340], File No. 
PCAOB 2007-02, available at http://www.sec.gov/comments/pcaob-2007-02/pcaob200702.shtml.
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    One of these actions is the PCAOB's issuance of final staff 
guidance on auditing ICFR of smaller public companies. On October 17, 
2007, the PCAOB published preliminary staff guidance that demonstrates 
how auditors can apply the principles described in AS No. 5 and 
provides examples of approaches to particular issues that might arise 
in the audits of smaller, less complex public companies.\20\ Topics 
discussed in the PCAOB's guidance include: entity-level controls, risk 
of management override, segregation of duties and alternative controls, 
information technology controls, financial reporting competencies, and 
testing controls with less formal documentation. The comment period on 
the PCAOB's guidance ended on December 17, 2007, and the PCAOB is 
working on the final guidance.
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    \20\ See ``An Audit of Internal Control that is Integrated with 
an Audit of the Financial Statements: Guidance for Auditors of 
Smaller Companies,'' (October 17, 2007), available at http://www.pcaobus.org.
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    Another action involves a study that we are undertaking to help 
determine whether our new management guidance on evaluating ICFR and AS 
No. 5 are having the intended effect of facilitating more cost-
effective ICFR evaluations and audits for smaller reporting companies. 
Our study plan includes gathering new data from a broad array of 
companies about the costs and benefits of compliance with the ICFR 
requirements. The study will pay special attention to those smaller 
companies that are complying with the ICFR requirements for the first 
time.
    One part of the study will consist of a web-based survey of all 
companies to which the section 404 requirements apply. Participation in 
this survey will be voluntary. Another part of the study will involve 
the Commission staff conducting in-depth interviews of a small number 
of interested parties. We are targeting the fall of 2008 for the 
initial release of findings.
    We have received letters from a total of 67 commenters on the 
proposal to further extend the section 404(b) auditor attestation 
requirement for non-accelerated filers.\21\ Approximately half of the 
commenters supported the proposed one-year extension,\22\ and half 
opposed a further delay in compliance with the section 404(b) 
requirements by non-accelerated filers.\23\ Many of the commenters that 
supported the proposed extension agreed that the one-year deferral was 
appropriate in light of our upcoming study. Absent the extension that 
we are granting in this release, many non-accelerated filers would have 
begun to incur independent auditor costs for fiscal years ending on or 
after December 15, 2008, before we had the opportunity to observe 
whether further action to improve the effectiveness and efficiency of 
section 404 implementation is warranted. In addition, several 
commenters that supported the proposed extension also believed the 
extension was necessary to provide additional time for companies and 
their auditors to consider the PCAOB's guidance on the ICFR audits of 
smaller public companies.\24\ Another commenter,\25\ while neither 
supporting nor opposing the proposed extension, suggested that the 
Commission should limit the extension to companies that qualify as a 
``smaller reporting company'' under Exchange Act Rule 12b-2.\26\
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    \21\ The public comments we received are available for 
inspection in the Commission's Public Reference Room at 100 F 
Street, NE., Washington DC 20549 in File No. S7-06-03. They are also 
available on-line at http://www.sec.gov/rules/proposed/s70603.shtml. 
Of the 67 commenters, 49 were graduate and undergraduate students at 
the University of Wisconsin-La Crosse. More than half of the 
students opposed the proposed extension.
    \22\ See, for example, letters from the U.S. Chamber of 
Commerce, First National Bank of Groton (NY), Mark Hart, Independent 
Community Bankers of America (``ICBA''), International Association 
of Small Broker Dealers and Advisors (``IASBD''), Kyle Kaja, George 
Merkl, New York State Society of Certified Public Accountants 
(``NYSSCPA''), Melissa Palmer, Maria Romundstad, the Office of 
Advocacy of the Small Business Administration (``SBA''), Small 
Business and Entrepreneurship Council (``SBEC''), David Tews and 
Jordan Walt.
    \23\ See, for example, letters from Kevin Burgess, California 
Public Employees' Retirement System (``CalPERS''), Council of 
Institutional Investors (``CII''), Daniel DeGier, Christopher Fearn, 
Jared Galassini and Anna Wildenberg.
    \24\ See, for example, letters from the U.S. Chamber of 
Commerce, ICBA and Nicole Nederloe.
    \25\ See letter from Ernst & Young LLP(``E&Y'').
    \26\ See 17 CFR 240.12b-2. Although there is considerable 
overlap between companies that meet the definition of a ``smaller 
reporting company'' in Exchange Act Rule 12b-2 and companies that 
are non-accelerated filers because they fall outside the definitions 
of ``accelerated filer'' and ``large accelerated filer,'' the terms 
``smaller reporting company'' and ``non-accelerated filer'' are not 
synonymous. For example, a company that has publicly issued a class 
of debt securities, but does not have a class of equity securities 
outstanding would be a non-accelerated filer even though it may not 
meet the definition of a ``smaller reporting company.'' Many 
companies that are debt-only issuers, however, are subsidiaries of 
larger public companies that meet the definition of accelerated 
filer or large accelerated filer. Therefore, we do not believe it 
necessary for purposes of this extension to make a distinction 
between non-accelerated filers and smaller reporting companies.
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    Many of the commenters opposed to the proposed extension thought 
that non-accelerated filers have had adequate time to prepare for full 
compliance with the Section 404 requirements.\27\ Several commenters 
opposed to the proposed extension also claimed that it was unnecessary 
for the Commission to undertake a study because several studies on the 
topic already have been completed, including some studies that reported 
evidence from surveys.\28\
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    \27\ See, for example, the letters from CII, Jared Galassini, 
Joshua Pike, and Jennifer Welsh.
    \28\ See, for example, the letters from CII and Michael 
Tolvstad.
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    We believe that an additional one-year deferral of the auditor 
attestation requirement is appropriate so that non-accelerated filers 
do not incur unnecessary compliance costs. An additional one-year 
deferral will allow these companies additional time to consider the 
PCAOB's guidance on ICFR audits of smaller public companies when it is 
finalized, as well as additional time for the auditors of non-
accelerated filers to incorporate such guidance in their planning and 
conduct of their ICFR audits for 2009. The planned study is designed to 
elicit information on the recent compliance experiences of companies 
that is not available in the various earlier studies, including those 
that use evidence from surveys.\29\
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    \29\ A key objective of the planned survey is to enable the 
Commission staff to evaluate any response bias that might cause the 
responses to over-represent the experiences of a particular sub-
sample of companies, as opposed to the companies that are affected 
by the Section 404 requirements more generally.
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II. Extension of Auditor Attestation Compliance Date for Non-
Accelerated Filers

    After consideration of the public comments that were received, we 
are adopting the one-year extension of the auditor attestation report 
requirement

[[Page 38096]]

substantially as proposed. We are amending Item 308T of Regulations S-K 
and S-B, Rule 2-02T of Regulation S-X, and Forms 10-Q, 10-K, 20-F and 
40-F to require non-accelerated filers to provide their auditor's 
attestation in their annual reports filed for fiscal years ending on or 
after December 15, 2009. A non-accelerated filer will continue to be 
required to state in its management report on ICFR that the company's 
annual report does not include an auditor attestation report.\30\
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    \30\ See Items 308T(a)(4) of Regulations S-K and S-B.
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    In the Proposing Release, we also requested comment on whether 
management's report on ICFR should be ``filed'' rather than 
``furnished'' and not be subject to liability under Section 18 of the 
Exchange Act \31\ during the second year of a non-accelerated filer's 
compliance with the ICFR requirements under section 404(a) if we 
adopted the proposed extension. Two commenters argued that we should 
discontinue treating the management report on ICFR as ``furnished'' 
rather than ``filed'' because the protection was not needed for the 
second year of the section 404(b) extension \32\ Three commenters 
believed that we should continue to allow the management report on ICFR 
of non-accelerated filers to be ``furnished'' rather than ``filed'' 
because non-accelerated filers should not be subject to liability under 
Section 18 until such time that they have had their ICFR attested to by 
their auditor.\33\
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    \31\ Section 18 of the Exchange Act [15 U.S.C. 78r] imposes 
liability on any person who makes or causes to be made in any 
application or report or document filed under the Act, or any rule 
thereunder, any statement that ``was at the time and in the light of 
the circumstances under which it was made false or misleading with 
respect to any material fact.'' As a result of the temporary Item 
308T of Regulation S-K and S-B and the temporary amendments to Forms 
20-F and 40-F, however, during the applicable periods, management's 
report would be subject to liability under this section only in the 
event that a non-accelerated filer specifically states that the 
report is to be considered ``filed'' under the Exchange Act or 
incorporates it by reference into a filing under the Securities Act 
or the Exchange Act.
    \32\ See letters from CalPERS and E&Y.
    \33\ See letters from the U.S. Chamber of Commerce, CommBancorp, 
Inc. and George Merkl.
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    We recognize that a non-accelerated filer that files only a 
management report on ICFR may become subject to more second-guessing as 
a result of separating the management and auditor reports. Management 
may conclude that the company's ICFR is effective when the management 
report is filed without the auditor's attestation report, but the 
company's auditor may come to a contrary conclusion in its report filed 
in a subsequent year, and as a result, the company's previous 
assessment may be called into question. To reduce the liability risk 
associated with such second-guessing, we believe that until such time 
as non-accelerated filers are required to comply with both the section 
404(a) and 404(b) requirements, it is reasonable to continue the 
temporary liability distinction and treat the management report as 
``furnished'' rather than ``filed.'' Therefore, we also have decided to 
extend the amendments that cause a non-accelerated filer's management 
report on ICFR to be ``furnished'' rather than ``filed.'' Of course, 
material misstatements or omissions in management's report on ICFR, 
regardless of whether the report is ``furnished'' or ``filed,'' are 
subject to liability under section 10(b) and Rule 10b-5 under the 
Exchange Act.\34\
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    \34\ See 15 U.S.C. 78j(b) and 17 CFR 240.10b-5.
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    The revised compliance dates for the Section 404 internal control 
requirements are presented in the table below:

------------------------------------------------------------------------
                               Compliance dates for the internal control
                                 over financial reporting requirements
                             -------------------------------------------
        Filer status                                 Auditor attestation
                              Management report on     on management's
                                      ICFR             report on ICFR
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U.S. Issuer:
    Non-accelerated filer     Annual reports for    Annual reports for
     (public float under $75   fiscal years ending   fiscal years ending
     million).                 on or after           on or after
                               December 15, 2007.    December 15, 2009.
    Large accelerated filer   Annual reports for    Annual reports for
     and accelerated filer     fiscal years ending   fiscal years ending
     (public float above $75   on or after           on or after
     million).                 November 15, 2004.    November 15, 2004.
Foreign private issuer:
    Non-accelerated filer     Annual reports for    Annual reports for
     (public float under $75   fiscal years ending   fiscal years ending
     million).                 on or after           on or after
                               December 15, 2007.    December 15, 2009.
    Accelerated filer         Annual reports for    Annual reports for
     (public float above $75   fiscal years ending   fiscal years ending
     million and below $700    on or after July      on or after July
     million).                 15, 2006.             15, 2007.
    Large accelerated filer   Annual reports for    Annual reports for
     (public float above       fiscal years ending   fiscal years ending
     $700 million).            on or after July      on or after July
                               15, 2006.             15, 2006.
U.S. or foreign private
 issuer:
    Newly public company....  Second annual report  Second annual
                                                     report.
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III. Paperwork Reduction Act

    In connection with our original proposal and adoption of the rules 
and amendments implementing the section 404 requirements,\35\ we 
submitted cost and burden estimates of the collection of information 
requirements of the amendments to the Office of Management and Budget 
(``OMB''). We published a notice requesting comment on the collection 
of information requirements in the proposing release for the rule 
amendments. We submitted these requirements to the OMB for review in 
accordance with the Paperwork Reduction Act of 1995 (``PRA'') \36\ and 
received approval of these estimates. We do not believe that the 
amendments will result in any change in the collection of information 
requirements of the amendments implementing section 404 and we received 
no comments suggesting the amendments would result in any change. 
Therefore, we are not revising our PRA burden and cost estimates 
submitted to the OMB.
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    \35\ See Release No. 33-8138 (October 22, 2002) [67 FR 66208] 
and Release No. 33-8238 (June 5, 2003) [68 FR 36636].
    \36\ 44 U.S.C. 3501 et seq. and 5 CFR 1320.11.
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IV. Cost-Benefit Analysis

A. Benefits

    The amendments will postpone for one year the date by which a non-
accelerated filer must begin to include in its annual report an auditor 
attestation report on management's assessment of internal control over 
financial reporting. As a result, non-accelerated filers will be 
required to complete only management's assessment in the first and 
second year

[[Page 38097]]

of their compliance with the section 404 requirements.
    We are undertaking a study to help assess whether the new 
management guidance and AS No. 5 are having the intended effect of 
facilitating more effective and efficient ICFR evaluations and audits 
for smaller reporting companies. Our interpretive guidance for 
management and AS No. 5 were designed to make management evaluations 
and ICFR audits more effective and efficient. We believe that an 
additional one-year deferral of the auditor attestation report 
requirement will benefit investors in non-accelerated filers by helping 
those smaller companies avoid incurring unnecessary compliance costs as 
we determine whether further action to improve the effectiveness and 
efficiency of section 404 implementation is warranted. In addition, we 
believe that investors in non-accelerated filers may experience 
benefits from the following economic effects of the extension:
     Auditors of non-accelerated filers will have significantly 
more time to conform their ICFR audit approach to meet the requirements 
of AS No. 5, and to consider the PCAOB's guidance for auditors of 
smaller public companies; \37\ and
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    \37\ Several commenters also noted this benefit. See, for 
example, letters from the Chamber of Commerce and ICBA.
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     Non-accelerated filers will have additional time to focus 
on their approach for evaluating and reporting on the effectiveness of 
ICFR. This may facilitate their efforts to develop best practices and 
efficiencies in preparing the management report prior to becoming 
subject to the auditor attestation report requirement.

B. Costs

    Under the amendments, investors in non-accelerated filers will have 
to wait longer than they would in the absence of the deferral for the 
assurances provided by the attestation report by the companies' auditor 
on management's report on ICFR. For example, several commenters 
expressed concern that the amendments may reduce investor confidence in 
non-accelerated filers.\38\ However, we believe that the risk that some 
investors may lose confidence in non-accelerated filers is small 
because the management reports on ICFR of these companies, while not 
subject to liability under section 18 of the Exchange, will continue to 
be subject to other liability provisions of the Exchange Act.
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    \38\ See letters from CalPERS, Hang Bui, John DeGoey, Jared 
Galassini, Stacy Lulloff, Anthony Morgan, Joshua Pike, Brandon 
Wagner and Jennifer Welsh.
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    The amendments may also increase the risk that, without the 
auditor's attestation, some non-accelerated filers may erroneously 
conclude that the company's ICFR is effective, when an ICFR audit might 
reveal that it is not effective. Two commenters argued the amendments 
could increase the risk that a weakness in a company's ICFR would not 
be detected or might be concealed from investors.\39\ In addition, some 
companies may conduct an assessment that is not as thorough, careful 
and as appropriate to the company's circumstances as they would perform 
if the auditor were also conducting an audit of ICFR.
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    \39\ See letters from E&Y and Michael Tolvstad.
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    No commenter provided cost estimates for the proposed extension. 
Several commenters, however, referred to costs estimates prepared by a 
number of sources regarding the costs of section 404 compliance 
generally.\40\ As mentioned above, we are undertaking our own study in 
part because these prior cost estimates do not reflect the recent 
efforts to make section 404 compliance more efficient.
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    \40\ See, for example, letters from CII and the SBA.
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V. Consideration of Impact on the Economy, Burden on Competition and 
Promotion of Efficiency, Competition and Capital Formation

    Section 23(a)(2) of the Exchange Act \41\ requires us, when 
adopting rules under the Exchange Act, to consider the impact that any 
new rule would have on competition. Section 23(a)(2) prohibits us from 
adopting any rule that would impose a burden on competition not 
necessary or appropriate in furtherance of the purposes of the Exchange 
Act. In addition, section 2(b) \42\ of the Securities Act and section 
3(f) \43\ of the Exchange Act require us, when engaging in rulemaking 
where we are required to consider or determine whether an action is 
necessary or appropriate in the public interest, to also consider 
whether the action will promote efficiency, competition, and capital 
formation.
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    \41\ 15 U.S.C. 78w(a).
    \42\ 15 U.S.C. 77b(b).
    \43\ 15 U.S.C. 78c(f).
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    We believe that the additional one-year delay of the auditor 
attestation report requirement will promote efficiency and capital 
formation by helping reduce inefficiencies and transition costs for 
non-accelerated filers. Several commenters stated that the proposed 
extension would help smaller companies reduce the overall costs 
associated with the ICFR requirements.\44\ In addition, the delay will 
provide us with the opportunity to evaluate whether the new management 
guidance and AS No. 5 are having the intended effect of facilitating 
more effective and efficient ICFR evaluations and audits and to observe 
whether further action is needed to improve the effectiveness and 
efficiency of section 404 before non-accelerated filers begin to incur 
costs. We expect the additional one-year deferral of the auditor 
attestation requirement to increase efficiency by providing more time 
for non-accelerated filers to prepare for compliance with the section 
404 requirements and by affording these companies and their auditors 
time to consider the PCAOB's small company ICFR audit guidance. 
Increased efficiency may promote capital formation and thereby benefit 
investors. However, we acknowledge that the deferral of the auditor 
attestation requirement may cause some investors to lose confidence in 
non-accelerated filers, which could make it more difficult for these 
companies to raise capital in the public markets.
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    \44\ See, for example, letters from U.S. Chamber of Commerce and 
ICBA.
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    It is possible that a competitive impact could result from the 
differing treatment of non-accelerated filers and larger companies that 
already have been complying with the section 404 requirements, but we 
did not receive any comments suggesting that this type of impact has 
occurred as a result of the prior extension or otherwise specifically 
addressing the effect of the extension on competition.

VI. Final Regulatory Flexibility Analysis

    We have prepared this Final Regulatory Flexibility Analysis 
(``FRFA'') in accordance with section 603 of the Regulatory Flexibility 
Act.\45\ This FRFA relates to amendments to the following temporary 
provisions: Item 308T of Regulations S-K and S-B, Rule 2-02T of 
Regulation S-X, Item 4T of Form 10-Q, Item 3A(T) of Form 10-QSB, Item 
9A(T) of Form 10-K, Item 8A(T) of Form 10-KSB, Item 15T of Form 20-F, 
and Instruction 3T of General Instruction B.(6) of Form 40-F. Prior to 
these amendments, a non-accelerated filer was scheduled to start 
providing its auditor's attestation report on ICFR in its annual report 
for a fiscal year ending on or after December 15, 2008. We are amending 
these forms and temporary rules to require a non-accelerated filer to 
start providing the auditor attestation report on ICFR in its

[[Page 38098]]

annual reports for fiscal years ending on or after December 15, 2009.
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    \45\ 5 U.S.C. 603.
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A. Reasons for, and Objectives of, the Amendments

    The Commission is undertaking a study to assess whether the new 
management guidance and AS No. 5 are having the intended effect of 
facilitating more effective and efficient ICFR evaluations and audits 
for smaller reporting companies. We are amending our forms and 
temporary rules to defer implementation of the auditor attestation 
report requirement for non-accelerated filers for an additional year 
for the following primary reasons:
     To enable non-accelerated filers more time to gain 
efficiencies in management's evaluation of the effectiveness of 
internal control over financial reporting;
     To provide the Commission with time to review the findings 
of its study and to consider whether further action to improve the 
effectiveness and efficiency of Section 404 implementation is 
warranted;
     To provide the PCAOB time to promulgate its guidance for 
ICFR audits of smaller public companies in final form; and
     To provide the auditors of non-accelerated filers 
additional time to consider such guidance.
    The amendments aim to further the goals of the Sarbanes-Oxley Act 
to enhance the quality of public company disclosure concerning the 
company's internal control over financial reporting and increase 
investor confidence in the financial markets.

B. Significant Issues Raised by Public Comment

    In the Proposing Release, we requested comment on the number of 
small entity issuers that may be affected, the existence or nature of 
the potential impact and how to quantify the impact of the amendments. 
As mentioned above, several commenters believed that the extension 
would help smaller companies reduce the overall costs associated with 
the ICFR requirements,\46\ but other commenters argued that a further 
delay may affect investor confidence in the ICFR of smaller 
companies.\47\ We did receive data from the Office of Advocacy of the 
Small Business Administration on the general costs of compliance 
related to implementation of the section 404 requirements.\48\ However, 
this data did not address the costs of delayed implementation, and we 
are conducting our own study to assess the costs that reflect our 
recent efforts to make section 404 compliance more efficient.\49\
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    \46\ See footnote 44 above.
    \47\ See footnote 38 above.
    \48\ See letter from SBA.
    \49\ The SBA also recommended that we use the results of our 
Section 404 study to update the Final Regulatory Flexibility Act 
analysis of the internal control reporting requirements included in 
the original 2003 release adopting the rules implementing section 
404 (Release No. 33-8238 [68 FR 36636]). In evaluating the 
efficiency and effectiveness of the section 404 requirements, we 
will look to the results of our study, as well as other information. 
We will also consider the results of our study when we conduct a 
review under section 610 of the Regulatory Flexibility Act.
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C. Small Entities Subject to the Amendments

    The amendments will affect some issuers that are small entities. 
Exchange Act Rule 0-10(a) \50\ defines an issuer, other than an 
investment company, to be a ``small business'' or ``small 
organization'' if it had total assets of $5 million or less on the last 
day of its most recent fiscal year. We estimate that there are 
approximately 1,100 issuers, other than registered investment 
companies, that may be considered small entities. The amendments will 
apply to any small entity that is subject to reporting under either 
section 13(a) or 15(d) of the Exchange Act. One commenter recommended 
that we use the definition of ``smaller reporting company'' \51\ in 
Securities Act Rule 405 \52\ and Exchange Act Rule 12b-2 \53\ to define 
``small entity'' for purposes of the FRFA.\54\ Although, we are not 
proposing any amendments to the definition of small entity in Exchange 
Act Rule 0-10(a) at this time, we will consider in the future whether 
any revisions to this definition are warranted.
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    \50\ 17 CFR 240.0-10(a).
    \51\ A ``small reporting company'' is defined as an issuer that 
is not an investment company, an asset-backed issuer (as defined in 
17 CFR 229.1101), or a majority-owned subsidiary of a parent that is 
not a smaller reporting company and that: (1) Had a public float of 
less than $75 million as of the last business day of its most 
recently completed second fiscal quarter, computed by multiplying 
the aggregate worldwide number of shares of its voting and non-
voting common equity held by non-affiliates by the price at which 
the common equity was last sold, or the average of the bid and asked 
prices of common equity, in the principal market for the common 
equity; or (2) In the case of an initial registration statement 
under the Securities Act or Exchange Act for shares of its common 
equity, had a public float of less than $75 million as of a date 
within 30 days of the date of the filing of the registration 
statement, computed by multiplying the aggregate worldwide number of 
such shares held by non-affiliates before the registration plus, in 
the case of a Securities Act registration statement, the number of 
such shares included in the registration statement by the estimated 
public offering price of the shares; or (3) In the case of an issuer 
whose public float as calculated under (1) or (2) was zero, had 
annual revenues of less than $50 million during the most recently 
completed fiscal year for which audited financial statements are 
available.
    \52\ 17 CFR 230.405.
    \53\ 17 CFR 240.12b-2.
    \54\ See letter from SBA.
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D. Reporting, Recordkeeping, and Other Compliance Requirements

    The amendments will alleviate reporting and compliance burdens by 
postponing by an additional year the date by which non-accelerated 
filers must begin to comply with the auditor attestation report on ICFR 
in their annual reports.

E. Agency Action To Minimize Effect on Small Entities

    The Regulatory Flexibility Act directs us to consider alternatives 
that would accomplish our stated objectives, while minimizing any 
significant adverse impact on small entities. In connection with the 
amendments, we considered the following alternatives:
     Establishing different compliance or reporting 
requirements or timetables that take into account the resources 
available to small entities;
     Clarifying, consolidating or simplifying compliance and 
reporting requirements under the rules for small entities;
     Using performance rather than design standards; and
     Exempting small entities from all or part of the 
requirements.
    In connection with the amendments, we considered several of these 
alternatives. One commenter recommended that we should consider a two-
year extension for larger non-accelerated filers and a three-year 
extension for non-accelerated filers that had market capitalizations of 
$25 million or less.\55\ The amendments establish a different 
compliance and reporting timetable for non-accelerated filers and small 
entities from that of other companies.
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    \55\ See letter from IASBD.
---------------------------------------------------------------------------

    As discussed above, the amendments are designed to allow non-
accelerated filers to avoid incurring unnecessary compliance costs 
before we have the benefit of analyzing the results of our section 404 
study, and to provide non-accelerated filers and their auditors with 
time to consider, and integrate the concepts in the forthcoming PCAOB 
smaller company ICFR audit guidance. We anticipate that one year should 
adequate.
    We believe that the amendments will promote the primary goal of 
enhancing the quality of reporting and increasing investor confidence 
in the fairness and integrity of the securities markets. Exempting 
small entities entirely from

[[Page 38099]]

the requirements of section 404(b) may be contrary to this goal.
    An exemption from the amendments delaying compliance with the 
auditor attestation requirement, on the other hand, would be 
inconsistent with one of the goals of our study to determine whether 
further action to improve the effectiveness and efficiency of section 
404 implementation is warranted before smaller companies have begun to 
incur independent auditor costs to perform integrated audits of their 
financial statements and ICFR.

VII. Statutory Authority and Text of the Amendments

    The amendments described in this release are adopted under the 
authority set forth in section 19 of the Securities Act, Sections 3, 
12, 13, 15, 23 and 36 of the Exchange Act, and sections 3(a) and 404 of 
the Sarbanes-Oxley Act.

List of Subjects

17 CFR Part 210

    Accountants, Accounting, Reporting and recordkeeping requirements, 
Securities.

17 CFR Part 228

    Reporting and recordkeeping requirements, Securities, Small 
businesses.

17 CFR Parts 229 and 249

    Reporting and recordkeeping requirements, Securities.

Text of Amendments

0
For the reasons set out in the preamble, the Commission is amending 
title 17, chapter II, of the Code of Federal Regulations as follows:

PART 210--FORM AND CONTENT OF AND REQUIREMENTS FOR FINANCIAL 
STATEMENTS, SECURITIES ACT OF 1933, SECURITIES EXCHANGE ACT OF 
1934, PUBLIC UTILITY HOLDING COMPANY ACT OF 1935, INVESTMENT 
COMPANY ACT OF 1940, INVESTMENT ADVISERS ACT OF 1940, AND ENERGY 
POLICY AND CONSERVATION ACT OF 1975

0
1. The authority citation for part 210 continues to read as follows:

    Authority: 15 U.S.C. 77f, 77g, 77h, 77j, 77s, 77z-2, 77z-3, 
77aa(25), 77aa(26), 78c, 78j-1, 78l, 78m, 78n, 78o(d), 78q, 78u-5, 
78w(a), 78ll, 78mm, 80a-8, 80a-20, 80a-29, 80a-30, 80a-31, 80a-
37(a), 80b-3, 80b-11, 7202, 7218 and 7262, unless otherwise noted.


0
2. Section 210.2-02T is amended by:
0
a. Removing paragraphs (a) and (b), and redesignating paragraphs (c) 
and (d) as paragraphs (a) and (b);
0
b. Revising the date ``December 15, 2008'' in newly redesignated 
paragraph (a) to read ``December 15, 2009''; and
0
c. Revising newly redesignated paragraph (b).
    The revision reads as follows:


Sec.  210.2-02T  Accountants' reports and attestation reports on 
internal control over financial reporting.

* * * * *
    (b) This section expires on June 30, 2010.

PART 228--INTEGRATED DISCLOSURE SYSTEM FOR SMALL BUSINESS ISSUERS

0
3. The authority citation for part 228 continues to read, in part, as 
follows:

    Authority: 15 U.S.C. 77e, 77f, 77g, 77h, 77j, 77k, 77s, 77z-2, 
77z-3, 77aa(25), 77aa(26), 77ddd, 77eee, 77ggg, 77hhh, 77jjj, 77nnn, 
77sss, 78l, 78m, 78n, 78o, 78u-5, 78w, 78ll, 78mm, 80a-8, 80a-29, 
80a-30, 80a-37, 80b-11, and 7201 et. seq., and 18 U.S.C. 1350.
* * * * *

0
4. Section 228.308T is amended by revising the ``Note to Item 308T'' 
and paragraph (c) to read as follows:


Sec.  228.308T  (Item 308T) Internal control over financial reporting.

    Note to Item 308T: This is a special temporary section that 
applies only to a fiscal period ending on or after December 15, 2007 
but before March 15, 2009.

* * * * *
    (c) This temporary Item 308T, and accompanying note and 
instructions, will expire on March 15, 2009.

PART 229--STANDARD INSTRUCTIONS FOR FILING FORMS UNDER SECURITIES 
ACT OF 1933, SECURITIES EXCHANGE ACT OF 1934 AND ENERGY POLICY AND 
CONSERVATION ACT OF 1975--REGULATION S-K

0
5. The authority citation for part 229 continues to read, in part, as 
follows:

    Authority: 15 U.S.C. 77e, 77f, 77g, 77h, 77j, 77k, 77s, 77z-2, 
77z-3, 77aa(25), 77aa(26), 77ddd, 77eee, 77ggg, 77hhh, 77iii, 77jjj, 
77nnn, 77sss, 78c, 78i, 78j, 78l, 78m, 78n, 78o, 78u-5, 78w, 78ll, 
78mm, 80a-8, 80a-9, 80a-20, 80a-29, 80a-30, 80a-31(c), 80a-37, 80a-
38(a), 80a-39, 80b-11, and 7201 et. seq.; and 18 U.S.C. 1350, unless 
otherwise noted.
* * * * *
0
6. Section 229.308T is amended by revising the ``Note to Item 308T'' 
and paragraph (c) to read as follows:


Sec.  229.308T  (Item 308T) Internal control over financial reporting.

    Note to Item 308T: This is a special temporary section that 
applies only to a registrant that is neither a ``large accelerated 
filer'' nor an ``accelerated filer'' as those terms are defined in 
Sec.  240.12b-2 of this chapter and only with respect to a fiscal 
period ending on or after December 15, 2007, but before December 15, 
2009.

* * * * *
    (c) This temporary Item 308T, and accompanying note and 
instructions, will expire on June 30, 2010.

PART 249--FORMS, SECURITIES EXCHANGE ACT OF 1934

0
7. The general authority citation for Part 249 is revised to read as 
follows:

    Authority: 15 U.S.C. 78a et seq. and 7201 et seq.; and 18 U.S.C. 
1350, unless otherwise noted.
* * * * *


0
8. Form 20-F (referenced in Sec.  249.220f), Part II, Item 15T is 
amended by:
0
a. Revising the date ``December 15, 2008'' in paragraph (2) to the 
``Note to Item 15T'' to read ``December 15, 2009''; and
0
b. Revising the date ``June 30, 2009'' in paragraph (d) to read ``June 
30, 2010''.

    Note: The text of Form 20-F does not, and this amendment will 
not, appear in the Code of Federal Regulations.



0
9. Form 40-F (referenced in Sec.  249.240f) is amended by:
0
a. Revising the date ``December 15, 2008'' in ``Instruction 3T(2)'' to 
the ``Instructions to paragraphs (b), (c), (d) and (e) of General 
Instruction B.(6)'' to read ``December 15, 2009''; and
0
b. Revising the date ``June 30, 2009'' in the paragraph following 
``Instruction 3T'' to the ``Instructions to paragraphs (b), (c), (d) 
and (e) of General Instruction B.(6)'' to read ``June 30, 2010''.

    Note: The text of Form 40-F does not, and this amendment will 
not, appear in the Code of Federal Regulations.



0
10. Form 10-Q (referenced in Sec.  249.308a) is amended by revising 
Item 4T to Part I to read as follows:

    Note: The text of Form 10-Q does not, and this amendment will 
not, appear in the Code of Federal Regulations.

Form 10-Q

* * * * *

PART I--FINANCIAL INFORMATION

* * * * *

Item 4T. Controls and Procedures

    (a) If the registrant is neither a large accelerated filer nor an 
accelerated filer as those terms are defined in Sec.  240.12b-2 of this 
chapter, furnish the

[[Page 38100]]

information required by Items 307 and 308T(b) of Regulation S-K (17 CFR 
229.307 and 229.308T(b)) with respect to a quarterly report that the 
registrant is required to file for a fiscal year ending on or after 
December 15, 2007, but before December 15, 2009.
    (b) This temporary Item 4T will expire on June 30, 2010.
* * * * *


0
11. Form 10-QSB (referenced in Sec.  249.308b) is amended by revising 
Item 3A(T) to Part I to read as follows:

    Note: The text of Form 10-QSB does not, and this amendment will 
not, appear in the Code of Federal Regulations.

Form 10-QSB

* * * * *

PART I--FINANCIAL INFORMATION

* * * * *

Item 3A(T). Controls and Procedures

    (a) Furnish the information required by Items 307 and 308T(b) of 
Regulation S-B (17 CFR 228.307 and 228.308T(b)) with respect to a 
quarterly report that the small business issuer is required to file for 
a fiscal year ending on or after December 15, 2007, but before October 
31, 2008.
    (b) This temporary Item 3A(T) will expire on October 31, 2008.
* * * * *
0
12. Form 10-K (referenced in Sec.  249.310) is amended by:
0
a. Revising the date ``December 15, 2008'' in paragraph (a) to Item 
9A(T) to Part II to read ``December 15, 2009''; and
0
b. Revising the date ``June 30, 2009'' in paragraph (b) to Item 9A(T) 
to Part II to read ``June 30, 2010''.

    Note: The text of Form 10-K does not, and this amendment will 
not, appear in the Code of Federal Regulations.



0
13. Form 10-KSB (referenced in Sec.  249.310b) is amended by revising 
the dates ``December 15, 2008'' in paragraph (a), and ``June 30, 2009'' 
in paragraph (b) to Item 8A(T) to Part II to read ``March 15, 2009''.

    Note: The text of Form 10-KSB does not, and this amendment will 
not, appear in the Code of Federal Regulations.


    By the Commission.

    Dated: June 26, 2008.
Florence E. Harmon,
Acting Secretary.
 [FR Doc. E8-14942 Filed 7-1-08; 8:45 am]
BILLING CODE 8010-01-P