Update on the SEC’s Authority to Exempt Small Issuers from Section 404 Compliance

Bobby Bartlett —  21 April 2006

The momentum seems to be building among legal academics that the SEC may lack the authority to exempt small companies from SOX 404 compliance.  As many may recall, Bill previously analyzed this issue in the inagural post of this blog and concluded that the SEC most likely did not have the requisite statutory authority (he provided a follow-up analysis here).  Larry Ribstein shares this sentiment.  Apparently, they are not alone. Â

Yesterday, the SEC Advisory Committee on Smaller Public Companies concluded its deliberations and approved a draft Final Report to be submitted to the SEC next week.  The Final Report continues to recommend exemptive relief from Section 404 for certain small-cap and micro-cap issuers.  However, I found interesting a revision from the prior draft in the discussion concerning the SEC’s authority to promulgate an exemption.  Specifically, footnote 110 notes that “a different view as to the Commission’s authority under Section 36(a) was expressed in a letter from Professor James D. Cox and 19 other law professors, although the professors acknowledged that ‘[s]pecific disclosure requirements tailored to the unique risks and likely regulatory benefits of smaller public companies are entirely appropriate and consistent with the rulemaking authority the Commission enjoys under Section 3(a) of the Sarbanes-Oxley Act.'”  Sadly, the letter doesn’t cite Bill’s analysis, but it is still worth a read. It can be found on the SEC website (see here).  Â