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SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 229, 230, 240, and 249

Release No. 34-88365; File No. S7-06-19

RIN 3235-AM41

Accelerated Filer and Large Accelerated Filer Definitions

AGENCY: Securities and Exchange Commission.

ACTION: Final rule.

SUMMARY: The Securities and Exchange Commission (“Commission”) is adopting

amendments to the accelerated filer and large accelerated filer definitions to more appropriately

tailor the types of issuers that are included in the categories of accelerated and large accelerated

filers and promote capital formation, preserve capital, and reduce unnecessary burdens for

certain smaller issuers while maintaining investor protections. The amendments exclude from

the accelerated and large accelerated filer definitions an issuer that is eligible to be a smaller

reporting company and that had annual revenues of less than $100 million in the most recent

fiscal year for which audited financial statements are available. The amendments also include a

specific provision excluding business development companies from the accelerated and large

accelerated filer definitions in analogous circumstances. In addition, the amendments increase

the transition thresholds for accelerated and large accelerated filers becoming non-accelerated

filers from $50 million to $60 million, and for exiting large accelerated filer status from $500

million to $560 million. Further, the amendments add a revenue test to the transition thresholds

for exiting from both accelerated and large accelerated filer status. Finally, the amendments add

a check box to the cover pages of Forms 10-K, 20-F, and 40-F to indicate whether an internal

control over financial reporting (“ICFR”) auditor attestation is included in the filing. As a result

of the amendments, certain low-revenue issuers will remain obligated, among other things, to

establish and maintain ICFR and have management assess the effectiveness of ICFR, but they

will not be required to have their management’s assessment of the effectiveness of ICFR attested

to, and reported on, by an independent auditor.

DATES: This final rule is effective April 27, 2020.

FOR FURTHER INFORMATION CONTACT: John Fieldsend, Special Counsel, in the

Division of Corporation Finance, at (202) 551-3430, and Brian Johnson, Assistant Director, in

the Division of Investment Management, at (202) 551-6792, U.S. Securities and Exchange

Commission, 100 F Street NE, Washington, DC 20549-3628.

SUPPLEMENTARY INFORMATION: We are amending 17 CFR 229.10(f) (“Item 10(f)”)

under Regulation S-K; 1 17 CFR 230.405 (“Rule 405”) under the Securities Act of 1933; 2 and 17

CFR 12b-2 (“Rule 12b-2”), 17 CFR 249.220f (“Form 20-F”), 17 CFR 249.240f (“Form 40-F”),

and 17 CFR 249.310 (“Form 10-K”) under the Securities Exchange Act of 1934 (“Exchange

Act”). 3

Table of Contents

II.

INTRODUCTION............................................................................................................. 5

DISCUSSION OF THE FINAL AMENDMENTS ........................................................ 7

A. Background ................................................................................................................. 7

B. Amendments to Exclude Low-Revenue SRCs from the Accelerated and Large

Accelerated Filer Definitions .................................................................................... 10

1. Proposed Amendments ........................................................................................ 10

2. Comments on the Proposed Amendments........................................................... 11

a. Comments on Using Revenue for Determining Accelerated and Large

Accelerated Filer Status .................................................................................. 12

15 U.S.C. 229.10 through 229.1305.

15 U.S.C. 77a et seq.

15 U.S.C. 78a et seq.

III.

IV.

b. Comments on the Proposed Amendments’ Effect on Capital Formation and

the Number of Public Issuers .......................................................................... 13

c. Comments on the Proposed Amendments’ Effect on Investor Protection ..... 15

d. Comments on the Disproportionate Costs and Benefits of the ICFR Auditor

Attestation Requirement to Small and Low-Revenue Companies ................. 20

e. Comments on the Relationship Between Non-Accelerated Filers and SRCs . 23

f. Other Comments ............................................................................................. 24

3. Final Amendments .............................................................................................. 27

a. Using Revenue for Determining Accelerated and Large Accelerated Filer

Status… ........................................................................................................... 28

b. Effect on Capital Formation and the Number of Public Companies .............. 29

c. Effect on Investor Protection .......................................................................... 32

d. Disproportionate Costs and Benefits of the ICFR Auditor Attestation for

Small and Low-Revenue Companies .............................................................. 38

e. Relationship Between Non-Accelerated Filers and SRCs .............................. 41

f. Effect on Business Development Companies ................................................. 42

g. Effect on Foreign Private Issuers .................................................................... 45

h. Requiring ICFR Auditor Attestation Less Frequently than Annually ............ 45

i. Check Box Indicating Whether an ICFR Auditor Attestation is Included in a

Filing... ........................................................................................................... 46

C. Amendments to Increase the Public Float Transition Thresholds from $50 million to

$60 million and $500 million to $560 million and to Add the SRC Revenue Test to

the Transition Threshold ........................................................................................... 48

1. Proposed Amendments ........................................................................................ 48

2. Comments ............................................................................................................ 51

3. Final Amendments .............................................................................................. 51

D. Transition Issues ........................................................................................................ 54

OTHER MATTERS ....................................................................................................... 55

ECONOMIC ANALYSIS .............................................................................................. 55

A. Introduction ............................................................................................................... 56

B. Baseline ..................................................................................................................... 62

1. Regulatory Baseline ............................................................................................ 62

2. Characteristics of Accelerated Filer Population .................................................. 71

3. Timing of Filings ................................................................................................. 74

4. Internal Controls and Restatements ..................................................................... 75

C. Discussion of Economic Effects................................................................................ 80

1. Affected Issuers ................................................................................................... 81

2. Potential Benefits of Expanding the Exemption from the ICFR Auditor

Attestation Requirement for Affected Issuers ..................................................... 92

a. Evidence on possible indirect costs of the ICFR auditor attestation

requirement ..................................................................................................... 92

b. Evidence on net costs of the ICFR auditor attestation requirement................ 94

i. Studies involving avoidance behavior ...................................................... 94

ii. Studies based on comparative analysis or market reactions ..................... 98

iii. Other evidence on net costs .................................................................... 100

c. Potential reduction in audit fees .................................................................... 102

d. Additional potential compliance cost savings............................................... 106

e. Implications of the cost savings .................................................................... 108

3. Potential Costs of Expanding the Exemption from the ICFR Auditor Attestation

Requirement for Affected Issuers...................................................................... 112

a. Broad considerations and evidence regarding the effects of ICFR auditor

attestations on financial reporting ................................................................. 113

b. Estimated effects on ICFR, the reliability of financial statements, and potential

fraud…. ......................................................................................................... 124

i. Effects on the prevalence of ineffective ICFR ........................................ 127

ii. Effects on the detection and disclosure of material weaknesses in ICFR128

iii. Effects on restatements ........................................................................... 131

iv. Effects on fraudulent financial reporting ................................................ 140

v. Timing of the effects ............................................................................... 147

c. Implications for investor decision-making ................................................... 149

d. Potential economic costs of effects on ICFR, the reliability of financial

statements, and potential fraud ..................................................................... 162

i. Computation of monetized estimates of costs ........................................ 164

ii. Discussion of economic costs ................................................................. 168

4. Potential Benefits and Costs Related to Other Aspects of the Amendments .... 175

a. Filing deadlines ............................................................................................. 175

b. Disclosures required of accelerated filers ..................................................... 177

c. Transition thresholds..................................................................................... 178

d. Disclosure ..................................................................................................... 181

5. Alternatives to the Amendments ....................................................................... 182

a. Exclude all SRCs from accelerated filer category ........................................ 183

b. Include or exclude certain issuer types ......................................................... 186

c. Alternative threshold..................................................................................... 190

PAPERWORK REDUCTION ACT ........................................................................... 191

A. Summary of the Collections of Information............................................................ 191

B. Burden and Cost Estimates Related to the Final Amendments ............................... 192

1. ICFR Auditor Attestation Requirement ............................................................ 193

2. Filing Deadlines, Disclosure Regarding Filing Availability, and Unresolved Staff

Comments .......................................................................................................... 195

3. Check Box Disclosure ....................................................................................... 196

4. Total Burden Reduction .................................................................................... 197

VI.

REGULATORY FLEXIBILITY ACT ANALYSIS .................................................. 197

A. Need for, and Objectives of, the Final Amendments .............................................. 197

B. Significant Issues Raised by Public Comments ...................................................... 198

C. Small Entities Subject to the Amendments ............................................................. 198

D. Projected Reporting, Recordkeeping, and Other Compliance Requirements ......... 199

E. Agency Action to Minimize Effect on Small Entities ............................................. 200

STATUTORY AUTHORITY AND TEXT OF RULE AMENDMENTS ........................... 202

INTRODUCTION

On May 9, 2019, we proposed amendments 4 to the “accelerated filer” and “large

accelerated filer” definitions in Rule 12b-2. 5 We proposed these amendments to promote capital

formation for certain smaller issuers while maintaining investor protections by more

appropriately tailoring the types of issuers that are included in the categories of accelerated and

large accelerated filers and revising the transition thresholds for accelerated and large accelerated

filers. Specifically, we proposed to exclude from the accelerated and large accelerated filer

definitions an issuer that is eligible to be a smaller reporting company (“SRC”) 6 and that has

annual revenue of less than $100 million in the most recent fiscal year for which audited

financial statements are available (“SRC revenue test”), with the effect that such an issuer would

not need to satisfy the requirements applicable to an accelerated or large accelerated filer. We

also proposed to increase the public float transition threshold for accelerated and large

accelerated filers to become a non-accelerated filer from $50 million to $60 million, and to

increase the exit threshold in the large accelerated filer transition provision from $500 million to

$560 million in public float. Finally, we proposed to add a revenue test to the transition

thresholds for exiting both accelerated and large accelerated filer status.

We received over 60 comment letters on the proposal, including over 40 unique letters

and approximately 20 letters that were substantially similar. Many of the commenters generally

Amendments to the Accelerated and Large Accelerated Filer Definitions, Release No. 34-85814 (May 9, 2019)

[84 FR 24876 (May 29, 2019)] (“Proposing Release”).

Although Rule 12b-2 defines the terms “accelerated filer” and “large accelerated filer,” it does not define the

term “non-accelerated filer.” If an issuer does not meet the definition of accelerated filer or large accelerated

filer, it is considered a non-accelerated filer.

See Item 10(f), Rule 405, and Rule 12b-2 (defining SRC).

supported the proposed amendments 7 while other commenters generally opposed them or

suggested the need for further empirical study. 8 In addition, the SEC’s Small Business Capital

Formation Advisory Committee (“SBCFAC”) adopted a recommendation supporting the

proposed amendments, 9 and the 2019 SEC Government-Business Forum on Small Business

See, e.g., letters from Adamas Pharmaceuticals, Inc. (July 19, 2019) (“Adamas”); Advanced Medical

Technology Association Accel (July 26, 2019) (“AdvaMed”); Aequor, Inc. (July 18, 2019) (“Aequor”);

Ardelyx, Inc. (July 18, 2019) (“Ardelyx”); American Securities Association (July 29, 2019) (“ASA”);

Biotechnology Innovation Organization (July 29, 2019) (“BIO”); Broadmark Capital (July 29, 2019)

(“Broadmark”); California Life Sciences Association (Jun. 10, 2019) (“CLSA”); Catalyst Biosciences, Inc.

(July 29, 2019) (“Catalyst”); Cerecor Inc. (July 3, 2019) (“Cerecor”); Chiasma, Inc. (July 11, 2019)

(“Chiasma”); Coalition of Four Small Businesses and their Investors (July 24, 2019) (“AdvaMed et al.”);

Concert Pharmaceuticals, Inc. (July 1, 2019) (“Concert”); Corvus Pharmaceuticals, Inc. (July 19, 2019)

(“Corvus”); Council of State Bioscience Associations (July 25, 2019) (“CSBA”); CSB Bancorp, Inc. (July 26,

2019) (“CSB”); CymaBay Therapeutics, Inc. (July 24, 2019) (“CymaBay”); Daré Bioscience, Inc. (July 10,

2019) (“Daré”); Darian B. Andersen, General Counsel, PC (Jun. 5, 2019) (“Andersen”); Equillium, Inc. (July

22, 2019) (“Equillium”); Evoke Pharma, Inc. (July 17, 2019) (“Evoke”); Gritstone Oncology Inc. (July 24,

2019) (“Gritstone”); Guaranty Federal Bancshares, Inc. (July 23, 2019) (“Guaranty”); Independent Community

Bankers of America (July 24, 2019) (“ICBA”); Kezar Life Sciences, Inc. (July 17, 2019) (“Kezar”); Kyle

Carver (May 25, 2019) (“Carver”); Marinus Pharmaceuticals, Inc. (July 17, 2019) (“Marinus”); Millendo

Therapeutics, Inc. (July 29, 2019) (“Millendo”); MSB Financial Corp. (July 19, 2019) (“MSB”); Nasdaq, Inc.

(July 29, 2019) (“Nasdaq”); Organovo, Inc. (July 18, 2019) (“Organovo”); Pieris Pharmaceuticals, Inc. (July 11,

2019) (“Pieris”); Revance Therapeutics, Inc. (July 22, 2019) (“Revance”); SI-BONE, Inc. (July 19, 2019) (“SIBONE”); South Carolina Bankers Association (July 26, 2019) (“SCBA”); Summit State Bank (May 28, 2019)

(“Summit”); Sutro Biopharma, Inc. (July 8, 2019) (“Sutro”); Syros Pharmaceuticals, Inc. (July 22, 2019)

(“Syros”); Teligent, Inc. (July 23, 2019) (“Teligent”); Terra Tech Corp. (May 29, 2019) (“Terra Tech”); The

Bank of South Carolina (July 26, 2019) (“BSC”); U.S. Chamber of Commerce’s Center for Capital Markets

Competitiveness (July 29, 2019) (“Chamber”); Xenon Pharmaceuticals Inc. (Jun. 19, 2019) (“Xenon”); and

Zynerba Pharmaceuticals, Inc. (July 8, 2019) (“Zynerba”).

See, e.g., letters from BDO USA, LLP (July 29, 2019) (“BDO”); Better Markets, Inc. (July 29, 2019) (“Better

Markets”); Center for Audit Quality (July 29, 2019) (“CAQ”); CFA Institute, in consultation with its Corporate

Disclosure Policy Council (Aug. 22, 2019) (“CFA Inst.”); Colleen Honigsberg, Associate Professor of Law,

Stanford Law School, et al. (July 22, 2019) (“Prof. Honigsberg et al.”); Consumer Federation of America (July

29, 2019) (“CFA”); Council of Institutional Investors (July 25, 2019) (“CII”); Crowe LLP (July 29, 2019)

(“Crowe”); Deloitte & Touche LLP (July 26, 2019) (“Deloitte”); Grant Thornton LLP (July 17, 2019) (“Grant

Thornton”); John Hassell, Indiana University (May 19, 2019) (“Prof. Hassell”); Mary Barth, Stanford

University, Wayne Landsman, University of North Carolina, Joseph Schroeder, Indiana University, and Daniel

Taylor, University of Pennsylvania (July 11, 2019) (“Prof. Barth et al.”); RSM US LLP (July 29, 2019)

(“RSM”); and Weili Ge, University of Washington; Allison Koester, Georgetown University; and Sarah

McVay, University of Washington (July 26, 2019) (“Prof. Ge et al.”).

See U.S. SEC. AND EXCH. COMM’N SMALL BUS. CAPITAL FORMATION ADVISORY COMM., Recommendation on

the Commission’s Proposal to Amend the Accelerated and Large Accelerated Filer Definitions (Aug. 23, 2019)

(“SBCFAC Recommendations”), available at https://www.sec.gov/spotlight/sbcfac/recommendations-rule-305-and-accelerated-filer-definition.pdf. Although it supported the proposed amendments, the SBCFAC stated

that it “would welcome the Commission to explore additional further amendments” to the accelerated and large

accelerated filer definitions and recommended exploring raising the revenue threshold to be a non-accelerated

filer to one higher than $100 million, basing the revenue test for an issuer to qualify as a non-accelerated filer

Capital Formation (“SEC Small Business Forum”) provided a recommendation on the

accelerated filer definition. 10 After taking into consideration these recommendations and the

public comments, we are adopting the amendments substantially as proposed. The final

amendments are consistent with our historical practice of providing scaled disclosure and other

accommodations for smaller issuers and with recent actions by Congress to reduce unnecessary

burdens on new and smaller issuers. 11

II.

DISCUSSION OF THE FINAL AMENDMENTS

A. Background

In June 2018, the Commission adopted amendments 12 to the SRC definition 13 to expand

the number of issuers that qualify for scaled disclosure accommodations. The amended SRC

definition allows an issuer to use either a public float 14 test or the SRC revenue test to determine

on a three-year rolling average instead of basing it on the revenue in the most recent fiscal year, and looking at

whether all SRCs should be non-accelerated filers.

See U.S. SEC. AND EXCH. COMM’N GOV’T-BUS. FORUM ON SMALL BUS. CAPITAL FORMATION, Report on the

38th Annual Government-Business Forum on Small Business Capital Formation (Aug. 14, 2019) (“SEC Small

Business Forum”), available at https://www.sec.gov/files/small-business-forum-report-2019.pdf. The SEC

Small Business Forum recommended aligning the definition of non-accelerated filer with the definition of

SRC to include issuers with a public float less than $250 million or with annual revenues less than $100

million (and either no public float or a public float less than $700 million) .

For example, Title I of the Jumpstart Our Business Startups Act of 2012 (‘‘JOBS Act’’) amended Section

404(b) of the Sarbanes-Oxley Act (“SOX”), 15 U.S.C. 7262(b), which relates to an issuer’s ICFR to exempt

emerging growth companies (“EGCs”) from the requirement of SOX Section 404(b). In particular, SOX

Section 404(b) requires that an issuer’s independent auditor attest to, and report on, management’s assessment

of the effectiveness of the issuer’s ICFR (“ICFR auditor attestation”). See Public Law 112–106, Sec. 103, 126

Stat. 306 (2012). In addition, Section 72002 of the Fixing America’s Surface Transportation Act of 2015

requires the Commission to revise Regulation S-K to further scale or eliminate requirements to reduce the

burden on EGCs, accelerated filers, SRCs, and other smaller issuers, while still providing all material

information to investors. See Pub. L. No. 114-94, 129 Stat. 1312 (2015).

See Smaller Reporting Company Definition, Release No. 33-10513 (June 28, 2018) [83 FR 31992 (July 10,

2018)] (“SRC Adopting Release”).

See note 6 above.

Public float is defined in paragraph (3)(i)(A) of the SRC definition in Rule 12b-2, which states that public float

is measured as of the last business day of the issuer’s most recently completed second fiscal quarter and

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. See also Item 10(f)

whether it is an SRC. The amendments increased the threshold in the public float test for an

issuer to initially qualify as an SRC from less than $75 million to less than $250 million. 15 The

Commission also expanded the revenue test to include issuers with annual revenues 16 of less than

$100 million if they have no public float or a public float of less than $700 million. 17 The

Commission intended the amendments to promote capital formation for smaller issuers by

reducing compliance costs for the newly eligible SRCs while maintaining appropriate investor

protections. 18

In conjunction with these amendments, the Commission also revised the accelerated filer

and large accelerated filer definitions in Rule 12b-2 to remove the condition that, for an issuer to

be an accelerated filer or a large accelerated filer, it must not be eligible to use the SRC

accommodations. 19 One result of these amendments is that some issuers now are categorized as

both SRCs and accelerated or large accelerated filers. 20 These issuers have some, but not all, of

(2)(i)(A) and Rule 405. An entity with no public float because, for example, it has equity securities outstanding

but is not trading in any public trading market would not be able to qualify on the basis of a public float test

alone. That entity must look to the SRC revenue test to determine whether it qualifies as an SRC.

To avoid situations where an issuer frequently enters and exits SRC status, each test includes two thresholds—

one for initially determining whether an issuer qualifies as an SRC and a subsequent transition threshold that is

lower for issuers that did not initially qualify as an SRC, or that no longer qualify as an SRC because they

exceeded the initial thresholds.

Annual revenues are measured as of the most recently completed fiscal year for which audited financial

statements are available. See Item 10(f)(2)(i)(B), Rule 405, and Rule 12b-2.

See Item 10(f)(1), Rule 405, and Rule 12b-2. The prior revenue test included issuers with no public float and

annual revenues of less than $50 million. See SRC Adopting Release, note 12 above, at 31995. The lower

transition thresholds under the revenue test for an issuer that did not initially qualify as an SRC, or that no

longer qualifies as an SRC because it exceeded the initial thresholds, were revised from less than $40 million of

annual revenues and no public float to less than $80 million of annual revenues and either no public float or a

public float of less than $560 million. See Item 10(f)(2)(iii)(B), Rule 405, and Rule 12b-2.

SRC Adopting Release, note 12 above, at 31992.

This amendment, among other things, preserved the existing thresholds in those definitions and did not change

the number of issuers subject to the ICFR auditor attestation requirement.

Although rare, under our existing rules, some issuers that meet the large accelerated filer definition may be

eligible to be an SRC because of the expanded revenue test in the SRC definition. See Proposing Release, note

4 above, at 24877, n. 25. As discussed below, in Section II.B.3., we are adopting the proposed amendment to

the benefits of scaled regulation. In particular, issuers that are categorized as both SRCs and

accelerated or large accelerated filers must comply with the earlier filing deadlines required of

accelerated and large accelerated filers for annual and quarterly reports and the requirement of

SOX Section 404(b). 21

Prior to the SRC amendments, the SRC category of filers generally did not overlap with

either the accelerated or large accelerated filer categories. 22 Now, however, as illustrated in

Figure 1 of this section, because the public float tests in the SRC and accelerated filer definitions

partially overlap, and the accelerated and large accelerated filer definitions no longer specifically

exclude an issuer that is eligible to be an SRC, an issuer meeting the accelerated filer definition

will be both an SRC and an accelerated filer 23 if it has:

•

A public float of $75 million or more, but less than $250 million, regardless of annual

revenues; or

•

Less than $100 million in annual revenues, and a public float of $250 million or

more, but less than $700 million.

Figure 1. Current Definitions of SRC, Accelerated Filer, and Large Accelerated Filer

the “large accelerated filer” definition so that an issuer that is eligible to be an SRC under the SRC revenue test

would not also qualify as a large accelerated filer.

15 U.S.C. 7262(b).

See SRC Adopting Release, note 12 above, at 32001.

The thresholds provided below are based on the initial thresholds of each definition; however, due to the

transition provisions of the accelerated and large accelerated filer definitions, additional issuers may also be

both an SRC and an accelerated or large accelerated filer.

B. Amendments to Exclude Low-Revenue SRCs from the Accelerated and Large

Accelerated Filer Definitions

1. Proposed Amendments

Under the existing accelerated filer and large accelerated filer definitions in Rule 12b-2,

an issuer must satisfy three conditions to be an accelerated filer or large accelerated filer. 24 We

proposed to add a new condition to the definitions of accelerated filer and large accelerated filer

that would exclude from those definitions an issuer that is eligible to be an SRC and that meets

the SRC revenue test. The most notable effect of the proposed amendments 25 would be that an

issuer that is eligible to be an SRC and that meets the SRC revenue test would not be subject to

the requirement of SOX Section 404(b) that an issuer’s independent auditor must attest to, and

report on, management’s assessment of the effectiveness of the issuer’s ICFR. 26 The final

amendments do not change an auditor’s role in a financial statement audit. 27

SOX Section 404(a) 28 requires almost all issuers, including SRCs, that file reports

The three existing conditions for qualifying as an accelerated filer are that an issuer: (1) had an aggregate

worldwide public float of $75 million or more, but less than $700 million, as of the last business day of the

issuer’s most recently completed second fiscal quarter; (2) has been subject to the requirements of 15 U.S.C.

78m (Exchange Act Section 13(a)) or 15 U.S.C. 78o(d) (Exchange Act Section 15(d)) for a period of at least

twelve calendar months; and (3) has filed at least one annual report pursuant to those sections. For a large

accelerated filer, conditions (2) and (3) are the same, but condition (1) is that an issuer had an aggregate

worldwide public float of $700 million or more, as of the last business day of the issuer’s most recently

completed second fiscal quarter. Also, as discussed in note 20 above, some issuers that meet the “large

accelerated filer” definition may be eligible to be an SRC.

The issuer also would not have to abide by the filing deadlines of an accelerated or large accelerated filer,

provide the disclosure required by Item 1B of Form 10-K and Item 4A of Form 20-F about unresolved staff

comments on its periodic and/or current reports, or provide the disclosure required by Item 101(e)(4) of

Regulation S-K about whether it makes filings available on or through its Internet website. See 17 CFR

229.101(e)(4).

See 17 CFR 240.13a-15(f) and 17 CFR 240.15d-15(f) (defining ICFR).

See letter from Deloitte (suggesting that the Commission explain how an auditor’s role in a financial statement

audit will change as a result of the amendments).

15 U.S.C. 7262(a).

pursuant to Exchange Act Section 13(a) or 15(d) 29 to establish and maintain ICFR and have their

management assess the effectiveness of their ICFR. 30 SOX Section 404(b) subjects certain

issuers not otherwise exempted to the ICFR auditor attestation requirement. 31 The most

significant exemption from the ICFR auditor attestation requirement is the exemption provided

to EGCs pursuant to Title I of the JOBS Act (“JOBS Act Exemption”). Generally, an EGC is a

company that has total annual gross revenues of less than $1.07 billion during its most recently

completed fiscal year end and that has not sold common equity securities under a registration

statement. 32 The JOBS Act Exemption provides EGCs with a five-year exemption from the

ICFR auditor attestation requirement. We estimate that the JOBS Act Exemption applies to

issuers with an aggregate market capitalization of about $585 billion, compared to about $95

billion in aggregate for the issuers that are newly exempt from the ICFR auditor attestation

requirement under the amendments. 33

2. Comments on the Proposed Amendments

Many commenters supported the portion of the proposed amendments that would exclude

See 17 CFR 240.13a-15 and 17 CFR 240.15d-15.

Investment companies registered under Section 8 of the Investment Company Act of 1940, 15 U.S.C 80a–8, are

specifically exempted from SOX Section 404 by SOX Section 405, 15 U.S.C. 7263. Notwithstanding the

exemption pursuant to SOX Section 405, these registered investment companies are subject to other

requirements regarding internal controls. See Proposing Release, note 4 above, at 24879, n. 44.

For example, SOX Section 404(c) exempts from Section 404(b) any issuer that is neither a large accelerated

filer nor an accelerated filer. See 15 U.S.C. 7262(c).

See 15 U.S.C. 77(b)(a)(19).

These estimates are based on staff analysis of data on market values from Compustat for annual reports in

calendar year 2018. See note 298 below for details on the identification of the population of different filer

types. See note 336 below for details on the identification of the population of affected issuers. Out of the

1,430 issuers who qualified as EGCs in 2018, 1,097 are also non-accelerated filers. The remaining EGCs are

still exempt from the ICFR auditor attestation requirement solely due to the JOBS Act Exemption, and those

issuers are significantly larger in terms of aggregate market capitalization (approximately $145 billion) than the

issuers newly exempted under the amendments (approximately $95 billion). This estimate excludes 41 EGCs

with an aggregate of approximately $20 billion in market capitalization for which we are unable to determine

non-accelerated filer status, the majority of which are Canadian issuers filing on Form 40-F.

an issuer that is eligible to be an SRC and that meets the SRC revenue test from the accelerated

and large accelerated filer definitions. 34 Other commenters opposed the proposed

amendments or suggested the need for further analysis. 35 Commenters’ views on different

aspects of the proposal, as well as its effects, are discussed topically, below.

a. Comments on Using Revenue for Determining Accelerated and

Large Accelerated Filer Status

A number of commenters stated explicitly that they supported using revenue as a measure

to determine whether an issuer should be subject to the ICFR auditor attestation requirement. 36

These commenters suggested that using a revenue measurement is preferable to using a public

float measurement 37 because public float is often affected by industry or economic trends not

specific to any particular issuer, 38 and that revenue is more predictable, 39 a better indicator of an

issuer’s complexity, 40 and a better indicator of an issuer’s ability to absorb the burdens of the

ICFR auditor attestation requirement. 41 Other commenters questioned whether revenue is an

appropriate measure for determining whether an issuer should be a non-accelerated filer in all

See, e.g., letters from Adamas, AdvaMed, AdvaMed et al., Aequor, Andersen, Ardelyx, Ardelyx’s slides from

its presentation to the SBCFAC Meeting (Aug. 13, 2019) (“Ardelyx Presentation”), ASA, BIO, Broadmark,

BSC, Carver, Catalyst, Cerecor, Chamber, Chiasma, CLSA, Concert, Corvus, CSB, CSBA, CymaBay, Daré,

Equillium, Evoke, Gritstone, Guaranty, ICBA, Institute of Management Accountants’ Financial Reporting and

Small Business Committees (July 16, 2019) (“IMA”), Kezar, Marinus, Millendo, MSB, National Association of

Manufacturers (July 26, 2019) (“NAM”), Nasdaq, Organovo, Pieris, Revance, SCBA, SI-BONE, Summit,

Sutro, Syros, Teligent, Terra Tech, Xenon, and Zynerba.

See, e.g., letters from BDO, Better Markets, CAQ, CFA, CFA Inst., CII, Crowe, Deloitte, Grant Thornton,

Prof. Barth et al., Prof. Ge et al., Prof. Hassell, Prof. Honigsberg et al., and RSM.

See, e.g., letters from BIO, Broadmark, Chamber, Concert, Corvus, and MSB.

See, e.g., letters from Broadmark, Chamber, Concert, Corvus, and MSB.

See letter from MSB.

See letter from Broadmark.

See, e.g., letters from Concert and Corvus.

See letter from Broadmark.

cases. 42 One commenter asserted that low-revenue companies may have less sophisticated or

experienced accounting functions and some aspects of their business may be associated with

accounting complexities. 43 This commenter also suggested that issuers may recognize revenue

in ways that could result in them frequently transitioning in and out of non-accelerated filer status.44

Another commenter indicated that an issuer could have a relatively low amount of revenue but

still have a large market capitalization and thus “greater investor exposure.” 45

b. Comments on the Proposed Amendments’ Effect on Capital

Formation and the Number of Public Issuers

Commenters expressed mixed views on the effect that the proposed amendments would

have on capital formation, the cost of capital, and the decisions of companies as to whether to

enter the public capital markets. Some commenters agreed with the view expressed in the

Proposing Release that, by expanding the JOBS Act Exemption, the proposed amendments

would enhance capital formation or allow affected issuers to preserve capital 46 while also

maintaining investor protection. 47 One commenter, questioning the benefits, if any, of the ICFR

auditor attestation requirement, asserted that there is no correlation between a smaller issuer’s

compliance with the ICFR auditor attestation requirement and stronger markets in general. 48

Additionally, some commenters suggested that eliminating the ICFR auditor attestation

See letter from Ernst & Young LLP (July 29, 2019) (“EY”), Grant Thornton, and National Association of State

Boards of Accountancy (July 23, 2019) (“NASBA”).

See letter from EY.

Id.

See letter from Grant Thornton.

See, e.g., letters from Andersen, CLSA, Concert, ICBA, and NASBA.

See, e.g., letters from ICBA and NASBA.

See letter from BIO.

requirement would encourage certain companies to enter the public markets. 49

Conversely, other commenters asserted that the proposed amendments would not enhance

capital formation, and some indicated they could even reduce capital formation. 50 Two of these

commenters expressed the view that eliminating the ICFR auditor attestation requirement could

increase the cost of capital for certain issuers because investors would require a premium to

invest in issuers due to the heightened risk of ineffective internal controls. 51 In addition, some

commenters maintained that the ICFR auditor attestation requirement does not prevent

companies from entering the public markets. 52 For example, one commenter suggested that the

Proposing Release’s statement about the significant decline in the number of issuers listed on

major exchanges implied that the cost of compliance with the ICFR auditor attestation

requirement has contributed materially to that decline. 53 This commenter and some others

asserted that the decline can be attributed to many other factors. 54 Some commenters stated that

confidence in the U.S. capital market system, likely stems, at least in part, from financial

reporting safeguards, including the ICFR auditor attestation requirement, and contended that the

proposed amendments would thereby reduce investor confidence in issuers’ financial reporting. 55

Several commenters indicated that the ICFR auditor attestation requirement is not

See, e.g., letters from AdvaMed, AdvaMed et al., Broadmark, Cerecor, and ICBA.

See, e.g., letters from Better Markets, CII, CFA, CFA Inst., and Prof. Ge et al.

See letters from Better Markets and CFA.

See, e.g., letters from CFA, CFA Inst., CII, and Crowe.

See letter from CFA.

See, e.g., letters from CII, CFA, CFA Inst., and Crowe. Other factors commenters cited include the expansion

of exemptions to registration that increase companies’ ability to raise funds privately, see, e.g., letters from

CFA, CII, and Crowe; corporate consolidations, see, e.g., letters from CFA and CII; market conditions, see

letter from CFA; and the general regulatory environment, see letter from Crowe.

See, e.g., letters from CAQ and CII.

necessary because issuers are permitted to voluntarily obtain an ICFR auditor attestation if they

believe it is in their interest to do so. 56 Some instances in which commenters suggested that

issuers may choose to voluntarily obtain an ICFR auditor attestation include when their investors

demand it, 57 when not obtaining it would have a negative impact on investment analysts’

coverage, 58 or when issuers otherwise deem it a good use of their capital resources. 59 In this

regard, one commenter suggested clarifying that it is the authority and responsibility of the issuer’s

audit committee to determine whether the issuer should voluntarily obtain an ICFR auditor

attestation.60

c. Comments on the Proposed Amendments’ Effect on Investor

Protection

Commenters’ views as to the effect of the proposed amendments on investor protection

were also mixed. Many commenters asserted that, even if the ICFR auditor attestation

requirement did not apply, other existing requirements would provide investors in these issuers

with sufficient protection. 61 Commenters cited a number of these other requirements, including

SOX Section 404(a); 62 Nasdaq’s listing standards, surveillance, and enforcement; 63 the required

management certifications; 64 and the obligation of an independent auditor to consider ICFR

See, e.g., letters from ASA, BIO, Broadmark, Chamber, Guaranty, and Nasdaq.

See, e.g., letters from BIO and Guaranty.

See letter from Guaranty.

Id.

See letter from EY.

See, e.g., letters from ASA, Broadmark, BSC, Carver, Cerecor, Guaranty, ICBA, MSB, NAM, Nasdaq, Pieris,

SCBA, and Xenon.

See, e.g., letters from ASA, Broadmark, Carver, ICBA, MSB, Nasdaq, and Xenon.

See letter from Nasdaq.

See 17 CFR 229.601(31)(i), 17 CFR 240.13a-14(a), and 17 CFR 240.15d-14(a). See, e.g., letters from MSB,

Nasdaq, and Xenon.

when conducting a financial statement audit. 65

For example, several commenters noted that, when conducting a financial statement

audit, the auditor is required to obtain an understanding of each component of ICFR, 66 which a

few of these commenters asserted would provide investors with sufficient protection absent the

ICFR auditor attestation requirement. 67 Other commenters noted that the requirement that an

auditor communicate to the issuer’s management and its audit committee any significant

deficiencies or material weaknesses related to ICFR in a financial statement audit would provide

a certain level of protection for investors in the affected issuers. 68 Some commenters expressed a

view that the ICFR auditor attestation requirement is not important or material to investors

generally. 69 A few of these commenters asserted that investors rarely ask an issuer that is

exempt from the ICFR auditor attestation requirement to voluntarily obtain such an attestation. 70

One commenter 71 cited a study 72 that found no statistically significant market response on

See, e.g., letters from ASA, Carver, Cerecor, MSB, NAM, and Xenon.

See, e.g., letters from ASA, CAQ, CFA Inst., Crowe, EY, Grant Thornton, Guaranty, NASBA, Nasdaq,

PricewaterhouseCoopers LLP (July 25, 2019) (“PWC”), and RSM.

See, e.g., letters from ASA, Guaranty, and Nasdaq.

See letter from Nasdaq.

See, e.g., letters from Adamas; Ardelyx; Ardelyx Presentation, ASA, BIO, Carver, Catalyst, Chiasma, Corvus,

CymaBay, Equillium, Evoke, Gritstone, Kezar, Marinus, Millendo, Organovo, Pieris, Revance, SI-BONE,

Syros, Teligent, and Zynerba. Some of these commenters and others asserted that the ICFR auditor attestation

requirement is not material for, or important to, investors based on the results of a study and their own

experience. See, e.g., letters from Adamas, Ardelyx, Catalyst, Chiasma, Corvus, CymaBay, Equillium, Evoke,

Gritstone, Kezar, Marinus, Millendo, Organovo, Pieris, Revance, SI-BONE, Syros, Teligent, and Zynerba

(citing Craig Lewis and Joshua White, Science or Compliance: Will Section 404(b) Compliance impede

Innovation by Emerging Growth Companies in the Biotech Industry, (Feb. 2019) (“BIO Study”), available at

https://www.bio.org/sites/default/files/BIO_EGC_White_Paper_02_11_2019_FINAL.pdf).

See, e.g., letters from Ardelyx Presentation and BIO.

See letter from BIO.

Jacqueline Hammersley, Linda Myers, and Catherina Shakespeare, Market Reactions to the Disclosure of

Internal Control Weaknesses and to the Characteristics of those Weaknesses under Section 302 of the Sarbanes

Oxley Act of 2002 (Mar. 2008), available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=979538.

average to disclosures of material weaknesses in disclosure controls, which suggests, according

to the commenter, that investors do not significantly change their long-term value assessment of

an issuer based on these disclosures.

In addition to these broader points, several commenters in the banking sector pointed out

that community banks and bank holding companies are subject to extensive supervision and

regulation by federal and state banking regulators, which they stated would protect investors in

this industry even if the affected issuers were not subject to the ICFR auditor attestation

requirement. 73

Conversely, other commenters asserted that the ICFR auditor attestation requirement is

an important investor protection and that eliminating it would undermine such protection. 74 One

commenter disputed the contention in the Proposing Release that eliminating the ICFR auditor

attestation requirement for low-revenue issuers would not significantly affect the ability of

investors to make informed investment decisions. 75 Some commenters stated that the ICFR

auditor attestation requirement increases investor confidence generally 76 and that investors view

the requirement as beneficial. 77

Some commenters asserted that the SOX Section 404(a) requirement would not provide

investors in low-revenue SRCs with sufficient protection if they were not also subject to the

ICFR auditor attestation requirement 78 because, as one commenter stated, the ICFR auditor

See, e.g., letters from BSC, Guaranty, ICBA, and SCBA.

See, e.g., letters from Better Markets, Grant Thornton, and Prof. Barth et al.

See letter from Prof. Barth et al.

See, e.g., letters from Better Markets, CAQ, CFA Inst., and EY.

See, e.g., letters from CII, CFA Inst., and EY.

See, e.g., letters from Better Markets, CFA Inst., Crowe, Grant Thornton, and Prof. Barth et al.

attestation requirement acts as an effective check on SOX Section 404(a). 79 Another commenter

asserted that management’s assessment is weakened when management knows that it will not be

challenged by an ICFR auditor attestation. 80 A third commenter claimed that investors would

place undue reliance on management’s report when not accompanied by an ICFR auditor

attestation. 81

A few commenters noted that a financial statement audit does not provide the same level

of assurance as an integrated audit 82 because a financial statement audit’s objective is different

from that of an integrated audit as it relates to ICFR. 83 Therefore, some commenters asserted

that, without the ICFR auditor attestation requirement, the requirement for auditors to obtain an

understanding of each component of ICFR when conducting a financial statement audit would

not provide sufficient investor protection. 84 Similarly, other commenters suggested that some

testing of ICFR conducted as part of a financial statement audit would not provide sufficient

investor protection. 85 One commenter asserted that the control testing performed by a financial

statement auditor would not be as extensive as testing performed in an ICFR auditor attestation

and that it is more difficult for a financial statement auditor to challenge the design of ICFR. 86

Another commenter noted that, despite the requirement that a financial statement auditor

See letter from Better Markets.

See letter from CFA Inst.

See letter from Grant Thornton.

See, e.g., letters from CFA Inst., Crowe, and EY.

See, e.g., letters from CAQ, CFA Inst., and RSM (noting that a financial statement audit’s objective is for the

auditor to obtain an understanding of the issuer’s ICFR that is sufficient to assess the factors that affect the risks

of material misstatement and to design further audit procedures, whereas an integrated audit’s objective is to

test and express an opinion on the effectiveness of the issuer’s ICFR).

See, e.g., letters from CAQ, CFA Inst. Crowe, EY, and RSM.

See, e.g., letters from EY, Grant Thornton, and NASBA.

See letter from EY.

communicate any significant deficiencies or material weaknesses related to ICFR to the issuer’s

management and its audit committee, a financial statement audit is not designed to identify such

significant deficiencies or material weaknesses. 87

Some commenters indicated that the ICFR auditor attestation requirement promotes

effective ICFR and more accurate disclosures related to ICFR, 88 including the likelihood and

timeliness of disclosing ineffective ICFR. 89 Also, a number of commenters noted that, as

discussed in the Proposing Release, effective ICFR, generally, and the ICFR auditor attestation

requirement, more specifically, enhances transparency; 90 increases the quality and reliability of

issuers’ financial statements, 91 corporate governance, 92 audits, 93 and analyst forecasts; 94 and

reduces the number of issuers’ restatements, misstatements, 95 the instances of fraud, 96 and

occurrences of insider trading. 97

A few commenters expressed concern about the effect that the amendments could have

on the reliability of key performance indicators and other measures. One commenter indicated

that investors in certain issuers that would become non-accelerated filers under the amendments

rely on key performance indicators that are derived from their financial statements, such as

Id.

See, e.g., letters from Better Markets, CFA, CII, Crowe, Grant Thornton, Prof. Barth et al., and PWC.

See, e.g., letters from Better Markets, CFA, Crowe, and Prof. Barth et al.

See letter from EY.

See, e.g., letters from Better Markets, CAQ, CFA, CII, Deloitte, EY, Grant Thornton, Prof. Barth et al., PWC,

and RSM.

See letter from Deloitte.

See letter from CAQ.

See letter from CFA.

See, e.g., letters from CAQ, CFA, CFA Inst., Crowe, Deloitte, EY, Grant Thornton, and Prof. Barth et al.

See, e.g., letters from Better Markets and Deloitte.

See letter from CFA.

backlog, sales orders, and number of customers, and asserted that eliminating the ICFR auditor

attestation requirement could reduce the reliability of those indicators. 98 Another commenter

noted that investors in those issuers rely on non-GAAP financial measures, key performance

indicators, and other disclosures and stated that the Commission may wish to consider auditor

involvement with that information to address potential risks related to completeness and

accuracy. 99

d. Comments on the Disproportionate Costs and Benefits of the

ICFR Auditor Attestation Requirement to Small and LowRevenue Companies

A number of commenters stated that the ICFR auditor attestation requirement is quite

costly. 100 One of these commenters indicated that the ICFR auditor attestation requirement “is

the most costly aspect of being an [a]ccelerated [f]iler.” 101 Several commenters asserted more

specifically that the ICFR auditor attestation requirement is disproportionally costly to small

and/or low-revenue issuers. 102 Some of these commenters indicated that the reason for the

disproportionate costs is that there are fixed costs associated with the ICFR auditor attestation

requirement that are not scalable for smaller issuers. 103 Other commenters stated that the

benefits of the ICFR auditor attestation requirement do not outweigh the costs, 104 including the

See letter from NASBA.

See letter from CAQ.

100

See, e.g., letters from BIO, Broadmark, Carver, Guaranty, ICBA, MSB, Summit, and Syros.

101

Letter from Guaranty.

102

See, e.g., letters from AdvaMed et al., Andersen, BIO, Broadmark, Chamber, CLSA, CSB, Guaranty, and

NAM.

103

See, e.g., letters from Broadmark and Guaranty.

104

See, e.g., letters from ICBA, MSB, and Syros.

costs associated with ICFR auditor attestation fees, 105 issuer personnel time, 106 and outside

consultants. 107

Some commenters asserted that eliminating the ICFR auditor attestation requirement

would not substantially reduce costs to issuers. 108 A few of these commenters noted that ICFR

auditor attestations have become less expensive and more effective because auditors are more

experienced in conducting them. 109 Some commenters stated that potential compliance cost

reductions may be negated if there is a loss of investor confidence and protection, 110 if ICFR

deficiencies go undetected, 111 if there is an increase in restatements and misstatements, 112 or if

there are higher costs of capital. 113. Additionally, some commenters stated that any cost

reductions would vary widely among issuers 114 and would be hard to quantify. 115

Other commenters asserted that the benefits of the ICFR auditor attestation requirement

are not as great for low-revenue and smaller issuers as they are for other issuers. 116 These

commenters expressed the view that the issuers that would be exempt from the ICFR auditor

attestation requirement under the proposed amendments are less likely to have ineffective ICFR

105

See, e.g., letters from MSB and Summit.

106

See, e.g., letters from Carver, MSB, and Summit.

107

See, e.g., letters from MSB and Summit.

108

See, e.g., letters from BDO, Better Markets, CFA, CFA Inst., EY, Grant Thornton, and RSM.

109

See, e.g., letters from CFA Inst. and Deloitte.

110

See, e.g., letters from Better Markets and CII.

111

See letter from CFA Inst.

112

See, e.g., letters from BDO, CFA, and CFA Inst.

113

See, e.g., letters from CFA and CFA Inst.

114

See, e.g., letters from EY, Grant Thornton, and PWC.

115

See, e.g., letters from Grant Thornton, PWC, and RSM.

116

See, e.g., letters from BIO and Guaranty.

than other issuers. One commenter cited a study that concluded that biotech EGCs are less likely

to have ineffective ICFR than other issuers. 117 Another commenter noted that ineffective ICFR

is less of a concern for banking issuers because of the “federal and state regulatory

oversight and internal control audits of community banks.” 118

Conversely, a number of other commenters contended that the benefits of the ICFR

auditor attestation requirement are greater for low-revenue and smaller issuers than for other

issuers. 119 Some of the commenters discussed how those issuers are more likely to have

ineffective ICFR. 120 Commissioner Robert J. Jackson Jr.’s dissent from the Proposing Release

(“Commissioner Jackson’s Statement”) 121 asserted that investors care most about ICFR auditor

attestations at those issuers that would not be subject to the ICFR auditor attestation requirement

under the proposed amendments, and that high-growth companies, which potentially would

include some of the affected issuers, are those in which the risk and consequences of fraud are

the greatest. 122 Some commenters referred to statistics cited in the Proposing Release to argue

that issuers not subject to the ICFR auditor attestation requirement have higher levels of

117

See letter from BIO (citing the BIO Study). Note that the BIO Study investigates only the incremental effect of

being in the category of biotech EGCs after accounting for the association of ineffective ICFR with the other

characteristics of these issuers (such as their size and return on assets). It is unclear from the study whether

these issuers have a higher or lower rate of ineffective ICFR on average, when considering all of their

characteristics.

118

See letter from Guaranty.

119

See, e.g., letters from Better Markets, CAQ, CFA, CFA Inst., CII, Crowe, EY, Grant Thornton, IMA, NASBA,

Prof. Barth et al., Prof. Hassell, and RSM.

120

See, e.g., letters from Better Markets, CAQ, CFA, CII, Grant Thornton, IMA, NASBA, Prof. Barth et al., and

Prof. Hassell.

121

Commissioner Robert J. Jackson Jr., Statement on Proposed Amendments to Sarbanes Oxley 404(b) Accelerated

Filer Definition (May 9, 2019), available at https://www.sec.gov/news/public-statement/jackson-statementproposed-amendments-accelerated-filer-definition. A few commenters cited Commissioner Jackson’s

Statement. See, e.g., letters from CFA, CFA Inst., and CII.

122

We address Commissioner Jackson’s Statement in the Economic Analysis. See Section IV.C.3.c. below.

ineffective ICFR compared with issuers subject to that requirement. 123 Additionally,

commenters observed that some low-revenue issuers or smaller companies may still have

complex financial statements that require sophisticated accounting. 124

Finally, some commenters maintained that the risks of fraud 125 and financial statement

restatements or misstatements 126 are greater for the issuers that would not be subject to the ICFR

auditor attestation requirement under the proposed amendments than they are for other issuers.

Other commenters cited research that concludes that, since 2003, non-accelerated U.S. filers

accounted for 62 percent of the total U.S. financial statement restatements. 127 Some commenters

contended that issuers that would not be subject to the ICFR auditor attestation requirement

under the proposed amendments have fewer resources and personnel, 128 which could result in

increased misstatements, 129 unidentified material weaknesses, 130 and ineffective ICFR. 131

e. Comments on the Relationship Between Non-Accelerated Filers

and SRCs

A number of commenters discussed the relationship between the non-accelerated

123

Commenters cited the statistics in the Proposing Release, note 4 above, that over 40 percent of non-accelerated

filers that are not subject to the ICFR auditor attestation requirement have ineffective ICFR, compared to less

than approximately nine and five percent of accelerated and large accelerated filers, respectively. As noted in

the Proposing Release, note 4 above, over 68 percent of non-accelerated filers have reported two consecutive

years of ineffective ICFR and over 38 percent have reported four consecutive years of ineffective ICFR in their

annual reports. See, e.g., letters from Better Markets and Grant Thornton.

124

See, e.g., letters from BDO and RSM.

125

See, e.g., letters from Better Markets, CFA, CII, and Prof. Barth et al.

126

See, e.g., letters from Better Markets, CAQ, EY, Grant Thornton, IMA, Prof. Barth et al., and RSM.

127

See, e.g., letters from CAQ and CFA Inst.

128

See, e.g., letters from CAQ, Crowe, EY, and Grant Thornton.

129

See, e.g., letter from Crowe.

130

See, e.g., letter from EY.

131

See, e.g., letters from CAQ and Grant Thornton.

filer and SRC definitions. 132 Some commenters noted the current relationship is

incongruent, which results in complexity. 133 Several commenters indicated that the proposed

amendments would reduce some of this complexity by more closely aligning the definitions. 134

In contrast, other commenters asserted that the proposed amendments would increase the

complexity of determining filer status. 135

While supporting the proposed amendments, some commenters recommended that the

final amendments completely align the SRC and non-accelerated filer definitions. 136

Additionally, one commenter recommended further extending the relief from the ICFR auditor

attestation requirement to issuers with a public float that exceeds $700 million if their annual

revenues are less than $100 million. 137

f. Other Comments

We received a variety of other comments on the Proposing Release. Some commenters

noted that it is difficult for investors to easily determine whether an issuer’s filing includes an

ICFR auditor attestation. 138 These commenters suggested requiring issuers to disclose whether

they are exempt from the ICFR auditor attestation requirement 139 and/or have voluntarily

132

See, e.g., letters from ASA, BDO, BIO, Broadmark, CFA, CFA Inst., Chamber, EY, Grant Thornton, Guaranty,

KPMG LLP (July 29, 2019) (“KPMG”), NAM, Nasdaq, PWC, and RSM.

133

See, e.g., letters from BDO, BIO, Broadmark, CFA, and Nasdaq.

134

See, e.g., letters from BIO, Grant Thornton, KPMG, and Nasdaq.

135

See, e.g., letters from BDO, CFA Inst., EY, PWC, and RSM. See also SBCFAC Meeting Transcript (Aug. 13,

2019), available at https://www.sec.gov/info/smallbus/acsec/sbcfac-transcript-081319.pdf.

136

See, e.g., letters from ASA, Guaranty, NAM, and Nasdaq.

137

See letter from Corvus.

138

See, e.g., letters from CAQ, CFA Inst., and Grant Thornton.

139

See, e.g., letters from CFA Inst., CII, and Grant Thornton.

obtained an ICFR auditor attestation 140 either on a filing’s cover page, 141 such as with a check

box, 142 or in management’s report on ICFR. 143 Two commenters recommended that the

Commission engage in a post-implementation review of the impact of the final amendments, 144

with one of these commenters recommending that the final amendments require a review of the

impact of the changes on the affected registrants five years after adoption of the

amendments. 145 Some commenters requested that we allow sufficient time and notice for

auditors and issuers to prepare for compliance with the final amendments, 146 whereas other

commenters noted that some issuers may be subject to the ICFR auditor attestation

requirement for only a short time 147 and requested the Commission adopt final amendments

quickly. 148 One commenter asserted that the measurement date for non-accelerated filer

status and the timing of the start of the auditor’s attestation of ICFR is burdensome to small

biotech registrants. 149

140

See, e.g., letters from CFA Inst. and KPMG.

141

See, e.g., letters from CAQ, CFA Inst., CII, and Grant Thornton.

142

See, e.g., letters from CAQ and Grant Thornton.

143

See letter from Grant Thornton.

144

See letters from IMA and PWC.

145

See letter from IMA.

146

See, e.g., letters from BDO, CAQ, Crowe, EY, KPMG, PWC, and RSM.

147

See, e.g., letters from Concert, MSB, Nasdaq, and Xenon.

148

See, e.g., letters from MSB and Summit.

149

See letter from Corvus. Public float for both SRC status and accelerated and large accelerated filer status is

measured on the last business day of the issuer’s most recently completed second fiscal quarter, and revenue for

purposes of determining SRC status is measured based on annual revenues for the most recent fiscal year

completed before the last business day of the second fiscal quarter. Therefore, an issuer will be aware of any

change in SRC status or accelerated or large accelerated filer status as of that date. Although an issuer that

determines it will no longer be eligible to be an SRC is permitted to continue to use the SRC accommodations for the

Form 10-K for the year in which it fails the measurement test, an issuer that becomes an accelerated or large

accelerated filer on that same measurement date would be required to include the ICFR auditor attestation in that Form

10-K. See Rule 12b-2, Item 10(f)(2)(i)(C), and Rule 405. Although the transition provisions apply differently,

the measurement dates for SRC status and accelerated and large accelerated filer status each provide an issuer with at

Additionally, although we did not propose amendments to the accelerated and large

accelerated filer definitions that would specifically address foreign private issuers (“FPI”) or

business development companies (“BDC”), we solicited comment on these points and a few

commenters requested we do so. 150 One commenter asserted that there should be no disparity

between an FPI that presents its financial statements in accordance with International Financial

Reporting Standards (“IFRS”) and a domestic issuer or FPI that presents its financial statements

in accordance with U.S. GAAP. 151 The commenter noted that an FPI that presents its financial

statements in accordance with IFRS cannot be an SRC, so such an FPI cannot rely on the

proposed amendments. Another commenter recommended that the Commission extend the

benefits of non-accelerated filer status to BDCs if they have total investment income of less than

$80 million in their most recently completed fiscal year for which audited financial statements

are available and have either no public float or public float of less than $700 million. 152 The

commenter stated that allowing BDCs to qualify as non-accelerated filers under this modified

SRC revenue test would reduce regulatory asymmetry between BDCs and operating companies,

consistent with recent congressional mandates to allow BDCs to use the same offering rules as

operating companies. The commenter also suggested that allowing smaller BDCs to benefit

from non-accelerated filer status would ease regulatory costs and burdens, which could

encourage more BDCs to enter public markets, creating greater access to capital for small

least six months to prepare for a change in its status, and we continue to believe that this is an adequate amount of time to

prepare for the transition.

150

See, e.g., letters from Dorsey & Whitney LLP (Aug. 16, 2019) (“Dorsey & Whitney”) and Proskauer Rose LLP

(July 26, 2019) (“Proskauer”).

151

See letter from Dorsey & Whitney.

152

See letter from Proskauer.

operating companies and expanding investment opportunities for retail investors. 153

3. Final Amendments

After considering the comments, we are adopting the final amendments substantially as

proposed. The final amendments add a new condition to the accelerated and large accelerated

filer definitions in Rule 12b-2 that excludes an issuer that is eligible to be an SRC and that had

annual revenues of less than $100 million in the most recent fiscal year for which audited

financial statements are available. The amendments also allow BDCs to qualify for this

exclusion if they meet the requirements of the SRC revenue test using their annual investment

income as the measure of annual revenue, although BDCs would continue to be ineligible to be

SRCs. 154 The final amendments are consistent with our historical practice of providing scaled

disclosure and other accommodations for smaller issuers 155 and with recent actions by Congress

to reduce burdens on new and smaller issuers. 156 The table below summarizes the conditions

required to be considered an accelerated and large accelerated filer under the final amendments

to Rule 12b-2.

153

Id.

154

See Section II.B.3.f. below.

155

See, e.g., Smaller Reporting Company Regulatory Relief and Simplification, Release No. 33-8876 (Dec. 19,

2007) [73 FR 934 (Jan. 4, 2008)]; Smaller Reporting Company Regulatory Relief and Simplification, Release

No. 33-8876 (Dec. 19, 2007) [73 FR 934 (Jan. 4, 2008)] (“2007 SRC Adopting Release”); and SRC Adopting

Release, note 12 above.

156

See note 11 above.

Table 1. Accelerated Filer and Large Accelerated Filer Conditions Under the Final

Amendments

Final Accelerated Filer Conditions

Final Large Accelerated Filer Conditions

The issuer has a public float of $75 million or more,

but less than $700 million, as of the last business day

of the issuer’s most recently completed second fiscal

quarter.

The issuer has a public float of $700 million or more,

as of the last business day of the issuer’s most recently

completed second fiscal quarter.

The issuer has been subject to the requirements of

Exchange Act Section 13(a) or 15(d) for a period of at

least twelve calendar months.

Same.

The issuer has filed at least one annual report pursuant

Exchange Act Section 13(a) or 15(d).

Same.

The issuer is not eligible to use the requirements for

SRCs under the revenue test in paragraph (2) or

(3)(iii)(B), as applicable, of the “smaller reporting

company” definition in Rule 12b-2 or, in the case of a

BDC, does not meet the requirements of the revenue

test in those paragraphs using annual investment

income as the measure of its annual revenues.

Same.

Below we discuss specific aspects of the final amendments about which we received

significant public comment and our response to those comments. In many cases, our responses

reflect analysis and data that is more comprehensively presented in the Economic Analysis. 157

a. Using Revenue for Determining Accelerated and Large

Accelerated Filer Status

As discussed above, 158 several commenters supported the use of revenue in the proposal,

providing a variety of reasons that a revenue measurement is preferable to using a public float

157

See Section IV. below.

158

See Section II.A.2.a. above.

measurement. 159 Others, however, questioned whether revenue is an appropriate measure for

determining whether an issuer should be considered a non-accelerated filer. 160 One of these

commenters asserted that low-revenue issuers may have less sophisticated or experienced

accounting functions and some aspects of their business may be associated with accounting

complexities. 161 Also, the commenter suggested that these issuers may recognize revenue in

ways that could result in them frequently transitioning in and out of non-accelerated filer status.162

As we discuss in more detail below, 163 we continue to believe, as a general matter, that

there may be greater costs and relatively lower benefits to including low-revenue issuers, as

compared to other issuers, in the accelerated and large accelerated filer definitions. While we

recognize that the circumstances of individual issuers and their accounting systems and processes

may vary, we believe that low-revenue issuers may, on average, be less susceptible to the risk of

certain types of restatements, such as those related to revenue recognition. 164 We also note that

the revisions to the transition thresholds included in the final amendments may help minimize the

risk of frequent reclassifications of issuer status.165 For these reasons, we continue to believe that

revenue is an appropriate measure for determining whether an issuer should be considered a nonaccelerated filer.

b. Effect on Capital Formation and the Number of Public Companies

Under the final amendments, an issuer that is eligible to be an SRC and that meets the

159

See, e.g., letters from Broadmark, Chamber, Concert, Corvus, and MSB.

160

See, e.g., letters from EY and Grant Thornton, and NASBA.

161

See letter from EY.

162

Id.

163

See Sections II.B.3.d. and Section IV.C.2.d. below.

164

See Section IV.C.3. below.

165

See Section II.C. below.

SRC revenue test will not be required to comply with accelerated or large accelerated filer

requirements and, thereby, will not be subject to the ICFR auditor attestation requirement. Not

subjecting these affected issuers to the ICFR auditor attestation requirement should reduce their

compliance costs. As discussed in the Economic Analysis, 166 we estimate that, consistent with

the proposal, an issuer no longer subject to the ICFR auditor attestation requirement would save

approximately $210,000 per year comprised of approximately $110,000 per year reduction in

audit fees and an additional reduction in non-audit costs of approximately $100,000.

Some commenters stated that eliminating the ICFR auditor attestation requirement would

enhance capital formation or allow those issuers to preserve capital. 167 We note, however, that a

number of other commenters asserted that these cost savings would be small, 168 and may not

help capital formation. 169 As we discuss in the Economic Analysis, 170 we continue to believe

that the expected savings are likely to represent a meaningful cost savings for many of the

affected issuers and, therefore, may have a positive effect on capital preservation and formation.

Although the average annual cost savings may represent a small percentage of the average

affected issuer’s revenues and market capitalization, we believe those savings may be

meaningful given that affected issuers have, on average, negative net income and negative net

cash flows from operations. 171 More generally, low-revenue issuers are likely to face financing

constraints because they do not have access to internally generated capital. 172 Therefore, the

166

See Section IV.C.2.b. below.

167

See, e.g., letters from Andersen, CLSA, Concert, ICBA, and NASBA.

168

See letters from CFA, CFA Inst., CII, and Prof. Barth et al.

169

See note 50 above.

170

See Section IV.C.2.d. below.

171

See note 362 below.

172

This information is based on staff analysis of data from Compustat. See Section IV.C.2.d. below.

average savings of $210,000 per year for these issuers may be put to productive use 173 such as

developing the company. 174

As we noted in the Proposing Release, 175 the affected issuers are a type of smaller issuer

whose representation in public markets has decreased relative to the years before SOX. Over the

past two decades, the number of issuers listed on major exchanges has decreased by about 40

percent, 176 but the decline has been concentrated among smaller size issuers. For example, the

number of listed issuers with a market capitalization below $700 million has decreased by about

65 percent, 177 and the number of issuers with less than $100 million in revenue has decreased by

about 60 percent. 178 Although factors other than the ICFR auditor attestation requirement may

have contributed to the decline, 179 we believe that the described cost reductions associated with

the final amendments could be a positive factor in encouraging additional small companies to

173

For example, in a survey of issuers in the biotech industry, among 11 biotech EGCs that responded to a question

regarding how an extension of the exemption from the ICFR auditor attestation requirement would affect them

given the costs associated with the requirement, eight out of the 11 issuers indicated that they expected a

positive impact on investments in research and development and six out of the 11 issuers indicated that they

expected a positive impact on hiring employees. See BIO Study, note 423 above.

174

See, e.g., letters from Adamas, Aequor, Andersen, Ardelyx, Catalyst, Chiasma, CLSA, Concert, Corvus,

CymaBay, Daré, Evoke, Equillium, Gritstone, ICBA, Kezar, Marinus, Millendo, NASBA, Organovo, Pieris,

Revance, SI-BONE, Sutro, Syros, Teligent, and Zynerba.

175

See Section III.C.1. of the Proposing Release, note 4 above. Staff extracted information regarding whether

issuers reported having securities registered under Section 12(b) of the Exchange Act from the cover page of

annual report filings using a computer program supplemented with hand collection. See note 336 below for

details on the identification of the population of affected issuers.

176

This estimate is based on staff analysis of data from the Center for Research in Security Prices database for

December 1998 versus December 2018. The estimate excludes RICs and issuers of ADRs.

177

Id.

178

This estimate is based on staff analysis of data from Standard & Poor’s Compustat and Center for Research in

Security Prices databases for fiscal year 1998 versus fiscal year 2017. The estimate excludes RICs and issuers

of ADRs.

179

See note 54 above.

level of transparency and investor protection with respect to those companies. 180

c. Effect on Investor Protection

We continue to believe that the amendments are not likely to have a significant effect on

the overall ability of investors in the affected issuers to make informed investment decisions and

note that many commenters agreed with this assessment. 181 As discussed in greater detail in the

Proposing Release, 182 issuers have a number of other obligations that we believe will provide

sufficient protections for investors in the affected issuers and allow investors in those issuers to

make informed investment decisions. These responsibilities derive from the Foreign Corrupt

Practices Act (“FCPA”) requirements with respect to internal accounting controls 183 as well as a

number of different changes to financial reporting that were introduced by SOX. 184

For example, although a non-accelerated filer that is eligible to be an SRC and that meets

the SRC revenue test will not be subject to the ICFR auditor attestation requirement, it will

remain subject to the SOX Section 404(a) requirement to state in its annual report the

responsibility of management for establishing and maintaining an adequate control structure and

procedures for financial reporting, and for that report to contain an assessment of the

effectiveness of that structure and its procedures. In addition, affected issuers are required to

devise and maintain a system of internal accounting controls sufficient to provide reasonable

assurances that transactions are recorded as necessary to permit the preparation of financial

180

See, e.g., letters from AdvaMed, AdvaMed et al., Broadmark, Cerecor, and ICBA.

181

See note 61 to 68 above and accompanying text.

182

See Section II.B. of the Proposing Release, note 4 above.

183

The FCPA added Section 13(b)(2)(B) to the Exchange Act, 15 U.S.C 78m(b)(2)(B) (referring to “internal

accounting controls” rather than ICFR).

184

See, e.g., SOX Sections 302, 15 U.S.C. 7241, and 404(a) and related rules. See 17 CFR 229.308, 17 CFR

240.13a-15, 17 CFR 240.15d-15, Form 20-F, Form 40-F, 17 CFR 270.30a-2, and 17 CFR 270.30a-3.

statements in conformity with GAAP. 185 Also, the principal executive and financial officers of

certain issuers are required to certify that, among other things, they are responsible for

establishing and maintaining ICFR, have designed disclosure controls and procedures to ensure

material information relating to the issuer and its consolidated subsidiaries is made known to

such officers by others within those entities, and have evaluated and reported on the

effectiveness of the issuer’s disclosure controls and procedures. 186

Furthermore, the issuers that are subject to the final amendments will remain subject to a

financial statement audit by an independent auditor, which will help maintain appropriate

investor protections. Even without an ICFR auditor attestation requirement, an independent

auditor is required to consider ICFR in the performance of a financial statement audit. 187 We

acknowledge, as stated by some commenters, 188 that the objective of a financial statement audit

and the level of control testing performed is different from an ICFR audit. However, we believe

that the requirements of a financial statement audit, among other requirements, provide some

additional protections and that, for low-revenue SRCs, this and the other protections and factors

associated with these issuers described above sufficiently mitigate the risk that the final

amendments will adversely affect the ability of investors to make informed investment

decisions. 189

185

15 U.S.C. 78m(b)(2)(B).

186

See 17 CFR 240.13a-14 or 17 CFR 240.15d-14 (requiring certification) and 17 CFR 229.601(b)(31)

(prescribing certification content). These rules were adopted pursuant to SOX Section 302. See 15 U.S.C.

7241.

187

See Public Company Accounting Oversight Board (“PCAOB”) Accounting Standard (“AS”) 2110, Identifying

and Assessing Risks of Material Misstatement, paragraphs .18 through.40 (“PCAOB AS 2110”), paragraphs .18

through .40.

188

See note 83 above.

189

See Section IV.C.3.b. below (stating that, in the Proposing Release, note 4 above, we noted that low-revenue

issuers may be less likely than other issuers to fail to detect and disclose material weaknesses in the absence of

an ICFR auditor attestation, perhaps because they have less complex financial systems and controls).

For example, the auditor in a financial statement audit is required to identify and assess

the risks of material misstatements, which is similar to the risk assessment evaluation required in

an ICFR auditor attestation. Additionally, the auditor engaged in a financial statement audit

often may test the operating effectiveness of certain internal controls even if not performing an

integrated audit to reduce the extent of substantive testing required to issue an opinion on the

financial statements. Moreover, even if an auditor decides not to rely on internal controls to

reduce the extent of substantive testing, the auditor may still identify internal control deficiencies

during such substantive testing in a financial statement audit.

Under PCAOB standards, the evaluation and communication of significant deficiencies

and material weaknesses in ICFR to management and the issuer’s audit committee is required in

both a financial statement audit and an ICFR auditor attestation. 190 The evaluation of the

severity of a control deficiency identified by the auditor is the same for a financial statement

audit and an ICFR auditor attestation. Further, a financial statement auditor has the

responsibility to review management’s disclosure for any misstatement of facts, such as a

statement that ICFR is effective when there is a known material weakness. 191 Therefore, we

continue to believe significant deficiencies and material weaknesses that an ICFR auditor

attestation may uncover also may be uncovered as a part of the financial statement audit of a

low-revenue SRC. As discussed above, 192 because of these requirements, a number of

commenters agreed that an auditor of the financial statements of a low-revenue issuer that would

be exempt from the ICFR auditor attestation requirement under the final amendments would still

be required to consider ICFR and therefore this process would provide sufficient investor

190

See Section II.C. of the Proposing Release, note 4 above.

191

Id.

192

See notes 61 to 68 above and accompanying text.

protection.

Other developments may serve to reinforce these existing investor protections. In 2010,

the PCAOB adopted enhanced auditing standards related to the auditor’s assessment of, and

response to, risk that, in part, clarify and augment the extent to which internal controls are to be

considered in a financial statement audit. 193 In particular, these risk assessment standards require

auditors in both an integrated and financial statement audit to evaluate the design of certain

controls. 194 The PCAOB has expressed concern about the number and significance of

deficiencies in auditing firm compliance with these risk assessment auditing standards, but it has

also noted promising improvements in their application. 195

Additionally, recent settled charges against four public companies for failing to maintain

effective ICFR for seven to 10 consecutive annual reporting periods 196 may have a deterrent

effect on issuers failing to remediate material weaknesses, which could reduce the overall rate of

persistence of material weaknesses in ICFR. Also, if management elects to obtain and use

automated controls testing and process automation, 197 this may result in improvements in ICFR

193

See Auditing Standards Related to the Auditor’s Assessment of and Response to Risk and Related Amendments

to PCAOB Standards, PCAOB Release No. 2010-004 (Aug. 5, 2010) (“PCAOB Release No. 2010-004”). See

also Public Company Accounting Oversight Board; Order Approving Proposed Rules on Auditing Standards

Related to the Auditor’s Assessment of and Response to Risk and Related Amendments to PCAOB Standards,

Release No. 34-63606, File No. PCAOB 2010-01 (Dec. 23, 2010) [75 FR 82417 (Dec. 30, 2010)] (“PCAOB

Release No. 2010-01”). These auditing standards are discussed in further detail in the Economic Analysis. See

Section IV.B.1. below.

194

See AS 2110, paragraphs .18 through.40, note 187 above.

195

See Inspection Observations Related to PCAOB "Risk Assessment" Auditing Standards (No. 8 through No.15),

PCAOB Release No. 2015-007 i through iii (Oct. 15, 2015) (“PCAOB Release No. 2015-007”).

196

See SEC Charges Four Public Companies with Longstanding ICFR Failures, press release (Jan. 29,2019)

(“SEC Press Release”), available at https://www.sec.gov/news/press-release/2019-6.

197

See, e.g., Kevin Moffitt, Andrea Rozario, & Miklos Vasarhelyi (2018), Robotic Process Automation for

Auditing, Journal of Emerging Technologies, 15(1) ACCT. 1 (“Robotic Process Automation”) (describing how,

for example, a robotic process automation program can be “set up to automatically match purchase orders,

invoices, and shipping documents [and] can check that the price and quantity on each of the documents match

[to] help auditors validate the effectiveness of preventive internal controls….”).

regardless of the ICFR auditor attestation requirement if their increased application results in

more robust financial reporting with fewer opportunities for ICFR deficiencies and/or in an

increase by management in their testing and related improvements of controls. In Section

IV.C.3.b.5, we note, as an example, that issuers may have made investments in systems,

procedures, or training to explain how control improvements may persist for certain affected

issuers. Finally, we note that auditors have had many years of experience with the 2010 risk

assessment standards, and therefore auditors may be more likely to test ICFR, even if an ICFR

auditor attestation is not required, as a means of enhancing auditing efficiency. 198

We recognize that some commenters disagreed with this assessment and asserted that

investor protections other than the ICFR auditor attestation requirement would not be sufficient

because, among other reasons, a financial statement audit has a different objective than an

integrated audit, 199 testing of ICFR in a financial statement audit is not as extensive, 200 it is more

difficult for a financial statement auditor to challenge the design of ICFR, 201 and a financial

statement audit is not designed to identify significant ICFR deficiencies or material

weaknesses. 202 As discussed in the Economic Analysis, we acknowledge that the amendments

may be associated with some adverse effects on the effectiveness of ICFR and the reliability of

198

See Study and Recommendations on Section 404(b) of the Sarbanes-Oxley Act of 2002 For Issuers With Public

Float Between $75 and $250 Million at 106 (Apr. 2011) (“2011 SEC Staff Study”), available at

https://www.sec.gov/news/studies/2011/404bfloat-study.pdf (stating that “…once effective controls are in place

at the issuer, the auditor is more likely to continue to test them even if [it is] not issuing an auditor attestation

during a particular year in order to rely on them for purposes of reducing substantive testing in the audit of the

financial statements, particularly for issuers that are larger and more complex”).

199

See, e.g., letters from CAQ, CFA Inst., and RSM.

200

See letter from EY.

201

Id.

202

Id.

financial statements for the affected issuers. 203 However, the Proposing Release presented

evidence that suggests that these effects and their impact on investor protection are likely to be

mitigated in the case of the affected issuers as compared to other accelerated filers. The

Economic Analysis provides further related analysis in response to commenter feedback and

does not find evidence that leads us to alter this view. 204

One commenter indicated that a low-revenue issuer could have a large market

capitalization and thus “greater investor exposure.” 205 As discussed in the Economic

Analysis, 206 we agree that, as capitalization increases, there is more investor capital at risk. We

note, however, that relative to higher-revenue issuers, on average, risk among these issuers is

likely more associated with their future prospects than their current financial statements. 207

Therefore, exempting low-revenue issuers from the ICFR auditor attestation requirement is less

likely to affect investor protections with respect to those issuers.

One commenter noted its concern that certain issuers that would no longer be subject to

the ICFR auditor attestation requirement are conducting large initial public offerings (“IPOs”)

based on key performance indicators that are derived from financial systems, and that eliminating

the ICFR auditor attestation requirement could result in potentially less robust internal controls

and unreliable data. 208 To the extent the commenter is primarily concerned with the information

203

See Section IV.A. below.

204

Id.

205

See letter from Grant Thornton.

206

See Section IV.C.3.d. below.

207

Also, the affected parties are limited to issuers with no more than $700 million in public float. Further, as

discussed in Section IV.C.3.d below, we estimate that in aggregate the affected issuers that will be newly

exempt from all ICFR auditor attestation requirements represent 0.2 percent of the total equity market

capitalization of issuers.

208

See letter from NASBA.

available to investors at the time of an IPO, we note that the affected issuers that would be newly

exempt from the ICFR auditor attestation requirement are generally more mature firms that are

not within five years of their IPO.

Also, we believe the risk for those low-revenue issuers for which key performance

indicators are material to investors and that are derived from financial systems is mitigated by

the requirement to maintain, evaluate, and disclose effectiveness of disclosure controls and

procedures 209 on a quarterly basis. 210 Key performance indicators or non-GAAP measures

disclosed within a report filed or submitted to the Commission generally are within the scope of

disclosure controls and procedures. The financial systems from which an issuer derives the key

performance indicator or non-GAAP measure would normally be included in ICFR and,

therefore, within the scope of management’s assessments as well. Further, the Commission

recently issued disclosure guidance on key performance indicators and metrics and reminded

issuers of the importance of effective controls and procedures when disclosing material key

performance indicators or metrics that are derived from their own information. 211

d. Disproportionate Costs and Benefits of the ICFR Auditor

Attestation for Small and Low-Revenue Companies

Not only is the ICFR auditor attestation requirement costly in general, as discussed

above, a number of commenters asserted that the ICFR auditor attestation requirement is

disproportionally costly to small and low-revenue issuers. 212 We agree that the costs of the ICFR

209

Although there is substantial overlap between an issuer’s disclosure controls and procedures and ICFR, there

are elements of each that are not subsumed by the other. See 17 CFR 240.13a-15 and 17 CFR 240.15d-15.

210

See 17 CFR 240.13a-14 and 17 CFR 240.15d-14.

211

See Commission Guidance on Management’s Discussion and Analysis of Financial Condition and Results of

Operations, Release No. 34-88094 (Jan. 30, 2020).

212

See note 102 above and accompanying text.

auditor attestation requirement may be particularly burdensome for these issuers because they

include fixed costs that are not scalable for smaller issuers, as also noted by several

commenters. 213 Further, low-revenue issuers have limited access to internally generated capital,

and so the costs may more directly impact their ability to spend on investments or hiring. 214 We

therefore expect that reducing these costs would have a more beneficial impact on small and

low-revenue issuers than it would for other issuers. Some commenters similarly expressed the

view that the amendments would enhance these issuers’ ability to preserve capital without

significantly affecting the ability of investors to make informed investment decisions based on

the financial reporting of those issuers. 215

As discussed above, other commenters claimed that eliminating the ICFR auditor

attestation requirement would not substantially reduce costs to issuers 216 and that there would be

other negative impacts of this change. 217 We acknowledge that the magnitude of these cost

savings likely will vary among issuers depending upon their particular facts and circumstances 218

and, as some commenters asserted, 219 ICFR auditor attestations have become less expensive over

time because auditors are more experienced in conducting them. However, based on the

comments received and our own analysis of available data, 220 we believe the cost reductions

from not being subject to the ICFR auditor attestation requirement could be substantial for

213

See letters from ASA, Broadmark, Chamber, and Guaranty.

214

See, e.g., letters from Daré, Summit and Xenon.

215

See letters from Andersen, CLSA, Concert, ICBA, and NASBA.

216

See note 108 above and accompanying text.

217

See notes 110 to 113 above and accompanying text.

218

See, e.g., letters from EY, Grant Thornton, and PWC.

219

See, e.g., letters from CFA Inst. and Deloitte.

220

See Section IV.C.2.d.

affected issuers.

We believe the benefits of the ICFR auditor attestation requirement likely are fewer for

low-revenue SRCs than for other issuers, an assessment supported by some commenters. 221 As a

result, obtaining the ICFR auditor attestation is likely, on average, to be less meaningful for these

issuers, and not obtaining one should have less of an impact on investor protection than for other

types of issuers. First, we note that low-revenue SRCs may be less susceptible to the risk of

certain kinds of misstatements, such as those related to revenue recognition. As discuss in the

Economic Analysis, 222 10 to 20 percent of restatements and about 60 percent of financial

disclosure fraud cases in recent times have been associated with improper revenue

recognition, 223 which is less of a risk, for example, for issuers that currently have little to no

revenue.

Second, as we noted in Table 14 of the Proposing Release, 224 issuers with revenues of

less than $100 million have, on average, restatement rates that are three to nine percentage points

lower than those for higher-revenue issuers. Moreover, certain low-revenue SRCs likely have

less complex financial systems and controls and, therefore, may be less likely than other issuers

to fail to detect and disclose material weaknesses in the absence of an ICFR auditor attestation.

Third, we believe that those issuers’ financial statements may be less critical to assessing

their valuation given, for example, the relative importance of their future prospects. We

221

See notes 116 to 118 above and accompanying text.

222

See Section IV.C.3. below.

223

See Audit Analytics, 2017 Financial Restatements: A Seventeen Year Comparison, (May 2018), and Committee

of Sponsoring Organizations of the Treadway Commission, (“COSO”), Fraudulent Financial Reporting 19982007: An Analysis of U.S. Public Companies (2010).) (“COSO 2010 Fraud Study”), available at

http://www.coso.org/documents/COSO-Fraud-Study-2010-001.pdf.

224

See Section III.C.4.b. of the Proposing Release, note 4 above.

recognize that other commenters disagreed and asserted that benefits of the ICFR auditor

attestation requirement are greater for lower-revenue and smaller issuers than for other issuers. 225

We carefully considered these comments and, as discussed in the Economic Analysis,

investigated the claims by conducting supplemental analysis, but we did not find evidence that

led us to alter our views. 226

e. Relationship Between Non-Accelerated Filers and SRCs

Under the final amendments, some, but not all, SRCs would become non-accelerated

filers. We are not adopting an alternative suggested by some commenters of fully aligning the

SRC and non-accelerated filer definitions. As we note in the Economic Analysis, 227 although

full alignment of the two definitions could provide several benefits, including greater regulatory

simplicity, reducing any frictions or confusion associated with issuers’ determination of their

filer status or reporting regime, and expanding the number of issuers that qualify as nonaccelerated filers, fully aligning the two definitions also could result in costs that are greater than

those for the amendments we are adopting. For example, the mitigating factors associated with

exempting low-revenue issuers, such as a potential lower susceptibility to the risks of certain

kinds of misstatements and a greater role of future prospects relative to current financial

statements in driving market valuations for these issuers as compared to other issuers, 228 may not

be present or may be more limited, for other types of SRCs.

As a result, fully aligning the SRC and non-accelerated filer thresholds could have

adverse effects on the reliability of the financial statements of the issuers with higher revenues

225

See notes 119 to 124 above and accompanying text.

226

See Section IV.C.3.a. below.

227

See Section IV.C.5.a. below.

228

See Section IV.C.3. below.

and the ability of investors to make informed investment decisions about those issuers. 229

Therefore, we do not believe it would be appropriate at this time to increase the public float

threshold for non-accelerated filers to align that definition with the SRC definition.

Additionally, we note that many non-accelerated filers remain eligible for the JOBS Act

Exemption for their first five years as a public company. The table below summarizes the

relationships between SRCs and non-accelerated and accelerated filers under the final

amendments.

Table 2. Relationships between SRCs and Non-Accelerated, Accelerated, and Large

Accelerated Filers under the Final Amendments

Relationships between SRCs and Non-Accelerated, Accelerated, and Large Accelerated Filers under the

Final Amendments

Status

Public Float

Annual Revenues

Less than $75 million

N/A

$75 million to less than $700 million

Less than $100 million

SRC and Accelerated Filer

$75 million to less than $250 million

$100 million or more

Accelerated Filer (not SRC)

$250 million to less than $700

million

$100 million or more

Large Accelerated Filer (not SRC)

$700 million or more

N/A

SRC and Non-Accelerated Filer

f. Effect on Business Development Companies

In a change from the proposal, the final amendments also exclude BDCs from the

accelerated and large accelerated filer definitions under circumstances that are analogous to the

229

Id.

exclusions for other issuers under the amendments. The amendments include a specific

provision applicable to BDCs, because BDCs are not eligible to be SRCs and to provide a

definition of “revenue” for BDCs to use for this purpose. 230 Specifically, a BDC will be

excluded from the accelerated and large accelerated filer definitions in Rule 12b-2 if the BDC:

(1) has a public float of $75 million or more, but less than $700 million; and (2) has investment

income of less than $100 million. 231 The amendments to Rule 12b-2 provide that, for this

purpose, a BDC’s revenue is the BDC’s investment income, as defined in Rule 6-07.1 of

Regulation S-X. 232 BDCs are subject to the same transition provisions for accelerated filer and

large accelerated status that apply to other issuers under the amendments, except that the

amendments’ BDC-specific “revenue” definition will apply to these transition provisions as

well. 233

Although the Commission did not propose to exclude BDCs from the accelerated and

large accelerated filer definitions using the SRC revenue test, the Commission did solicit

comment on such an approach and discussed the relative costs and benefits of this alternative in

the Proposing Release. 234 In response, one commenter urged that we adopt such an approach,

stating that, among other reasons, the policy reasons that support providing regulatory relief to

smaller reporting companies should apply equally to smaller BDCs. 235 This commenter

230

Although a BDC is considered to be eligible to use the requirements for SRCs under the revenue test in

paragraph (2) or (3)(iii)(B) of the “smaller reporting company” definition in Rule 12b-2 for purposes of the

amended accelerated filer and large accelerated filer definitions, BDCs will continue to be ineligible to be SRCs

under the final amendments.

231

See paragraphs (1)(iv), (2)(iv), and (4) of the amended definitions of accelerated filer and large accelerated filer

in Rule 12b-2. Consistent with the current definitions of these terms, a BDC with public float of less than $75

million is already a non-accelerated filer, regardless of the amount of its annual investment income.

232

See 17 CFR 210.6-07.1.

233

See Section II.C. below (discussing the amended transition provisions more generally).

234

See Sections II.C., II.E., and III.C.6. of the Proposing Release, note 4 above.

235

See letter from Proskauer.

suggested that the Commission expand the proposed amendment to the definition of accelerated

filer and large accelerated filer to exclude BDCs with total investment income of less than $80

million in the most recently completed fiscal year for which audited financial statements are

available and either no public float or public float of less than $700 million.

Although we observed in the Proposing Release that the SRC revenue test would not be

meaningful for BDCs because BDCs prepare financial statements under Article 6 of Regulation

S-X and generally do not report revenue, the final amendments’ definition of “revenue” for

purposes of the BDC-specific provisions incorporate information that BDCs report in their

financial statements. A BDC’s investment income includes income from dividends, interest on

securities, and other income. 236 We recognize, as stated in the Proposing Release, that investors

in BDCs generally may place greater significance on the financial reporting of BDCs relative to

low-revenue non-investment company issuers and BDC financial statements will continue to be

audited by an independent auditor. As the commenter supporting this approach observed,

however, the policy considerations supporting the final amendments generally apply to BDCs. 237

Moreover, BDCs that are excluded from the accelerated and large accelerated filer definitions

will remain obligated, among other things, to establish and maintain internal control over

financial reporting and have management assess the effectiveness of internal control over

financial reporting. The final amendments also are consistent with other rulemaking initiatives

in which we have sought to provide BDCs parity with other reporting companies in appropriate

236

A BDC’s annual investment income is equivalent to annual revenues solely for purposes of the accelerated filer

and large accelerated filer definitions. These amendments do not affect the meaning of “revenue” or

“investment income” in other Commission rules or provisions of the securities laws.

237

See letter from Proskauer.

circumstances. 238

g. Effect on Foreign Private Issuers

Under the proposed amendments, an FPI would be excluded from the accelerated and

large accelerated filer definitions if it qualifies as an SRC 239 under the SRC revenue test in

Exchange Act Rule 12b-2. One commenter asserted that the final amendments should permit an

FPI that presents its financial statements using IFRS to qualify for the exemption based on the

low-revenue test. 240 We note that foreign issuers that qualify as FPIs or SRCs are permitted to

avail themselves of special accommodations unique to each reporting regime, but must select one

reporting regime or the other. The final amendments provide an exemption from the ICFR

auditor attestation requirement for low-revenue SRCs. Issuers that qualify as FPIs and elect to

use the FPI reporting regime have other accommodations available to them, such as the ability to

disclose material changes in their ICFR and effectiveness of disclosure controls and procedures

on an annual basis, as compared to the quarterly basis required of U.S. issuers, including

SRCs. 241

h. Requiring ICFR Auditor Attestation Less Frequently than

Annually

The final amendments do not revise our rules to require an ICFR auditor attestation

238

See Securities Offering Reform for Closed-End Investment Companies, Release No. 33427 (Mar. 20, 2019) [84

FR 14448 (Apr. 10, 2019)].

239

See 2007 SRC Adopting Release, note 155 above, Section II, and Acceptance From Foreign Private Issuers of

Financial Statements Prepared in Accordance with International Financial Reporting Standards without

Reconciliation to U.S. GAAP, Release No. 33-8879 (Dec. 21, 2007) [73 FR 985 (Jan. 4, 2008)], Section III.E.4.

(stating that an FPI is not an SRC unless it makes its filings on forms available to U.S. domestic issuers and

otherwise qualifies to use the SRC scaled disclosure accommodations). We are adding instructions to the SRC

definitions in Item 10(f), Rule 405, and Rule 12b-2 clarifying our position that an FPI is not eligible to use the

requirements for SRCs unless it uses the forms and rules designated for domestic issuers and provides financial

statements prepared in accordance with U.S. GAAP.

240

See letter from Dorsey & Whitney.

241

See Rule 13a-15(d), Rule 15d-15(d), Item 15(d) of Form 20-F, and General Instruction B(6)(e) of Form 40-F.

requirement less frequently than annually. Issuers that are accelerated or large accelerated filers

will be required to obtain an ICFR auditor attestation every year, unless they qualify as EGCs, as

under our current rules. We did not propose to revise this requirement, but requested comment

on this matter, and every commenter that discussed the subject 242 asserted that issuers that are

subject to the ICFR auditor attestation requirement should obtain one annually. A few of these

commenters asserted that requiring the ICFR auditor attestation only once every three years

would not decrease costs significantly because auditors consider prior year audit results

when planning and performing the current year audit, so performing an audit of ICFR every

three years would reduce efficiencies gained from performing audits annually and add

complexity and costs. 243 Also, one commenter indicated that auditors in many instances

may continue to test internal controls in the financial statement audit, which potentially

limits any resulting cost reduction. 244

i. Check Box Indicating Whether an ICFR Auditor Attestation is

Included in a Filing

Although we did not propose a requirement that issuers report whether they have

obtained an ICFR auditor attestation, we requested comment on whether we should do so. As

discussed above, 245 some commenters recommended that the final rule include a requirement for

an issuer to prominently disclose in its filing whether an ICFR auditor attestation is included.

This type of disclosure was also recommended by the Government Accountability Office

242

See, e.g., letters from Crowe, KPMG, and NASBA.

243

See, e.g., letters from Crowe and KPMG.

244

See letter from KPMG.

245

See notes 138 to 143 above and the accompanying text.

(“GAO”) in a 2013 study of internal controls requirements. 246 No commenters opposed such a

requirement. Disclosure of the ICFR auditor attestation is currently required within the auditor’s

report on the financial statements and management’s annual report on ICFR. 247 After reviewing

these comments, we are persuaded to add a check box to the cover pages of Forms 10-K, 20-F,

and 40-F to indicate whether an ICFR auditor attestation is included in the filing because we

agree that more prominent and easily accessible disclosure of this information would be useful to

investors and market participants while imposing only minimal burdens on issuers.

Under the new rule, issuers will be required to include the check box on their cover pages

in any annual report filed on or after the final amendments’ effective date. Once issuers are

required to tag the cover page disclosure data using Inline eXtensible Business Reporting

Language (“Inline XBRL”), they will also be required to tag this cover page check box

disclosure in Inline XBRL because Item 406 of Regulation S-T (“Item 406”), 248 Item

601(b)(104), 249 paragraph 104 to “Instructions as to Exhibits” of Form 20-F, and paragraph B.17

under the “General Instructions” of Form 40-F require those issuers to tag every data point on the

cover pages of Form 10-K, Form 20-F, and Form 40-F. 250 We do not expect the incremental

compliance burden associated with tagging the additional cover page information to be

significant, given that registrants already are being required on a phased-in basis to tag other

246

See U.S. GOV’T ACCOUNTABILITY OFFICE, GAO-13-582, Internal Controls: SEC Should Consider Requiring

Companies to Disclose Whether They Obtained an Auditor Attestation (July 2013) (“2013 GAO Study”).

247

See Item 308 of Regulation S-K and PCAOB AS 3101.

248

17 CFR 232.406.

249

17 CFR 229.601(b)(4).

250

Item 406 mandates that companies required to tag their financial statements in Inline XBRL must also tag their

cover page data in Inline XBRL. Operating companies are required to tag their financial statements in Inline

XBRL on a phase-in basis. See Inline XBRL Filing of Tagged Data, Release No. 33-10514 (June 28, 2018) [83

FR 40846 (July 10, 2018)] and 17 CFR 232.405.

cover page information as well as information in their financial statements. 251

C. Amendments to Increase the Public Float Transition Thresholds from $50

million to $60 million and $500 million to $560 million and to Add the SRC

Revenue Test to the Transition Threshold

1. Proposed Amendments

An issuer initially becomes an accelerated filer after it first meets certain conditions as of

the end of its fiscal year, including that it had a public float of $75 million or more but less than

$700 million as of the last business day of its most recently completed second fiscal quarter. An

issuer initially becomes a large accelerated filer in a similar manner, including that it had a

public float of $700 million or more as of the last business day of its most recently completed

second fiscal quarter. Once the issuer becomes an accelerated filer, it will not become a nonaccelerated filer unless it determines at the end of a fiscal year that its public float had fallen

below $50 million on the last business day of its most recently completed second fiscal quarter.

Similarly, a large accelerated filer will remain one unless its public float had fallen below $500

million on the last business day of its most recently completed second fiscal quarter. If the large

accelerated filer’s public float falls below $500 million but is $50 million or more, it becomes an

accelerated filer. Alternatively, if the issuer’s public float falls below $50 million, it becomes a

non-accelerated filer. 252 The purpose of these transition thresholds is to avoid situations in

251

Electronic Data Gathering, Analysis and Retrieval System (“EDGAR”) filers that are required by Item 406 to

provide cover page Inline XBRL data tagging will be required to tag the ICFR data element only after a revised

Document Entity Identifier taxonomy has been posted to SEC.gov and the Commission has adopted a new

EDGAR Filer Manual that reflects appropriate changes to the submission of Forms 10-K, 20-F and 40-F.

252

For example, under the rules prior to these amendments, if an issuer that is a non-accelerated filer determines at

the end of its fiscal year that it had a public float of $75 million or more, but less than $700 million, on the last

business day of its most recently completed second fiscal quarter, it will become an accelerated filer. On the

last business day of its next fiscal year, the issuer must re-determine its public float to re-evaluate its filer status.

If the accelerated filer’s public float fell to $70 million on the last business day of its most recently completed

second fiscal quarter, it would remain an accelerated filer because its public float did not fall below the $50

million transition threshold. Alternatively, if the issuer’s public float fell to $49 million, it would then become a

non-accelerated filer because its newly determined public float is below $50 million. As another example, an

which an issuer frequently enters and exits accelerated and large accelerated filer status due to

small fluctuations in its public float.

In the SRC Adopting Release,253 we amended the SRC rules so that the SRC transition

thresholds were set at 80 percent of the corresponding initial qualification thresholds. In the

Proposing Release, we proposed to revise the accelerated and large accelerated filer transition

thresholds to be 80 percent of the corresponding initial qualification thresholds to align the

transition thresholds across the SRC, accelerated filer, and large accelerated filer definitions.

Additionally, we indicated that revising these thresholds would limit the cases in which an issuer

could be both an accelerated filer and an SRC or a large accelerated filer and an SRC, thereby

reducing regulatory complexity.

We proposed to revise the transition threshold for becoming a non-accelerated filer from

$50 million to $60 million and the transition threshold for leaving the large accelerated filer

status from $500 million to $560 million. We also proposed to add the SRC revenue test to the

public float transition thresholds for accelerated and large accelerated filers. If the SRC revenue test

were not added to the accelerated filer and large accelerated filer transition provisions, an

issuer’s annual revenues would never factor into determining whether an accelerated filer could

become a non-accelerated filer, or whether a large accelerated filer could become an accelerated

or non-accelerated filer. We proposed that an issuer that is already an accelerated filer would

issuer that has not been a large accelerated filer but had a public float of $700 million or more on the last

business day of its most recently completed second fiscal quarter would then become a large accelerated filer at

the end of its fiscal year. If, on the last business day of its subsequently completed second fiscal quarter, the

issuer’s public float fell to $600 million, it would remain a large accelerated filer because its public float did not

fall below $500 million. If, however, the issuer’s public float fell to $490 million at the end of its most recently

completed second fiscal quarter, it would become an accelerated filer at the end of the fiscal year because its

public float fell below $500 million. Similarly, if the issuer’s public float fell to $49 million, the issuer would

become a non-accelerated filer.

253

See note 12 above.

remain one unless either its public float falls below $60 million or it becomes eligible to use the

SRC accommodations under the revenue test in paragraph (2) or (3)(iii)(B) of the SRC

definition, 254 as applicable. 255 Therefore, under the proposed amendments, an accelerated filer

would remain an accelerated filer until its public float falls below $60 million or its annual

revenues fall below the applicable revenue threshold ($80 million or $100 million), at which

point it would become a non-accelerated filer.

Similarly, we proposed conforming amendments to the large accelerated filer transition

provisions for when an issuer that is already a large accelerated filer transitions to either

accelerated or non-accelerated filer status. To transition out of large accelerated filer status at the

end of the issuer’s fiscal year, an issuer would need to have a public float below $560 million as

of the last business day of its most recently completed second fiscal quarter or meet the revenue

test in paragraph (2) or (3)(iii)(B), as applicable, of the SRC definition. A large accelerated filer

would become an accelerated filer at the end of its fiscal year if its public float fell to $60 million

or more but less than $560 million as of the last business day of its most recently completed

second fiscal quarter and its annual revenues are not below the applicable revenue threshold ($80

million or $100 million). The large accelerated filer would become a non-accelerated filer if its

public float fell below $60 million as of the last business day of its most recently completed

second fiscal quarter or its annual revenues fell below the applicable revenue threshold ($80

254

Paragraph (2) of the SRC definition states that an issuer qualifies as an SRC if its annual revenues are less than

$100 million and it has no public float or a public float of less than $700 million. Paragraph (3)(iii)(B) of the

SRC definition states, among other things, that an issuer that initially determines it does not qualify as an SRC

because its annual revenues are $100 million or more cannot become an SRC until its annual revenues fall

below $80 million.

255

An issuer that is initially applying the SRC definition or previously qualified as an SRC would apply paragraph

(2) of the SRC definition. Once an issuer determines that it does not qualify for SRC status, it would apply

paragraph (3)(iii)(B) of the SRC definition at its next annual determination.

million or $100 million). 256

2. Comments

We received very few comments regarding the proposed changes to the transition

thresholds. The commenters who discussed the proposed amendments to increase the public

float transition thresholds supported them. 257 One commenter also suggested that the

Commission consider indexing the thresholds to inflation in a manner similar to the indexing that

applies to the EGC definition. 258 Only two commenters addressed the proposed amendments to

add the SRC revenue test to the transition thresholds, and these commenters supported that

proposal. 259

3. Final Amendments

After considering the comments, we are adopting the final amendments as proposed. As

discussed in greater detail in the Economic Analysis,260 transition thresholds in Rule 12b-2 are lower

than entry thresholds to keep issuers from frequently needing to reclassify their filer status. The

frequent reclassifications that would result without the transition thresholds may cause confusion for

issuers and investors as to the issuer’s status. Also, such frequent reclassifications may increase

issuers’ costs because they would frequently need to revise their disclosure schedules and

256

One exception to this requirement is that an issuer that was a large accelerated filer whose public float had

fallen below $700 million (but remained $560 million or more) but became eligible to be an SRC under the

SRC revenue test in the first year the SRC amendments became effective would become a non-accelerated filer

even though its public float remained at or above $560 million. See SRC Adopting Release, note 12 above, at n.

31 (“For purposes of the first fiscal year ending after effectiveness of the amendments, a registrant will qualify

as a SRC if it meets one of the initial qualification thresholds in the revised definition as of the date it is

required to measure its public float or revenues (the ‘measurement date’), even if such registrant previously did

not qualify as a SRC.”).

257

See, e.g., letters from CLSA, Nasdaq, and RSM.

258

See letter from RSM.

259

See letters from CLSA and Nasdaq.

260

See Section IV.C.4.c below.

continually consider the impact of whether they are subject to the ICFR auditor attestation

requirement from one year to the next, and may increase investors’ incremental costs of

evaluating the reliability of the issuer’s financial disclosures. Therefore, we believe a transition

threshold is appropriate. However, we recognize that providing a transition threshold results in some

issuers remaining in their filer status even though their public float or revenues are below that filer

status’s entry threshold.

The final amendments revise the public float transition threshold for accelerated and large

accelerated filers to become a non-accelerated filer from $50 million to $60 million and revise

the public float transition threshold for a large accelerated filer to lose its large accelerated filer

status from $500 million to $560 million. Prior to the final amendments, the public float threshold

for an accelerated and large accelerated filer to become a non-accelerated filer was $50 million

and the public float transition threshold for a large accelerated filer to lose its large accelerated

filer status was $500 million. We believe these threshold amounts are too low and result in more

issuers than intended being classified as an accelerated or large accelerated filer. However, we

believe there should be some transition threshold so as to avoid some volatility. The amendments

would make the public float transition thresholds 80 percent of the initial thresholds, which is consistent

with the percentage used in the transition thresholds for SRC eligibility. We believe this approach

appropriately balances the risk of frequent reclassifications resulting from a higher percentage threshold

against the risk of delaying appropriate transitions due to a lower threshold. The table below

summarizes how an issuer’s filer status will change based on its subsequent public float

determination.

Table 3. Subsequent Determination of Filer Status Based on Public Float under Final

Amendments

Final Amendments to the Public Float Thresholds

Initial Public Float

Determination

Resulting Filer Status

Subsequent Public Float

Determination

Resulting Filer Status

$700 million or more

Large Accelerated Filer

$560 million or more

Large Accelerated Filer

Less than $560 million but

$60 million or more

Accelerated Filer

Less than $60 million

Non-Accelerated Filer

Less than $700 million but

$60 million or more

Accelerated Filer

Less than $60 million

Non-Accelerated Filer

Less than $700 million

but $75 million or more

Accelerated Filer

The final amendments also add the SRC revenue test to the transition threshold for

accelerated and large accelerated filers. As we noted in the Proposing Release, if we do not add the

SRC revenue test to the accelerated filer and large accelerated filer transition provisions, an

issuer’s annual revenues would never factor into determining whether an accelerated filer could

become a non-accelerated filer, or whether a large accelerated filer could become an accelerated

or non-accelerated filer. We note that one commenter stated that the manner in which issuers may

recognize revenue could cause them to frequently lose and gain non-accelerated filer status.261 We

believe that providing transition thresholds should mitigate any such concern.

Under the final amendments, an accelerated filer with revenues of $100 million or more

that is eligible to be an SRC based on the public float test contained in paragraphs (1) and

261

See letter from EY.

(3)(iii)(A) of the SRC definition can transition to non-accelerated filer status in a subsequent year

if it has revenues of less than $100 million. For example, an issuer with a December 31 fiscal

year end that did not exceed the public float threshold in the prior year and that has a public float,

as of June 30, 2020, of $230 million and annual revenues for the fiscal year ended December 31,

2019 of $101 million will be eligible to be an SRC under the public float test; however, because

the issuer would not be eligible to be an SRC under the SRC revenue test, it will be an

accelerated filer (assuming the other conditions described in Table 1 are also met). At the next

determination date (June 30, 2021), if its public float, as of June 30, 2021, remains at $230

million and its annual revenues for the fiscal year ended December 31, 2020 are less than $100

million, the issuer will be eligible to be an SRC under the SRC revenue test (in addition to the

public float test) and thus it will become a non-accelerated filer.

On the other hand, an issuer with a December 31 fiscal year end that has a public float, as

of June 30, 2020, of $400 million and annual revenues for the fiscal year ended December 31,

2019 of $101 million will not be eligible to be an SRC under either the public float test or the

SRC revenue test and will be an accelerated filer (assuming the other conditions described in

Table 1 also are met). At the next determination date (June 30, 2021), if its public float, as of

June 30, 2021, remains at $400 million, that issuer will not be eligible to be an SRC under the

SRC revenue test unless its annual revenues for the fiscal year ended December 31, 2020 are less

than $80 million, at which point it will be eligible to be an SRC under the SRC revenue test and

to become a non-accelerated filer.

D. Transition Issues

The final amendments will become effective 30 days after they are published in the

Federal Register. The final amendments will apply to an annual report filing due on or after the

effective date. Even if that annual report is for a fiscal year ending before the effective date, the

issuer may apply the final amendments to determine its status as a non-accelerated, accelerated,

or large accelerated filer. For example, an issuer that has a March 31, 2020 fiscal year end and

that is due to file its annual report after the effective date of the amendments may apply the final

amendments to determine its filing status even though its fiscal year end date precedes the

effective date. An issuer that determines it is eligible to be a non-accelerated filer under the final

amendments will not be subject to the ICFR auditor attestation requirement for its annual report

due and submitted after the effective date of the amendments and may comply with the filing

deadlines that apply, and other accommodations available, to non-accelerated filers.

III. OTHER MATTERS

If any of the provisions of these amendments, or the application of these provisions to

any person or circumstance, is held to be invalid, such invalidity shall not affect other provisions

or application of such provisions to other persons or circumstances that can be given effect

without the invalid provision or application. Pursuant to the Congressional Review Act, 262 the

Office of Information and Regulatory Affairs has designated these amendments as not “a major

rule,” as defined by 5 U.S.C. 804(2).

IV. ECONOMIC ANALYSIS

We are mindful of the costs and benefits of the amendments. The discussion below

addresses the economic effects of the amendments, including their anticipated costs and benefits,

as well as the likely effects of the amendments on efficiency, competition, and capital

formation. 263 We also analyze the potential costs and benefits of reasonable alternatives to the

262

5 U.S.C. 801 et seq.

263

Section 2(b), 15 U.S.C. 77b(b), and Section 3(f) of the Exchange Act, 15 U.S.C. 78c(f), directs the Commission,

when engaging in rulemaking where it is required to consider or determine whether an action is necessary or

appropriate in the public interest, to consider, in addition to the protection of investors, whether the action will

promote efficiency, competition, and capital formation. Further, Section 23(a)(2) of the Exchange Act, 15

amendments. Where practicable, we have attempted to quantify the economic effects of the

amendments; however, in certain cases, we are unable to do so because either the necessary data

are unavailable or certain effects are not quantifiable. In these cases, we provide a qualitative

assessment of the likely economic effects.

A. Introduction

As discussed above, we are adopting amendments to the definitions of “accelerated filer”

and “large accelerated filer” that will generally extend non-accelerated filer status to issuers with

up to $700 million in public float if they are eligible to be SRCs and their revenues are less than

$100 million. As non-accelerated filers, among other things, these issuers will not be required to

obtain an ICFR auditor attestation pursuant to SOX Section 404(b). The amendments are

intended to reduce compliance costs for these issuers while maintaining investor protections by

more appropriately tailoring the types of issuers that are included in the categories of accelerated

and large accelerated filers.

In the Proposing Release, we presented evidence that the imposition of the ICFR auditor

attestation requirement has been associated with benefits to issuers and investors, such as

reduced rates of ineffective ICFR and more reliable financial statements. 264 However, as

explained in the Proposing Release, the affected issuers may find the costs of this requirement to

be particularly burdensome given certain fixed costs that may not scale with size. Importantly,

because these issuers have limited access to internally-generated capital, savings on compliance

costs may be more likely to be applied to additional investment, research, or hiring.

U.S.C. 78w(a)(2), requires the Commission, when making rules under the Exchange Act, to consider the impact

that the rules would have on competition, and prohibits the Commission from adopting any rule that would

impose a burden on competition not necessary or appropriate in furtherance of the purposes of the Exchange

Act.

264

See Section III.C.4.a. of the Proposing Release, note 4 above,. See also Section IV.C.3.a. below.

We acknowledged, in the Proposing Release, that exempting these low-revenue issuers

from the ICFR auditor attestation requirement may result in adverse effects such as an increased

prevalence of ineffective ICFR and restatements, and we estimated the potential effects on the

rates of such issues among the affected issuers. At the same time, we provided evidence in

support of two mitigating factors specific to the affected issuers. 265 First, we documented that

low-revenue issuers have relatively low rates of restatement, which could mean that the affected

issuers may, on average, be less susceptible to the risk of certain kinds of misstatements. Next,

we provided evidence that the market value of the low-revenue issuers was not as associated

with contemporary financial statements as for higher-revenue issuers, which could imply that

their valuations are driven to a greater degree by their future prospects.

Commenters raised a number of concerns with our analysis and conclusions in the

Proposing Release. We carefully reviewed all of the comments received and in a few instances,

conducted supplemental analysis in response to the issues and questions raised by those

comments. Overall, based on our analysis of the available evidence and data, our primary

conclusions have not substantively changed. While we address the comments in detail in the

body of the Economic Analysis below, we highlight certain of our findings in relation to some

commenter concerns here.

One concern raised by commenters is that rather than targeting issuers where there may

be relatively fewer benefits of the ICFR auditor attestation requirement, the amendments will

remove this requirement for exactly those issuers where the benefits may be greatest. 266 These

265

We also noted in the Proposing Release, note 4 above, that issuers exempted from this requirement may choose

to voluntarily obtain an ICFR auditor attestation if investors demand it or the issuers otherwise deem it, from

their perspective, to be the best use of their resources.

266

See, e.g., letters from CFA, CFA Inst., and CII. See also Commissioner Jackson’s Statement.

commenters supported this assertion by, for example, claiming that investors react more strongly

to news of restatements or material weaknesses in ICFR—and thus care more about the benefits

of an ICFR auditor attestation—at small or low-revenue issuers as compared to other issuers. 267

In response to these comments, we have conducted additional analyses of the investor response

to ICFR disclosures and restatement announcements. We do not find any evidence that investors

react more negatively to restatements or to auditors reporting material weaknesses in ICFR at

low-revenue issuers than at higher-revenue issuers. Further, based on the suggestions of a

commenter, 268 we have refined our analysis of the extent to which financial statement variables

are associated with the valuation of different types of issuers. We continue to find that financial

statement variables explain a greater amount of the variation in stock prices and returns for

higher-revenue issuers than for low-revenue issuers, even when we focus on more seasoned

issuers similar to those that would be affected by the amendments or when we expand the set of

variables that we consider. Overall, our analysis does not provide support for the assertion that

investors care more about the information produced by the ICFR auditor attestation requirement

at low-revenue issuers than at other issuers.

A few commenters asserted that the costs of the amendments will significantly outweigh

any benefits. 269 We have conducted supplemental analysis and quantification of the potential

costs of the amendments and do not find evidence to support the views of these commenters. We

carefully considered the cost estimates provided by commenters and found them useful in

refining our own analysis. However, we found some of these estimates to be overstated. For

267

Id.

268

See letter from Crowe.

269

See, e.g., letters from Better Markets and Prof. Barth et al.

example, some estimates applied costs associated with a small fraction of issuers to all of the

affected issuers or implicitly compared aggregate estimates of costs over multiple years to the

estimated savings for a single year. 270 Others identified investor harms that occurred despite the

ICFR auditor attestation requirement being in place, which may demonstrate the limitations of

the ICFR auditor attestation requirement rather than informing us of the risks of removing the

requirement. 271

Some commenters stated that the Proposing Release did not provide sufficient

quantification of the costs of the amendments. 272 In response to those comments, as additional

context for our consideration of the possible effects of the final amendments, we conducted

supplemental analysis of the expected frequency, type, and magnitude of potential adverse

effects. We consider effects resulting from potential misreporting about the effectiveness of

ICFR as well as those driven by potential changes in the actual effectiveness of ICFR. Where

possible, we estimate dollar costs as well as dollar transfers across shareholders, which represent

costs to some shareholders and benefits to other shareholders. We note that these cost estimates

do not fully adjust for the mitigating factors that we find to be associated with low-revenue

issuers and may therefore be inflated. Also, we caution against attempts to over-interpret the

relation between our quantitative estimates of monetized benefits and monetized costs because

we are not able to place dollar values on all of the potential costs and benefits of the

amendments.

Several commenters argued that the expected cost savings are too small to be

270

See letter from Prof. Barth et al. (with respect to quantified benefits of ICFR audit for the average company).

271

See letters from Better Markets and Prof. Barth et al. (with respect to estimates of income and stock market

impact of restatements).

272

See, e.g., letters from Better Markets, CFA Inst., CII, Prof. Barth et al., and Prof. Ge et al.

economically meaningful, 273 and that the amendments are unlikely to have capital formation

benefits. 274 We acknowledge that, while the amendments could be a positive factor in the

decision of additional companies to enter public markets, it may not be the decisive factor, and

the direct impact of the amendments on the number of public companies may be limited to the

extent that companies may be more focused on other factors associated with the decision to go

public. However, we continue to believe that the expected savings is likely, in many cases, to

represent a meaningful cost savings for the affected issuers. 275 In particular, while the average

annual cost savings may represent a small percentage of the average affected issuers’ revenues

and market capitalizations, it is still likely to be meaningful given that the net income and

operating cash flows of the affected issuers are typically negative. 276 These savings may thus

have beneficial economic effects on net capital formation through the productive use of this

preserved capital towards, for example, new investments.

Some commenters indicated that the Proposing Release did not adequately consider the

risk of fraud, 277 or that the risks of fraudulent financial reporting may be particularly high for

low-revenue issuers. 278 We acknowledge the argument that incentives to engage in misconduct

could be different for low-revenue issuers and, in response to these comments, we conducted

273

See, e.g., letters from CFA, CFA Inst., CII, and Prof. Barth et al.

274

See, e.g., letters from Better Markets, CII, CFA, CFA Inst., and Prof. Ge et al.

275

One commenter requested that we replicate, with recent data, the analysis in a previous study that found a

“bunching” of firms below the public float threshold for entering accelerated filer status, in order to explore

whether the costs of the ICFR auditor attestation requirement remain as high as previously documented. See

letter from Prof. Honigsberg, et al. See also Commissioner Jackson’s Statement. As discussed in more detail

below, we provide this analysis and find that there may be some such “bunching,” but we note that our

conclusion that the cost savings may be meaningful to the affected issuers does not rely on this analysis or the

related study.

276

See note 362 below.

277

See, e.g., letters from CFA Inst., CII, and Prof. Barth et al.

278

See, e.g., letter from CFA, CFA Inst., CII and Prof. Barth et al.

supplemental analysis concerning the risk of fraud. In particular, we conducted an analysis to

investigate this risk and did not find evidence based on the available data that low-revenue

issuers that, like the affected issuers, are not within five years of their IPO (“seasoned” issuers),

are more highly represented in the set of seasoned issuers associated with financial misconduct

or financial reporting fraud than they are in the overall population of seasoned issuers. We also

estimated the extent to which expanding the exemption from the ICFR auditor attestation

requirement could affect the likelihood of the affected issuers engaging in such activities and

include a quantification of the associated costs of this risk in our overall assessment of the

potential costs of the amendments. Overall, this supplemental analysis does not cause us to

change our primary conclusions regarding the potential effects of the amendments.

The economic analysis also considers other changes associated with the amendments.

For example, the affected issuers will be permitted an additional 15 days and five days,

respectively, after the end of each period to file their annual and quarterly reports, relative to the

deadlines that apply to accelerated filers. 279 The amendments also revise the transition

provisions for accelerated and large accelerated filer status, including increasing the public float

thresholds to exit accelerated and large accelerated filer status from $50 million and $500 million

in public float to $60 million and $560 million in public float. Additionally, the amendments

introduce a new check-box disclosure on the cover page of annual reports on Forms 10-K, 20-F,

and 40-F to indicate whether an ICFR auditor attestation is included in the filing.

The discussion that follows examines the potential benefits and costs of the amendments

in detail. As part of our analysis, we consider both the comments received on the Proposing

279

Non-accelerated filers also are not required to provide disclosure required by Item 1B of Form 10-K and Item

4A of Form 20-F about unresolved staff comments on their periodic and/or current reports or disclosure

required by Item 101(e)(4) of Regulation S-K about whether they make filings available on or through their

Internet websites.

Release and the likelihood that the effects of the ICFR auditor attestation have changed over time

with changes in auditing standards and other market conditions.

B. Baseline

To assess the economic impact of the amendments, we are using as our baseline the

current state of the market under the existing definition of “accelerated filer.” This section

discusses the current regulatory requirements and market practices. It also provides statistics

characterizing accelerated filers, the timing of filings, disclosures about ineffective ICFR, and

restatement rates under the baseline.

1. Regulatory Baseline

Our baseline includes existing statutes and Commission rules that govern the

responsibilities of issuers with respect to financial reporting, as well as PCAOB auditing

standards and market standards related to the implementation of these responsibilities.

In particular, accelerated and large accelerated filers are subject to accelerated filing

deadlines for their periodic reports relative to non-accelerated filers. These deadlines are

summarized in Table 4 below. All registrants can file Form 12b-25 (“Form NT”) to avail

themselves of an additional 15 calendar days to file an annual report, or an additional five

calendar days to file a quarterly report, and still have their report deemed to have been timely

filed.

Table 4. Filing Deadlines for Periodic Reports

Calendar Days after Period End

Category of Filer

Annual

Quarterly

Non-Accelerated Filer

90 days

45 days

Accelerated Filer

75 days

40 days

Large Accelerated Filer

60 days

40 days

The Proposing Release discusses in detail the issuer and auditor responsibilities with

respect to disclosure controls and procedures and ICFR for issuers of different filer types. 280

These responsibilities derive from the FCPA requirements with respect to internal accounting

controls as well as a number of different changes to financial reporting that were introduced by

SOX.

In particular, all issuers 281 are required to devise and maintain an adequate system of

internal accounting controls 282 and to have their corporate officers assess the effectiveness of the

issuer’s disclosure controls and procedures 283 and disclose the conclusions of their assessments,

typically on a quarterly basis. 284 In addition, all issuers are required to have their corporate

officers certify in each of their periodic reports that the information in the report fairly presents,

in all material respects, the issuer’s financial condition and results of operations. 285 All issuers

280

See Sections II.B. and III.B.1. of the Proposing Release, note 4 above.

281

Specifically, the requirements apply to all issuers that file reports pursuant to Section 13(a) or 15(d) of the

Exchange Act.

282

See Section 13(b)(2)(B) of the Exchange Act.

283

See note 209 above.

284

See note 210 above.

285

See 17 CFR 240.13a-14(b) and 17 CFR 240.15d-14(b).

other than RICs and asset-backed securities (“ABS”) issuers 286 are also required to include

management’s assessment of the effectiveness of their ICFR in their annual reports. 287 Further,

all issuers are required to have the financial statements in their annual reports examined and

reported on by an independent auditor, who, even if not engaged to provide an ICFR auditor

attestation, is responsible for considering ICFR in the performance of the financial statement

audit. 288 Also, an auditor engaged in a financial statement only audit may test the operating

effectiveness of some internal controls in order to reduce the extent of substantive testing

performed in the audit. Importantly, all of these responsibilities with respect to financial

reporting and ICFR apply equally to non-accelerated as well as accelerated and large accelerated

filers. Finally, all issuers listed on national exchanges are required to have an audit committee

that is composed solely of independent directors and is directly responsible for the appointment,

compensation, retention and oversight of the issuer’s independent auditors. 289 The amendments

do not change any of these requirements, including the requirements of a financial statement

audit.

Beyond these requirements, accelerated filers and large accelerated filers other than

286

See 17 CFR 240.13a-15 and 17 CFR 240.15d-15. A newly public issuer is also not required to provide a SOX

Section 404(a) management report on ICFR until its second annual report filed with the Commission. See

Instructions to Item 308 of Regulation S-K.

287

See Management’s Report on Internal Control Over Financial Reporting and Certification of Disclosure in

Exchange Act Periodic Reports, Release No. 33-8238 (June 5, 2003) [68 FR 36635 (June 18, 2003)]. These

evaluations of ICFR, as well as any associated ICFR auditor attestations, should be based on a suitable,

recognized control framework. The most widely used framework for this purpose is the one set forth in a report

of the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”).

288

See PCAOB AS 2110, note 187 above. See also the discussion below in this section about this auditing

standard.

289

See 17 CFR 240.10A-3. In the absence of an ICFR auditor attestation requirement, we note that the audit

committee is responsible for approving whether to voluntarily obtain an ICFR auditor attestation, and would be

alerted by the auditor engaged in a financial statement only audit if the auditor becomes aware of a significant

deficiency or material weakness in ICFR.

EGCs, RICs, and ABS issuers are required under SOX Section 404(b) and related rules to

include an ICFR auditor attestation in their annual reports. In addition, certain banks, even if

they are non-accelerated filers, are required under Federal Deposit Insurance Corporation

(“FDIC”) rules to have their auditor attest to, and report on, management’s assessment of the

effectiveness of the bank’s ICFR (the “FDIC auditor attestation requirement”). 290

One commenter raised questions about the nature of the FDIC auditor attestation

requirement and how it compares to the ICFR auditor attestation requirement. 291 For banks that

are subject to the ICFR auditor attestation requirement, the FDIC regulations require ICFR

attestation engagements to be performed according to the same standards as the ICFR auditor

attestation requirement under SOX Section 404(b) (i.e., AS 2201, 292 as discussed below). 293 For

other banks, the FDIC allows ICFR attestations to be performed either according to AS 2201 or

according to the American Institute of Certified Public Accountants (“AICPA”) attestation

standard. 294 In 2015, the Auditing Standards Board of the AICPA issued Statement on Auditing

Standards (“SAS”) No. 130, revising their attestation standard with the intention of adhering as

closely as possible to AS 2201 while aligning with their generally accepted auditing standards

and avoiding unintended consequences in practice. 295 The FDIC also requires that the attestation

290

Part 363 of the FDIC regulations requires that the auditor of an insured depository institution with consolidated

total assets of $1 billion or more (as of the beginning of the fiscal year) examine, attest to, and report separately

on the assertion of management concerning the effectiveness of the institution’s internal control structure and

procedures for financial reporting.

291

See letter from CFA Inst.

292

See AS 2201, An Audit of Internal Control Over Financial Reporting That Is Integrated with An Audit of

Financial Statements (“AS 2201”).

293

See Section 18A of Appendix A to Part 363 of the FDIC regulations.

294

Id.

295

See Executive Summary to SAS 130 (October 2015), available at

https://www.aicpa.org/Research/Standards/AuditAttest/DownloadableDocuments/SAS_130_Summary.pdf.

reports be made available for public inspection (at the bank’s main and branch offices or,

alternatively, by mail to anyone who requests it). 296 Per Section IV.B.4 below, material

weaknesses reported in SOX Section 404(a) reports and the corresponding SOX Section 404(b)

reports typically mirror each other, so material weaknesses identified by the FDIC auditor

attestation may also become publicly known via corresponding SOX Section 404(a) management

reports. Finally, we note that FDIC and Federal Reserve examiners may also independently

review and assess the adequacy of ICFR of banks.

Some issuers that are not required to comply with SOX Section 404(b) voluntarily obtain

an ICFR auditor attestation. 297 Estimates of the number of issuers of each filer type are provided

in Table 5 below. 298

296

See Section 363.4 of Part 363 of the FDIC regulations.

297

Up to about seven percent of exempt issuers voluntarily provided an ICFR auditor attestation from 2005

through 2011. See 2013 GAO Study, note 246 above. We find similar results when examining data for nonaccelerated filers and EGCs in calendar years 2014 through 2018 from Ives Group Audit Analytics to identify,

among issuers of these types that have a SOX Section 404(a) management report, how many also have an ICFR

auditor attestation report available in the database. See note 298 below regarding the identification of filer

types.

298

The estimates in this table are based on staff analysis of self-identified filer status for issuers filing annual

reports on Forms 10-K, 20-F, or 40-F in calendar year 2018, excluding any such filings that pertain to fiscal

years prior to 2017. Staff extracted filer status from filings using a computer program supplemented with hand

collection and compared the results for robustness with data from XBRL filings, Ives Group Audit Analytics,

and Calcbench. FPIs represent those filing on Forms 20-F or 40-F and do not include FPIs that choose to file on

Form 10-K. EGC issuers are identified by using data from Ives Group Audit Analytics and/or by using a

computer program to search issuer filings, including filings other than annual reports, for a statement regarding

EGC status. The estimates generally exclude RICs because these issuers do not file on the annual report types

considered. This table also excludes 143 issuers, mostly Canadian MJDS issuers filing on Form 40-F (which

does not require disclosure of filer status or public float), for which filer type is unavailable.

Table 5. Filer Status for Issuers Filing Annual Reports in 2018

Large

Non-Accelerated*

Accelerated

FPI

265

137

264

EGC

1,097

333

Total

3,900

1,416

2,266

* The estimated number of non-accelerated filers includes approximately 621 ABS issuers,

which are not required to comply with SOX Section 404. Staff estimates that very few, if

any, ABS issuers are accelerated or large accelerated filers. ABS issuers are identified as

issuers that made distributions reported via Form 10-D.

Audits of ICFR and the associated ICFR auditor attestation reports are made in

accordance with AS 2201, 299 previously known as Auditing Standard Number 5 (“AS No. 5”). 300

This standard, which replaced Auditing Standard Number 2 (“AS No. 2”) in 2007, was intended

to focus auditors on the most important matters in the audit of ICFR and eliminate procedures

that the PCAOB believed were unnecessary to an effective audit of ICFR. 301 Among other

things, the 2007 standard facilitates the scaling of the evaluation of ICFR for smaller, less

complex issuers by, for example, encouraging auditors to use top-down risk-based approaches

and to use the work of others in the attestation process. 302 It was accompanied by Commission

guidance similarly facilitating the scaling of SOX Section 404(a) management evaluations of

299

See note 292 above.

300

AS No. 5 was renumbered as AS 2201, note 292 above, effective Dec. 31, 2016. See Reorganization of PCAOB

Auditing Standards and Related Amendments to PCAOB Standards and Rules, PCAOB Release No. 2015-002

(Mar. 31, 2015).

301

See Auditing Standard No. 5, An Audit of Internal Control Over Financial Reporting That Is Integrated with An

Audit of Financial Statements, and Related Independence Rule and Conforming Amendments, PCAOB Release

No. 2007-005A (June 12, 2007). See also Public Company Accounting Oversight Board; Order Approving

Proposed Auditing Standard No. 5, An Audit of Internal Control Over Financial Reporting that is Integrated

with an Audit of Financial Statements, a Related Independence Rule, and Conforming Amendments, Release

No. 34-56152, File No. PCAOB 2007-02 (July 27, 2007) [72 FR 42141 (Aug. 1, 2007)].

302

Id.

ICFR. 303

The adoption of AS 2201 in 2007 has been found to have lowered audit fees. 304

However, several studies have provided evidence that, at least initially, after the adoption of AS

2201, the quality of ICFR of issuers subject to the ICFR auditor attestation requirement

decreased relative to that of other issuers. 305 Around 2010, PCAOB inspections of auditors

began to include a heightened focus on whether auditing firms had obtained sufficient evidence

to support their opinions on the effectiveness of ICFR. 306 There is some evidence that these

inspections have led to an improvement in the reliability of ICFR auditor attestations, 307 but also

concerns that audit fees also increased around the same time. 308

In 2010, the PCAOB adopted enhanced auditing standards related to the auditor’s

303

See Commission Guidance Regarding Management’s Report on Internal Control Over Financial Reporting

Under Section 13(a) or 15(d) of the Securities Exchange Act of 1934, Release No. 33-8810 (June 20, 2007) [72

FR 35323 (June 27, 2007)]. See also Amendments to Rules Regarding Management’s Report on Internal

Control Over Financial Reporting, Release No. 33-8810 (June 20, 2007) [72 FR 35309 (June 27, 2007)].

304

See, e.g., Study of the Sarbanes-Oxley Act of 2002 Section 404 Internal Control over Financial Reporting

Requirements (Sept. 2009) (“2009 SEC Staff Study”), available at https://www.sec.gov/news/studies/2009/sox404_study.pdf; Rajib Doogar, Padmakumar Sivadasan, & Ira Solomon, 48(4) J. OF ACCT. RES. 795 (2010).

305

See, e.g., Joseph Schroeder & Marcy Shepardson, Do SOX 404 Control Audits and Management Assessments

Improve Overall Internal Control System Quality?, 91(5) ACCT. REV. 1513 (2016) (“Schroeder and Shepardson

2016 Study”); Lori Bhaskar, Joseph Schroeder, & Marcy Shepardson, Integration of Internal Control and

Financial Statement Audits: Are Two Audits Better than One? ACCT. REV. (forthcoming 2018) (“Bhaskar et al.

2018 Study”), available at http://aaajournals.org/doi/abs/10.2308/accr-52197. See Section IV.C.3.a. and notes

464 and 474 below for more information on these studies.

306

See Jeanette Franzel, Board Member, PCAOB, Speech by PCAOB board member at the American Accounting

Association Annual Meeting, Current Issues, Trends, and Open Questions in Audits of Internal Control over

Financial Reporting (2015), available at https://pcaobus.org//News/Speech/Pages/08102015_Franzel.aspx.

307

See Mark Defond & Clive Lennox, Do PCAOB Inspections Improve the Quality of Internal Control Audits?,

55(3) J. OF ACCT. RES. 591 (2017) (“Defond and Lennox 2017 Study”).

308

See, e.g., Tammy Whitehouse, Audit Inspections: Improvement? Maybe. Costs? Yes, Compliance Week (April

14, 2015), available at https://www.complianceweek.com/news/news-article/audit-inspections-improvementmaybe-costs-yes#.W5LW7mlpCEd; and Jennifer McCallen, Roy Schmardebeck, Jonathan Shipman, & Robert

Whited, Have the Costs and Benefits of SOX Section 404(b) Compliance Changed Over Time?, Working Paper

(Nov. 2019), available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3420787 (“McCallen et al. 2019

study”).

assessment of and response to risk. 309 The enhanced risk assessment standards have likely

reduced, to some extent, the degree of difference between a financial statement only audit and an

integrated audit (which includes an audit of ICFR) because the standards clarify and augment the

extent to which internal controls are to be considered even in a financial statement only audit. In

particular, the risk assessment standards applying to both types of audits require auditors, in

either case, to evaluate the design of certain controls, including whether the controls are

implemented. 310

Based on the results of inspections in the several years after the adoption of the new risk

assessment auditing standards, the PCAOB expressed concern about the number and significance

of deficiencies in auditing firm compliance with these standards, but also noted promising

improvements in the application of these standards. 311 While the risk assessment standards may

reduce the degree of difference between a financial statement only audit and an integrated audit,

there remain important differences in the requirements of these audits as they relate to controls.

For example, in an integrated audit, but not a financial statement only audit, the auditor is

required to identify likely sources of misstatements in considering the evaluation of ICFR. 312

Also, the extent of the procedures necessary to obtain the required understanding of controls

generally will be greater in an integrated audit due to the different objectives of such an audit as

309

See PCAOB Release No. 2010-004 and PCAOB Release No. 2010-01, note 193 above.

310

See AS 2110, paragraphs .18-.40, note 187 above.

311

See PCAOB Release No. 2015-007, note 195 above.

312

See PCAOB Release No. 2010-004, note 309 above, at 7 and A10-41. As discussed above, even in a financial

statement only audit, if the auditor becomes aware of a significant deficiency or material weakness in ICFR, it is

required to inform management and the audit committee of this finding and has the responsibility to review

management’s disclosure for any misstatement of facts, such as a statement that ICFR is effective when there is

a known material weakness. See notes 190 to 191 above and the accompanying text.

compared to a financial statement only audit. 313

The Commission recently settled charges against four public companies for failing to

maintain effective ICFR for seven to 10 consecutive annual reporting periods. 314 These

enforcement cases may have a deterrent effect among issuers failing to remediate material

weaknesses, which might reduce the overall rate of persistence of material weaknesses in ICFR.

We also note that there have been some recent changes in accounting and auditing that

are part of our baseline and could increase the uncertainty of our analysis due to their effects on

factors such as audit fees, restatements, and ICFR. For example, three new reporting standards

have been issued recently by FASB, on the topics of revenue recognition, leases, and credit

losses, which could temporarily increase audit fees as issuers and auditors adjust to the new

standards. 315 Recent changes in technology, such as the potential for management to use

automated controls testing and process automation, 316 may result in improvements in ICFR

regardless of the ICFR auditor attestation requirement if their increased application results in

more robust financial reporting processes with fewer opportunities for deficiencies and/or in an

increase by management in control testing and related improvements. Such automation could

also reduce audit fees, including the costs of an audit of ICFR, but at least one report suggests

that the uptake of these technologies has been slow. 317 Finally, auditors have had many years of

experience with integrated audits, as well as risk assessment standards that require the

313

See Proposed Auditing Standards Related to the Auditor’s Assessment of and Response to Risk and Conforming

Amendments to PCAOB Standards, PCAOB Release No. 2008-006 A9-8 (Oct. 21, 2008).

314

See SEC Press Release, note 196 above.

315

Information on these and other FASB Accounting Standards updates is available at

https://www.fasb.org/jsp/FASB/Page/SectionPage&cid=1176156316498.

316

See, e.g., Robotic Process Automation, note 197 above.

317

See, e.g., Protiviti survey results, Benchmarking SOX Costs, Hours and Controls (2018) (“Proti

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