Accelerated Filer and Large Accelerated Filer Definitions

Federal RegisterMar 26, 2020

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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;

17 CFR 230.405 (“Rule 405”) under the Securities Act of 1933;

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”).

15 U.S.C. 229.10 through 229.1305.

15 U.S.C. 77a

et seq.

15 U.S.C. 78a

et seq.

Table of Contents

I. Introduction

II. Discussion of the Final Amendments

A. Background

B. Amendments to Exclude Low-Revenue SRCs From the Accelerated and Large Accelerated Filer Definitions

1. Proposed Amendments

2. Comments on the Proposed Amendments

a. Comments on Using Revenue for Determining Accelerated and Large Accelerated Filer Status

b. Comments on the Proposed Amendments' Effect on Capital Formation and the Number of Public Issuers

c. Comments on the Proposed Amendments' Effect on Investor Protection

d. Comments on the Disproportionate Costs and Benefits of the ICFR Auditor Attestation Requirement to Small and Low-Revenue Companies

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

f. Other Comments

3. Final Amendments

a. Using Revenue for Determining Accelerated and Large Accelerated Filer Status

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

c. Effect on Investor Protection

d. Disproportionate Costs and Benefits of the ICFR Auditor Attestation for Small and Low-Revenue Companies

e. Relationship Between Non-Accelerated Filers and SRCs

f. Effect on Business Development Companies

g. Effect on Foreign Private Issuers

h. Requiring ICFR Auditor Attestation Less Frequently Than Annually

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

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

2. Comments

3. Final Amendments

D. Transition Issues

III. Other Matters

IV. Economic Analysis

A. Introduction

B. Baseline

1. Regulatory Baseline

2. Characteristics of Accelerated Filer Population

3. Timing of Filings

4. Internal Controls and Restatements

C. Discussion of Economic Effects

1. Affected Issuers

2. Potential Benefits of Expanding the Exemption From the ICFR Auditor Attestation Requirement for Affected Issuers

a. Evidence on Possible Indirect Costs of the ICFR Auditor Attestation Requirement

b. Evidence on Net Costs of the ICFR Auditor Attestation Requirement

i. Studies Involving Avoidance Behavior

ii. Studies Based on Comparative Analysis or Market Reactions

iii. Other Evidence on Net Costs

c. Potential Reduction in Audit Fees

d. Additional Potential Compliance Cost Savings

e. Implications of the Cost Savings

3. Potential Costs of Expanding the Exemption From the ICFR Auditor Attestation Requirement for Affected Issuers

a. Broad Considerations and Evidence Regarding the Effects of ICFR Auditor Attestations on Financial Reporting

b. Estimated Effects on ICFR, the Reliability of Financial Statements, and Potential Fraud

i. Effects on the Prevalence of Ineffective ICFR

ii. Effects on the Detection and Disclosure of Material Weaknesses in ICFR

iii. Effects on Restatements

iv. Effects on Fraudulent Financial Reporting

v. Timing of the Effects

c. Implications for Investor Decision-Making

d. Potential Economic Costs of Effects on ICFR, the Reliability of Financial Statements, and Potential Fraud

i. Computation of Monetized Estimates of Costs

ii. Discussion of Economic Costs

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

a. Filing Deadlines

b. Disclosures Required of Accelerated Filers

c. Transition Thresholds

d. Disclosure

5. Alternatives to the Amendments

a. Exclude All SRCs From Accelerated Filer Category

b. Include or Exclude Certain Issuer Types

c. Alternative Threshold

V. Paperwork Reduction Act

A. Summary of the Collections of Information

B. Burden and Cost Estimates Related to the Final Amendments

1. ICFR Auditor Attestation Requirement

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

3. Check Box Disclosure

4. Total Burden Reduction

VI. Regulatory Flexibility Act Analysis

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

B. Significant Issues Raised by Public Comments

C. Small Entities Subject to the Amendments

D. Projected Reporting, Recordkeeping, and Other Compliance Requirements

E. Agency Action To Minimize Effect on Small Entities

Statutory Authority and Text of Rule Amendments

I. Introduction

On May 9, 2019, we proposed amendments

to the “accelerated filer” and “large accelerated filer” definitions in Rule 12b-2.

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”)

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.

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).

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 supported the proposed amendments

while other commenters generally opposed them or suggested the need for further empirical study.

In addition, the SEC's Small Business Capital Formation Advisory Committee (“SBCFAC”) adopted a recommendation supporting the proposed amendments,

and the 2019 SEC Government-Business Forum on Small Business Capital Formation (“SEC Small Business Forum”) provided a recommendation on the accelerated filer definition.

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.

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) (“SI-BONE”); 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-3-05-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 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

Public Law 114-94, 129 Stat. 1312 (2015).

II. Discussion of the Final Amendments

A. Background

In June 2018, the Commission adopted amendments

to the SRC

definition

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

test or the SRC revenue test to determine 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.

The Commission also expanded the revenue test to include issuers with annual revenues

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

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.

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) (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.

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.

One result of these amendments is that some issuers now are categorized as both SRCs and accelerated or large accelerated filers.

These issuers have some, but not all, of 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).

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 “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).

Prior to the SRC amendments, the SRC category of filers generally did not overlap with either the accelerated or large accelerated filer categories.

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

if it has:

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.

• 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.

ER26MR20.000

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.

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

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.

The final amendments do not change an auditor's role in a financial statement audit.

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).

SOX Section 404(a)

requires almost all issuers, including SRCs, that file reports pursuant to Exchange Act Section 13(a) or 15(d)

to establish and maintain ICFR and have their management assess the effectiveness of their ICFR.

SOX Section 404(b) subjects certain issuers not otherwise exempted to the ICFR auditor attestation requirement.

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.

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.

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

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.

2. Comments on the Proposed Amendments

Many commenters supported the portion of the proposed amendments that would exclude an issuer that is eligible to be an SRC and that meets the SRC revenue test from the accelerated and large accelerated filer definitions.

Other commenters opposed the proposed amendments or suggested the need for further analysis.

Commenters' views on different aspects of the proposal, as well as its effects, are discussed topically, below.

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.

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.

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

because public float is often affected by industry or economic trends not specific to any particular issuer,

and that revenue is more predictable,

a better indicator of an issuer's complexity,

and a better indicator of an issuer's ability to absorb the burdens of the ICFR auditor attestation requirement.

Other commenters questioned whether revenue is an appropriate measure for determining whether an issuer should be a non-accelerated filer in all cases.

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.

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.

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.”

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.

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.

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

while also maintaining investor

protection.

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.

Additionally, some commenters suggested that eliminating the ICFR auditor attestation requirement would encourage certain companies to enter the public markets.

See, e.g.,

letters from Andersen, CLSA, Concert, ICBA, and NASBA.

See, e.g.,

letters from ICBA and NASBA.

See

letter from BIO.

See, e.g.,

letters from AdvaMed, AdvaMed

et al.,

Broadmark, Cerecor, and ICBA.

Conversely, other commenters asserted that the proposed amendments would not enhance capital formation, and some indicated they could even reduce capital formation.

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.

In addition, some commenters maintained that the ICFR auditor attestation requirement does not prevent companies from entering the public markets.

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.

This commenter and some others asserted that the decline can be attributed to many other factors.

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.

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.

Several commenters indicated that the ICFR auditor attestation requirement is not necessary because issuers are permitted to voluntarily obtain an ICFR auditor attestation if they believe it is in their interest to do so.

Some instances in which commenters suggested that issuers may choose to voluntarily obtain an ICFR auditor attestation include when their investors demand it,

when not obtaining it would have a negative impact on investment analysts' coverage,

or when issuers otherwise deem it a good use of their capital resources.

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.

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.

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.

Commenters cited a number of these other requirements, including SOX Section 404(a);

Nasdaq's listing standards, surveillance, and enforcement;

the required management certifications;

and the obligation of an independent auditor to consider ICFR when conducting a financial statement audit.

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.

See, e.g.,

letters from ASA, Carver, Cerecor, MSB, NAM, and Xenon.

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,

which a few of these commenters asserted would provide investors with sufficient protection absent the ICFR auditor attestation requirement.

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.

Some commenters expressed a view that the ICFR auditor attestation requirement is not important or material to investors generally.

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.

One commenter

cited a study

that found no statistically significant market response on 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.

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

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.

See, e.g.,

letters from BSC, Guaranty, ICBA, and SCBA.

Conversely, other commenters asserted that the ICFR auditor attestation requirement is an important investor protection and that eliminating it would undermine such protection.

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.

Some commenters stated that the ICFR auditor attestation requirement increases investor confidence generally

and that investors view the requirement as beneficial.

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.

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

because, as one commenter stated, the ICFR auditor attestation requirement acts as an effective check on SOX Section 404(a).

Another commenter asserted that management's assessment is weakened when management knows that it will not be challenged by an ICFR auditor attestation.

A third commenter claimed that investors would place undue reliance on management's report when not accompanied by an ICFR auditor attestation.

See, e.g.,

letters from Better Markets, CFA Inst., Crowe, Grant Thornton, and Prof. Barth

et al.

See

letter from Better Markets.

See

letter from CFA Inst.

See

letter from Grant Thornton.

A few commenters noted that a financial statement audit does not provide the same level of assurance as an integrated audit

because a financial statement audit's objective is different from that of an integrated audit as it relates to ICFR.

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.

Similarly, other commenters suggested that some testing of ICFR conducted as part of a financial statement audit would not provide sufficient investor protection.

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.

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

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.

Id.

Some commenters indicated that the ICFR auditor attestation requirement promotes effective ICFR and more accurate disclosures related to ICFR,

including the likelihood and timeliness of disclosing ineffective ICFR.

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;

increases the quality and reliability of issuers' financial statements,

corporate governance,

audits,

and analyst forecasts;

and reduces the number of issuers' restatements, misstatements,

the instances of fraud,

and occurrences of insider trading.

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.

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 backlog, sales orders, and number of customers, and asserted that eliminating the ICFR auditor attestation requirement could reduce the reliability of those indicators.

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.

See

letter from NASBA.

See

letter from CAQ.

d. Comments on the Disproportionate Costs and Benefits of the ICFR Auditor Attestation Requirement to Small and Low-Revenue 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 costs associated with ICFR auditor attestation fees,

105

issuer personnel time,

106

and outside consultants.

107

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.

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.

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

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.

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 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

116

See, e.g.,

letters from BIO and Guaranty.

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.

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 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

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-statement-proposed-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.

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.

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

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.

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

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

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

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

136

See, e.g.,

letters from ASA, Guaranty, NAM, and Nasdaq.

137

See

letter from Corvus.

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 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

138

See, e.g.,

letters from CAQ, CFA Inst., and Grant Thornton.

139

See, e.g.,

letters from CFA Inst., CII, and Grant Thornton.

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 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.

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 operating companies and expanding investment opportunities for retail investors.

153

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.

153

Id.

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.

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

See

Section IV. below.

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 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

158

See

Section II.A.2.a. above.

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.

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 non-accelerated filer.

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.

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 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.

166

See

Section IV.C.2.b. below.

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

173

such as developing the company.

174

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.

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.

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 register their securities offerings or a class of their securities, which would provide an increased level of transparency and investor protection with respect to those companies.

180

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.

180

See, e.g.,

letters from AdvaMed, AdvaMed

et al.,

Broadmark, Cerecor, and ICBA.

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

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.

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 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

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.

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

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 protection.

190

See

Section II.C. of the Proposing Release, note 4 above.

191

Id.

192

See

notes 61 to 68 above and accompanying text.

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

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”).

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 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

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 . . . .”).

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”).

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 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

199

See, e.g.,

letters from CAQ, CFA Inst., and RSM.

200

See

letter from EY.

201

Id.

202

Id.

203

See

Section IV.A. below.

204

Id.

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.

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.

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 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.

208

See

letter from NASBA.

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

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).

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 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

212

See

note 102 above and accompanying text.

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.

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 affected issuers.

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.

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.

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 1998-2007: 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

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.

224

See

Section III.C.4.b. of the Proposing Release, note 4 above.

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 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

225

See

notes 119 to 124 above and accompanying text.

226

See

Section IV.C.3.a. below.

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 non-accelerated 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.

227

See

Section IV.C.5.a. below.

228

See

Section IV.C.3. below.

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 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.

229

Id.

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

SRC and Non-Accelerated Filer

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.

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 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

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).

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 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.

234

See

Sections II.C., II.E., and III.C.6. of the Proposing Release, note 4 above.

235

See

letter from Proskauer.

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 circumstances.

238

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.

238

See Securities Offering Reform for Closed-End Investment Companies,

Release No. 33427 (Mar. 20, 2019) [84 FR 14448 (Apr. 10, 2019)].

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

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.

h. Requiring ICFR Auditor Attestation Less Frequently Than Annually

The final amendments do not revise our rules to require an ICFR auditor attestation 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

242

See, e.g.,

letters from Crowe, KPMG, and NASBA.

243

See, e.g.,

letters from Crowe and KPMG.

244

See

letter from KPMG.

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 (“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.

245

See

notes 138 to 143 above and the accompanying text.

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.

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 cover page information as well as information in their financial statements.

251

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.

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.

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 non-accelerated 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 which an issuer frequently enters and exits accelerated and large accelerated filer status due to small fluctuations in its public float.

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 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.

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.

253

See

note 12 above.

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 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.

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.

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 million or $100 million).

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.”).

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

257

See, e.g.,

letters from CLSA, Nasdaq, and RSM.

258

See

letter from RSM.

259

See

letters from CLSA and Nasdaq.

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 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.

260

See

Section IV.C.4.c below.

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 $75 million or more

Accelerated Filer

Less than $700 million but $60 million or more

Accelerated Filer.

Less than $60 million

Non-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.

261

See

letter from EY.

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 (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, 2020, remains at $230 million and its annual revenues for the fiscal year ended December 31, 2019 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).

262

5 U.S.C. 801

et seq.

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 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.

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 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.

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.

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.

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.

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 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.

266

See, e.g.,

letters from CFA, CFA Inst., and CII.

See also

Commissioner Jackson's Statement.

267

Id.

268

See

letter from Crowe.

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 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

269

See, e.g.,

letters from Better Markets and Prof. Barth

et al.

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).

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.

272

See, e.g.,

letters from Better Markets, CFA Inst., CII, Prof. Barth

et al.,

and Prof. Ge

et al.

Several commenters argued that the expected cost savings are too small to be 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.

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.

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 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.

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.

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.

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.

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 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

Category of filer

Calendar days after

period end

Annual

Quarterly

Non-Accelerated Filer

Accelerated Filer

Large Accelerated Filer

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.

280

See Sections II.B. and III.B.1. of the Proposing Release, note 4 above.

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 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.

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).

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.

Beyond these requirements, accelerated filers and large accelerated filers other than 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

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.

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 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.

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

296

See

Section 363.4 of Part 363 of the FDIC regulations.

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

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 non-accelerated 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

Non-

accelerated *

Accelerated

Large

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 ICFR.

303

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.

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)].

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

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/sox-404_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-improvement-maybe-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”).

In 2010, the PCAOB adopted enhanced auditing standards related to the auditor's 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

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.

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 compared to a financial statement only audit.

313

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.

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).

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.

314

See

SEC Press Release, note 196 above.

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 automatio

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