The requirement to comply with the SEC's new rules requiring public companies to use interactive data for financial information is soon going to directly impact smaller reporting companies - those public companies with a market capitalization of $75 million or less.  The rules require public companies to file their financial statements, footnotes, and financial statement schedules in the new XBRL format.  Smaller reporting companies won't be required to comply with the rules until 2011, beginning with fiscal years ending on or after June 15, 2011.   Unlike other initiatives impacting smaller reporting companies, including compliance with certain SOX requirements (see below), smaller reporting companies are not likely to get any breaks or sympathy from Congress in complying with the XBRL filing requirement.  The demand for interactive data is too great, and no group has surfaced to effectively challenge the burden imposed on smaller reporting companies by the new rules.  As a result, smaller reporting companies are once again going to have to bear additional financial and other costs to remain public, although the burdens are certainly going to be less than other initiatives.  Read on...

 

Non-accelerated fillers, which include most smaller reporting companies, were granted a slight reprieve from the SEC in October to comply with the most onerous provision of SOX, Rule 404(b).  The reprieve only extends the 7 year holiday that smaller reporting companies have had from complying with the Rule for an additional 6 months.  Rule 404(b) requires auditors to attest to management's assessment of the issuer's internal controls over financial reporting. The SEC has extended the deadline when all non-accelerated filers are required to comply with Section 404(b) to annual reports filed for fiscal years ending on or after June 15, 2010.  However, a sharply divided Financial Service Committee of the U.S. House of Representatives was successful in introducing an amendment to the Investor Protection Act, which is currently making its way through the House of Representatives, to permanently exempt smaller reporting companies from complying with Section 404(b).  

No doubt the burdens imposed by Rule 404(b) have had a disproportionate impact on smaller reporting companies.  Clear evidence exists that the burdens caused by compliance are a factor in causing many companies to list overseas, "go dark" or go private altogether.  It's these concerns that caused a bipartisan contingent of the Financial Service Committee to seek refuge from Section 404(b).   However, the amendment was approved by a narrow margin of 37-32, illustrating the challenge the measure will face as the bill makes its way through the House.  While the current economic environment is resulting in a Congress sympathetic to the issues facing smaller reporting companies, the current SEC led by Chair Mary Shapiro will certainly resist any efforts to further delay implementation of Rule 404(b).  The contrasting views certainly set the stage for a consequential and relevant debate between the regulators and those representing the interests of smaller reporting companies.   Unfortunately, for now, smaller reporting companies need to plan to ensure compliance with Rule 404(b), as Congressional action is far from certain.

There are currently numerous initiatives being considered by the SEC that may impact smaller reporting companies, including additional changes to Regulation D to provide greater flexibility to issuers and to clarify and improve the application of the rules, initiatives that may at some point require that financial statements be prepared in accordance with International Financial Reporting Standards (IFRS) as opposed to GAAP, as well as proposals to replace EDGAR entirely and replace it with an altogether new disclosure and filing system, called IDEA - for Interactive Data Electronic Applications.  The later proposal was introduced at about the same time the SEC established the 21st Century Disclosure Initiative with the directive to produce a comprehensive blueprint for overhauling completely the SEC's current form-based filing system.  The first report resulting from the Initiative, released in January of this year, made numerous recommendations to the SEC to transition its disclosure system from a document-based approach to a data-based approach. 
 
Other than changes to Regulation D, it is unlikely any of these regulatory initiatives will affect smaller reporting companies in the near future, given the SEC's current regulatory priorities, as well as the revolutionary nature of many of these initiatives.  These initiatives will be closely watched by SEC Connect, on behalf of our clients, and we'll be bringing any developments to your attention in future MD&A Newsletters.