SEC Advisory Committee on Smaller Public Firms

I just caught up with this draft report by the SEC’s Advisory Committee on Smaller Public Companies. It’s got a lot of interesting stuff in it, including a proposal to exempt the smallest firms from mandatory compliance with SOX’s internal controls provision, defined as the smallest 1% by total capitalization with less than $125 million in annual revenue, and the next smallest 5% by total capitalization with less than $10 million in revenue.

This proposal reflects some creative thinking, including an idea to let small firms opt-into the internal controls rule, the use of capitalization rather than public float as a cut-off, and the combination of capitalization with a revenue screen.

Despite the creativity, I still think that the way to go is Congressional action – repeal or significant revision – perhaps spurred by the recent PCAOB suit. Any SEC action is significantly constrained by the current statute. Moreover, though SOX may be worst for the smallest companies, it’s bad across the spectrum of firms. Indeed, the focus on the smallest companies may be a political move to deflect pressure for repeal.

Apart from the substantive issue of whether to stop with small firms, there is a logistical one. Although the Advisory Committee’s line-drawing recommendation is well-considered, it’s still going to create some significant headaches and political issues.

If the SEC or Congress insists on approaching SOX revision by peeling off companies, why just public companies? Foreign firms may be an even better place to start. See here for some evidence. Eliminating big foreign firms might make big US firms feel lonelier than getting rid of microcaps, which could help to keep up the pressure for Congressional action.