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Small Firms Still Want SEC to Give Them a Pass
By Kathleen Day
Washington Post Staff Writer
Thursday, April 13, 2006

A government advisory group dominated by executives representing small businesses yesterday reaffirmed its intent to ask federal regulators to exempt half of the country's publicly traded companies from a new investor-protection rule.

Small businesses have argued that the new legal requirements are too burdensome and expensive.

The group, the Advisory Committee on Smaller Public Companies, is set to present a final report making the request to the Securities and Exchange Commission by April 23, despite widespread criticism its recommendations are too extreme.

Among the critics are some institutional investor groups; consumer groups; and at least two former SEC chairmen:  Arthur Levitt, who served under President Bill Clinton, and Richard Breeden, who served under President George H. W. Bush.

Breeden said in an interview yesterday that the group's request "lacks merit" because its definition of a small company is overly broad.  "No one forces anyone to be a public company and take money from investors," Breeden said.  "If a business feels the burdens of being public are too great, it should consider going private."  He and others point out that a majority of securities frauds involve small businesses.  Failure to curb fraud ultimately will hurt the ability of all small companies to raise funds by selling stock, he and others say.

A majority of the five-member Securities and Exchange Commission, including SEC Chairman Christopher Cox, have indicated publicly that they won't support an exemption that goes as far as the advisory group wants.

The rule in question is part of the 2002 Sarbanes-Oxley Act, which Congress passed to restore investor confidence after shareholders lost billions of dollars because of accounting fraud at Enron Corp., WorldCom Inc. and a host of other companies.

Specifically, the rule requires executives of every publicly traded company to attest that their companies have internal controls in place to ensure financial statements filed with the Securities and Exchange Commission are accurate.  The rule also requires that an outside auditor verify the controls are adequate.

Half the country's public companies, including all large ones, began complying with the rule with their 2004 financial statements, which were filed with the SEC in early 2005.  But the SEC has delayed requiring small companies -- defined as those with publicly traded stock worth $75 million or less, which make up half of all public companies -- from having to comply with the rule after protests that the requirement was too onerous.

The advisory group is expected to recommend that companies with a market capitalization of about $128 million or less not be required to attest that their internal controls are adequate.  Larger companies would be required to attest to the adequacy of their controls but would not be required to have an auditor sign off on them.

Critics of an exemption say they favor simplifying regulations for genuinely small companies.  And many critics agree that auditing firms have made compliance with the rule unnecessarily costly.  But they argue wholesale exemption is a bad idea.

Many critics also dispute the SEC's legal ability to invoke an exemption.  The law's namesakes disagree on that. Rep. Michael G. Oxley (R-Ohio) -- who fought major portions of the legislation, putting his name on it only when it was clear it would pass anyway -- says the SEC has the authority.  Sen. Paul S. Sarbanes (D-Md.), the engine behind the legislation, cites legal scholars who say it does not, though he has said the law allows the agency to make adjustments for small firms.

At least two council members had harsh words for those who oppose their recommendations.  James A. "Drew" Connolly III, a professional investor who also founded the CEO Council, an organization of executives of smaller public companies, called opponents' arguments "half-baked."  Richard M. Jaffee, chairman of Oil-Dri Corp., which has publicly traded stock worth $75 million and makes cat litter and other products, said most critics lacked the business experience of those supporting exemptions.

Consumer groups disagree, saying small business is overly represented on the council and consumers not enough.

Breeden has said that the cost of complying with Sarbanes-Oxley "is less than 1 percent" of the cost of executive pay packages at many companies.  "If businesses are having a hard time making ends meet, maybe they should start with look to reducing their compensation expenses," he said.