As expected the Securities and Exchange Commission yesterday came out with its blueprint to ease financial-control rules and red tape for smaller public companies.
Along the way, the SEC has also proposed tightening rules for investors in hedge funds. To put it bluntly, investors will need more cash under the new proposed rule – $2.5 million versus $1 million under the existing system.
And the regulator has proposed to make it easier for foreign firms to deregister from the United States. Under current law, if you have more than 300 US investors, you can't deregister. Around Washington, it's known as "the Hotel California effect" (you can check out any time you want, but you can never leave).
But under the proposed rule change, a foreign private company's right to pull away from the SEC's reporting requirements will be based solely on its trading volume in the United States.
All these proposals are much more sensible than what's been in place so far. In particular, the changes around Section 404 are well overdue. They give management new guidelines covering areas, like processes to identify potential risks to accurate financial reporting and evaluation of the effectiveness of internal financial controls.
True, smaller businesses don't get what many had asked for: a blanket exemption from Section 404. They still have to follow the rules.
But what's important is that these changes are designed to allow smaller companies to tailor their procedures. And that's really needed in a sector where, unlike the big sprawling corporations, you have a handful of people wearing many hats and where the procedures and operations are less convoluted.
The shift towards a principles-based system is to be commended. But at the same time, the bones of Sarbanes-Oxley remain in place. With some common sense tweaking.
Not surprisingly, the initial response has been positive.
Bob Greifeld, president and chief executive officer of NASDAQ has put out a statement welcoming the proposed changes:
"I believe the proposed rules will allow companies to focus on the most important aspects of internal controls and financial reporting, while removing unnecessary expense…It will also allow for a more meaningful recognition of the good Sarbanes-Oxley has done – independent directors, more effective disclosure, and audit committees that are more accountable and involved. These elements are preserved as bulwarks of investor confidence.''
Still, there are some worrying signs.
Congress, for example, has left it to the regulators to work out how to fix the problem. But as the New York Times reported this week, the question is whether the new-look Congress is now going to think that it's off the hook and that it doesn't have to do anything else:
"The fight over auditing standards has far broader political implications, according to officials, lawmakers and industry executives. An adequate resolution of the issue by regulators would take significant pressure off Congress to address other complaints from some business groups about the law and other corporate governance rules."
If the politicians really believe that, they might be in for a surprise. Expect the pressure to continue.
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