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ANALYSIS: SEC Again Splits on Accelerated Filer Rule Vote

March 16, 2020, 3:56 PM

The latest SEC rulemaking produced no surprises. The Commission canceled an open meeting, passed a deregulatory measure by a 3-1 vote, and saw a vigorous dissent from Commissioner Allison Lee.

The new rule tweaked the definition of accelerated and large accelerated filers to remove the requirement that an auditor attest to the adequacy of internal controls over financial reporting (ICFR) for smaller reporting public companies with revenues of less than $100 million. Congress imposed the auditor attestation requirement in the Sarbanes-Oxley Act to deter management from manipulating financial results. Issuers have long complained about the costs, however.

Opposing Voices

The rule change has been controversial from the beginning. In his dissent from the vote to issue the proposal, former Commissioner Robert Jackson stated that “while paying auditors isn’t free, neither is fraud.” According to Jackson, now a professor of law at New York University, “fraud is more likely when insiders are less careful about controls.” He observed that “hard evidence from the market, not ideological intuition, should tell us how to strike that balance” between investor protection and compliance costs, and concluded that “it is clear that this proposal has no apparent basis in evidence.”

Investor protection advocates struck a similar chord. Barbara Roper of the Consumer Federation of America stated that “this proposal is based on the false premise that investor protection and capital formation are competing and largely incompatible aims.” She concluded that “affected issuers will face higher costs of capital from investors to compensate for the heightened risks associated with weaker ICFR.”

Similarly, the Council of Institutional Investors concluded that “allowing low-revenue issuers to avoid the ICFR auditor attestation requirement could significantly affect the ability of investors to make informed investment decisions because it would substantially impact the quality of financial reporting by those issuers.”

Commissioner Lee wrote a particularly pointed dissent. She noted that in several recent Commission actions, the public comments indicated “a clear division of views between investors and other commenters,” and in each instance, the commissioner observed that the majority “disfavored or even disregarded investor views.” Commissioner Lee expressed her “growing concern that we may not give adequate consideration to the views of investors on certain issues.” She appeared to move beyond voicing policy differences to questioning the current role of the Commission with regard to one of its core functions: investor protection. She cautioned that “there must be a limit to the number of times we can credibly assert to investors that we act in their best interests by making policy choices they directly oppose.”