Medical Device Daily Washington Writer
WASHINGTON – Smaller life sciences companies soon could see some relief from one of the Sarbanes-Oxley Act's more burdensome regulations, if the SEC adopts recommendations put forth by an advisory committee last week.
Importantly for the industry, the SEC's 21-member Advisory Committee on Smaller Public Companies has proposed changes to Section 404 of the corporate governance law, which has been criticized for its sweeping approach.
The Medical Device Manufacturers Association (MDMA; Washington), which counts among its members mostly smaller device firms and has been active in pushing for reforms because of its charge that Sarbanes-Oxley was written without forethought to such companies, is largely behind the recommendations.
Mark Leahey, the association's executive director, told Medical Device Daily that the proposals are “a step in the right direction.“ He added that the intent underlying Sarbanes-Oxley “is pure,“ but stressed that the resulting unintended consequences have placed “extremely burdensome hurdles and costs associated with them“ on smaller companies, funds that instead would go toward research and development.
Therefore, he said it was critical that the committee recognized that the law's one-size-fits-all approach is not the solution to better corporate governance. Section 404 reform is atop the committee's list of the draft report recommendations.
Notable are definitions of smaller public companies, which if adopted would encompass 80% of all U.S. public companies, though reforms would impact only a few of them. Specifically, the committee proposed that micro-cap companies have common stock (or equivalent) equal to the lowest 1% of total U.S. equity market capitalization (currently about $128 million), and small-cap companies include those with common stock (or equivalent) that totals the next lowest 5%. Therefore, smaller public companies – micro-cap and small-cap – would comprise the lowest 6% of U.S. market cap.
Certain smaller public companies would benefit from the committee's recommendations for reforming Section 404 of Sarbanes-Oxley, viewed by many as its most onerous aspect. Section 404 calls for upper management to attest to financial statements and employ external auditors.
The management attestation provision is essentially repetitive, as Section 302 of Sarbanes-Oxley already requires the filing of financial reports, and the external audit provision has proven overly costly to companies with little to no revenue.
The committee's endorsements include an outright exemption to Section 404's requirements to micro-cap companies with less than $125 million in annual revenue and small-cap companies with less than $10 million in annual revenue, provided that their corporate governance controls include adherence to additional standards under earlier laws. The committee further suggested that small-cap companies be exempt from external auditor involvement in the Section 404 process if their annual revenue ranges between $10 million and $250 million, subject to compliance with the same aforementioned corporate governance standards. An additional category would excuse companies with revenues of less than $10 million but with a market cap up to $787 million.
The SEC commissioned the advisory committee more than a year ago to consider Sarbanes-Oxley reforms. A committee meeting scheduled for this week will include a vote on this draft, followed by a 30-day public comment period. Leahey said MDMA would use that period to submit further thoughts on Sarbanes-Oxley reform. A final report to the SEC is due by April 30.
MDMA's efforts also are borne in part through a coalition formed by the Biotechnology Industry Organization (also Washington) to fight for reform on behalf of biotechnology, healthcare technology, high-technology and venture capital industries. The coalition, which includes the other Washington-based device industry trade asociation, the Advanced Medical Technology Association, represents more than 5,300 companies from all 50 states and around the world.
Opposition to Sarbanes-Oxley reforms has come from the four major accounting firms in the U.S., which have said that Section 404 audit costs would come down after a year, as well as from some consumer groups.