SEC moves to make rules ‘easy to apply’ for firms

Times Staff Writer

Responding to a chorus of complaints, regulators Wednesday moved to give companies more leeway in complying with financial reporting rules imposed by 2002’s Sarbanes-Oxley corporate reform law.

The 5-0 vote by the Securities and Exchange Commission was one in a series of steps taken by the agency at a daylong meeting. The SEC also proposed stricter eligibility rules for hedge fund investors and measures intended to make it easier for foreign companies to set up shop here.

SEC Chairman Christopher Cox said that the sweeping agenda was united by a theme of strengthening financial markets and serving the needs of investors.

“If American markets aren’t competitive, investors lose,” he said.


The commission voted unanimously to propose changes to Section 404 of Sarbanes-Oxley, which Congress passed in the wake of accounting fraud at Enron Corp. and other companies.

The provision requires that corporate executives make an annual evaluation on the effectiveness of their internal controls, but the SEC has not guided them on how to comply with that requirement.

Instead, managers have followed instructions from their auditors, who have come under fire for demanding information with questionable relevance to the integrity of financial statements, including minute details on how records are maintained and even how power to the computer room is guaranteed.

Under the new proposal, managers would be given broad latitude to decide what sort of methods best serve to verify their company’s financial statements, and they would be given leeway to focus on the areas they believe are most likely to have a material effect on their financial picture.


Companies with smaller and simpler organizations, for example, might be expected to have less documentation than their larger counterparts with far-flung operations. At smaller firms, routine materials such as memos about operations that top managers are intimately involved with might satisfy regulators as part of the control regime.

At bigger firms, where senior managers may be many miles removed from important activities, more sophisticated flow charts and data might be needed.

The internal control reporting requirements for smaller companies are kicking in next year. Larger companies already have been phased in.

“There never was anything wrong with the principles of 404,” said SEC Commissioner Roel C. Campos, a Democrat. “What we need to work on is the implementation.”


In a recent briefing, Cox said his goal was to make the new guidelines “principle-based, accessible, understandable and relatively easy to apply.”

With the new approach, he said, “we believe that companies of all sizes and complexities will be able to conduct the evaluation more efficiently and more effectively.”

Regulators also proposed that auditors no longer have to evaluate managers’ assessment of the controls, a change that would allow managers to rely on their own judgment rather than on directions from auditors in conducting their assessments.

Wednesday’s actions are not final. Commissioners will soon establish a period for public comment, with the goal of having new requirements in place later next year.


In addition, the Public Company Accounting Oversight Board is preparing to unveil a proposal affecting the duties of auditors under Section 404.

One SEC official who went along with Wednesday’s vote nonetheless expressed a jury-is-out view on the broader matter of whether the regulatory efforts will ultimately make sense for the economy.

“The proof of the pudding is in the eating,” said Commissioner Paul S. Atkins, a Republican who is often critical of government regulation.

Separately, the SEC responded Wednesday to a court decision this year that overturned its rule requiring that many hedge funds register with the agency.


In a new proposal, the SEC makes clear that deceptive practices by hedge fund advisors, such as lying to investors or omitting important information, would fall under its anti-fraud authority.

Regulators also would stiffen eligibility requirements that limit who may invest in such funds. The new measure would impose a requirement that individuals have $2.5 million in investments, a threshold intended to ensure that the risky funds are limited to people with financial wherewithal.

Since 1982, the wealth requirement has been $1 million, a figure that has been markedly eroded by inflation over the last quarter century.

“These investments are not for mom and pop,” Cox told reporters during a break in the daylong session. Then he added, “unless mom and pop happen to be very sophisticated investors.”


In other actions Wednesday, commissioners moved to allow companies to distribute proxy materials to shareholders over the Internet. Companies would still be required to supply printed copies if shareholders request it.

The commission also voted to make it easier for foreign companies to pull out of U.S. exchanges, a shift that supporters said would make foreigners less inhibited to set up shop here.