In 2010, SOX as we know it may undergo a dramatic change.  There are two pending events about the Act that directly impact who it affects and how it is administered.  The first may eliminate a large number of companies that need to comply with the section 404(b) of the Act; the other may restructure the Act all together.

The first topic deals with businesses below $75 million in market capitalization and their requirement to comply with section 404(b), the requirement for independent auditors to attest the effectiveness of management’s assessment of internal controls.  In October 2009, the SEC once again extended the deadline for non-accelerated filers to comply with section 404(b) to June 15, 2010. This deadline, though extended numerous times in the past, is said to be the last extension.  However, due to recent legislation passed by the House Financial Services Committee, non-accelerated filers below $75 million in market capitalization may be exempt from 404(b) permanently.  There is still a long way for the amendment to pass the full House and Senate, and as with any anti-regulatory legislation, there are numerous pros and cons that come with it.

The pros are clear, if passed this piece of legislation will provide financial relief to smaller businesses from a requirement that has already been extended a handful of times and that provides a disproportionate cost.  A recent SEC Advisory Committee report noted that in 2004 companies with revenues over $5 billion spent .06% of revenue and companies under $100 million spent 2.55% (SEC report pages 33-34.) The cons are also compelling. The proposed amendment may reduce investors’ confidence in and increase their chances of fraud.  These combined may reduce investor activity in small public companies and further reduce their chances to raise capital. 

The second, more controversial topic is the Supreme Court case Free Enterprise Fund v. The Public Company Accounting Oversight Board.  At issue is whether or not the PCAOB created by the Act is constitutional.  The main argument of Free Enterprise Fund is that since the SEC appoints the board members, the President does not have adequate control over the Board as the Constitution requires of all Executive Branch agencies (i.e. violates the separation of powers between the Legislative and Executive branches).

Supporters of the Board say that the SEC has long since used the services of private self-regulatory organizations similar to the PCAOB such as the New York Stock Exchange and the Financial Industry Regulatory Authority.  They claim the Board is not an independent agency, but rather an entity that functions under the complete control of the SEC.  People for the reform of the Board, such as the Free Enterprise Fund, say that the Board is in fact independent from the SEC because the SEC can only remove members for cause as oppose to at will. A recent Wall Street Journal article sheds more light on the subject.

The impact of the potential changes is debatable.  However, it does open a Pandora’s Box to allow legislators a chance to create additional amendments to the Act, such as shielding banks from the fair value accounting requirement.   

The decade started with the bursting of the dot-com bubble and a litany of corporate scandals that led eventually to the creation of SOX.  2010 is lined up as a pivotal year to how U.S. public companies operate.