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From: StockDung4/10/2006 11:20:36 AM
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Congress To Cox On His ?Drop Dead!? Message To Small Public Companies: ?Fix The Sarbanes 404 Problem Or We Will? / FinancialWire®

April 10, 2006 (FinancialWire) U.S. Securities and Exchange Commission Chair Christopher Cox?s unexpected message to smaller public companies, headlined ?Cox To Small Public Companies: Drop Dead!,? and his own advisory committee not only has not only not sat well public, which so far has voted 73% in the latest Investrend Poll that he should ?resign? over continued interferences in the SEC processes, but he also received in a sharp and pointed retort from Congress.

April 10, 2006 (FinancialWire) U.S. Securities and Exchange Commission Chair Christopher Cox?s unexpected message to smaller public companies, headlined ?Cox To Small Public Companies: Drop Dead!,? and his own advisory committee not only has not only not sat well public, which so far has voted 73% in the latest Investrend Poll that he should ?resign? over continued interferences in the SEC processes, but he also received in a sharp and pointed retort from Congress.

?The Congress does intend to take some action if the SEC (and the PCAOB) doesn?t,? said Rep. Candace S. Miller (R-Mich), chair of the House Government Affairs Regulatory Affairs Subcommittee,? regarding the exhorbitant costs of compliance under Sarbanes-Oxley 404, which was a response to the ?blue chip scandals? at Enron (OTC: ECTPQ), Worldcom, now a part of Verizon (NYSE: VZ), HealthSouth (OTC: HLSH) and Tyco International (NYSE: TYC), among others, and which were not afterwards ?right-sized.?

The Investrend Poll is at

The SEC Chair had spoken in a similar vein over the journalist subpoenas, after which he backtracked, and he may already be waffling on his comments regarding SarBox 404.

In a subsequent interview with the Associated Press, however, Cox said he will ?take into account the recommendations of a small business advisory panel, due out soon.?

That would be more in line with the position of the Congressman, Michael Oxley, whose name is on the law, who now says smaller public companies should have ?relief? from the onerous and costly provisions of 404, which some call the ?Auditors Windfall Act? because of the huge fees they are able to command, enough to entice many public companies to ?go dark,? a potential huge loss to many small public consumers and shareholders.

The Congressional rejoinder came after testimony from three congresspersons who had participated in a "listening tour" in which they heard the Section 404 concerns of smaller public companies, according to the Securities Law Daily Banner.

Republican Reps. Tom Feeney (Fla.) and Mark S. Kirk (Ill.) and Democratic Rep. Gregory W. Meeks (N.Y.) also said that there is broad-based bipartisan support in Congress for reform of Section 404 with respect to smaller companies. Kirk said that if the SEC and PCAOB do not act, "next year the listening tour will turn into a legislative tour."

The SLDB said Miller told reporters after the hearing, "There clearly is a feeling that there has to be some movement here." She said that "optimally," the SEC and PCAOB would act to address the current concerns. The question is whether or not they have the will to do so, she said, "and if they don't have the political will, obviously, we have the [political] will here."

Miller also said that Section 404 burdens are all the small- and mid-size auto suppliers in her congressional district want to talk about, and "they're all afraid they'll go to jail."

?Kirk said that the critical issue for Congress is whether the commission puts the full Section 404 compliance burden on smaller companies. So far, the SEC has delayed implementation of the provision for smaller public companies until July 2007. If the SEC adopted the recommendations of the SEC's Advisory Committee on Smaller Public Companies, giving Section 404 exemptive relief to companies with a market capitalization of $750 million and below, ?94 percent of the public markets? would meet full SOX requirements, Kirk said.

Under SOX Section 404, SEC rules require corporate management to include in the company's annual report an assessment of its internal control over financial reporting, along with an auditor's attestation. The external auditor must report on whether management's assessment of the effectiveness of internal control is fairly stated and provide a separate opinion on whether the company's internal control is effective.

Miller said that "while the SEC initially estimated the cost to comply with Section 404 to be $91,000 per company or $1.24 billion in the aggregate, multiple studies peg the actual compliance cost at $35 billion," or nearly 30 times the original estimates. Kirk, meanwhile, using AMR Research statistics, urged that SOX compliance is costing about 50 times more than estimated in 2002 and will exceed $6 billion in 2006.

"As a percentage of revenue, smaller issuers in 2004 spent eleven times more on SOX implementation than did larger companies," Miller said. Audit fees for microcap companies increased 84 percent; for smallcap companies, 92 percent; and for S&P 500 companies, 55 percent, the SLDP said she recounted.

Kirk also noted that the most dramatic effect of Section 404 implementation for larger public companies has been "almost a disappearance of foreign listings on U.S. markets." There has been a 90 percent drop in foreign listings coming to this country, he said. Meanwhile, a U.K. market--the London Stock Exchange's AIM market, which is specifically tailored to growing businesses--is being marketed as a "Sarbanes-Oxley-free market," he said. "Because of Section 404 compliance costs, American financial markets are rapidly falling behind," Kirk said. The lawmaker also maintained that an increasing number of public companies have gone private as a result of SOX.

Meeks argued strongly along these lines as well, citing statistics to illustrate a mass movement of foreign stock offerings offshore and the delisting of hundreds of small corporations. In addition, Meeks said that in the implementation of Section 404, there has been "no incentive to be reasonable." "It's protect yourself at all costs," he said, arguing that a standard of "zero doubt" is operative under the PCAOB's auditing standard (AS 2) and that it is too high.

Meeks said he was not offering any particular solutions, like Miller stressed the bipartisan nature of the congressional will to see change in this area. "This is not a Democrat or Republican issue. This is an American issue," he reportedly said.

Former staffers at the SEC have told FinancialWire that ?morale? at the SEC, in the light of Cox?s continuing premature interferences in the processes of the agency, ?has never been lower.?

A few weeks ago a Houston newspaper, calling Cox a ?politician,? called for his resignation.

The Los Angeles Times noted that studies show that the ?extra costs for smaller firms to comply with the rules can run as high as $1 million a year,? meaning not hiring employees or ?scrapping the launch of anew product.?

Scale matters, the Times opined, ?both to the economy, which is largely driven by small business, and to many publicly traded companies themselves, for which the costs of compliance with Sarbanes-xley are often burdensome.?

Also supporting the modifications is U.S. Representative Michael Oxley, whose name is on the Sarbanes-Oxley law, and the CEO of Nasdaq (NASDAQ: NDAQ), Bob Greifeld.

At issue is the Final Report of the SEC Advisory Committee on Smaller Public Companies, whose 21-member panel includes executives of several small public companies, including Bluefly, Inc. (NASDAQ: BFLY) and Calypte Biomedical Corp. (AMEX: HIV).

The movement, supported by the U.S. Securities and Exchange Commission Advisory Committee on Smaller Public Companies, including National Instruments Corp. (NASDAQ: NATI), Oil-Dri Corporation of America (NYSE: ODC) and Kimball International, Inc. (NASDAQ: KBALB), had already gained powerful allies in retiring U.S. Representative Michael Oxley, whose name is on the law, and U.S. Representative Richard Baker, chair of a financial services subcommittee.

Greifeld said he has been a ?consistent supporter of the principles of Sarbanes-Oxley, despite the crescendo of corporate criticism it has engendered,? saying it is a ?tough but essential step toward restoring investor confidence through greater transparency, accountability and improved corporate governance.?

He said he also expected anguish over the provisions to wear off but that has been proven wrong.

?If anything, sentiment has hardened and the perception gap abroad is now wider than ever. As the CEO of a U.S. stock market, I am in frequent contact with a broad spectrum of business leaders, many of whom list on our exchange. When it comes to SOX, their message is clear: The burden of compliance is onerous, the cost is significant, and it falls disproportionately on smaller companies that are least able to pay. Our research has shown that the burden on small companies, on a percentage of revenue basis, is 11 times that of large companies.

?That is only part of the problem. In my travels to countries like China, India and Israel, I meet with the new generation of international entrepreneurs who are building businesses and dreaming of the day they can take their companies public. The constant refrain I hear is that when it comes time to do an IPO, they will be reluctant to list on American markets. They will look elsewhere to raise capital, and the main reason they cite is SOX. Indeed, a recent piece in these pages suggested that 90% of international small companies intending to go public are choosing to list abroad because of SOX costs and concerns. Despite the compelling advantages of listing with the world's most efficient markets and having access to our vast pool of sophisticated investors, many of these companies are likely to follow the line of least resistance and list abroad.?

Ironically, he said, ?by setting the bar so high in the U.S., SOX has had the unintended consequence of triggering a ?race to the bottom? by stock markets and companies seeking advantage via less jeopardy, less regulation, less cost and less hassle. International business clearly perceives a ?problem? with U.S. markets today, and the perception of burdensome, costly regulation has become an article of faith. This entrenched perception exists outside the bounds of reality. It is a heavy, and unnecessary, price to pay for the important benefits and welcome reforms that have resulted from SOX.?

Griefeld said that SOX is important; by and large, it works. We have had three years to assess its strengths and problems. Perhaps 90% of complaints have their genesis in 20 lines of text. We lay the widespread misperception about the cost and difficulty of compliance at the feet of the famous Section 404.

?So the time has come to address those 404 concerns without diluting the essential investor protections that are the true legacy of SOX. Specifically, we should adopt the recommendations of the SEC's Advisory Committee on Smaller Public Companies, which has proposed an exemption from 404 for companies with less than $128 million in market cap and revenues under $125 million. Companies with up to $787 million in market cap, as long as they had revenues less than $250 million, would receive partial exemption. The companies exempted account for only 6% of U.S. market cap, which means 404 would still apply fully to 94% of equity market capitalization.

He concluded: ?Nasdaq strongly supports the committee proposals for smaller public companies. We believe they address the legitimate problems associated with Section 404 without diminishing the important reforms that have helped rebuild investor confidence and make American markets the envy of the world. A demonstrated willingness to be flexible, to make minor changes to solve major problems, will also give us a bully pulpit to respond to growing international perception about the cost and jeopardy of participation in American markets.?

In his letter to Cox, Oxley said, ?We write to support the view that the Commission currently possesses the authority to provide relief from the provisions of the Sarbanes-Oxley Act under the Securities and Exchange Act of 1934 as well as the Sarbanes-Oxley law.?

The new developments left several opposition groups, such as the Big Four accounting firms, who fear losing revenues, former SEC Chief Accountant Lynn Turner, and the Consumer Federation of America, scrambling to come up with new reasons why shareholders of America?s smallest public companies should be saddled with what some call a ?tax,? and others call a blatant attempt to run development stage companies out of business or cause them to ?go dark,? leaving their small shareholders with no exit.

Some of these shareholders find the Consumer Federation?s opposition particularly inexplicable, since most observers believe the existing provisions for the smallest public companies are anti-consumer.

At the same time, a coalition of chambers of commerce is developing under the leadership of Massachusetts, to exempt public companies with less than $125 million in revenue from having to implement Section 404, which requires extensive internal and external auditing procedures well beyond the means of most such companies.

While such companies represent 52.6% of the 13,094 public companies in the U.S., their combined market caps are only 1% of the entire universe. Sarbanes-Oxley was primarily targeted at the Enrons and Worldcoms. The 21.5% of of public companies with market caps above $748 million at that level represent 94% of all U.S. equity market capitalization.

An article regarding the developing coalition is at

Paul Guzzi, president of the Greater Boston Chamber of commerce, said SarBox 404 ?disproportionately impacts the technology sector,? and is ?anti-competitive.?

Lyn Zurbrigg, a consultant who helped Abt Associates conduct the study, was quoted as saying the average first-year cost of implementing Sarbanes-Oxley was about US$4.5 million -- way more than the approximate $100,000 backers originally said it would cost.

It is also far more than the market cap or available cash to the smallest public companies.

The SEC advisory panel is asking the SEC to give a complete exemption from Section 404 requirements to micro-cap companies with less than $125 million in annual revenue, and to small-cap companies with less than $10 million in annual revenue.

The committee defines companies with market capitalization under $128 million as "micro-cap companies" and those with market capitalization between $128 million and $787 million as "small-cap companies,? said Reuters in a report.

?Small-cap companies with annual revenue between $10 million and $250 million would also be exempt from the external audit requirements of Section 404 under the recommendations.?

Until April 10, the public can comment. The SEC?s website for the committee is at The committee?s ?final report? is at

Information about commenting is at

?These new developments are very helpful,? said James A. ?Drew? Connolly, a member of the advisory committee and Director of Corporate Development for Investrend Communications, Inc., parent of Investrend Information (, publisher of FinancialWire, ?but we are a long way from home. There are some powerful interested aligned against small companies and small investors, and it?s going to take all of us to make our plight understood and known.?

Leroy Dennis, representing a mid-sized accounting firm, McGladrey & Pullen, said he supports the recommendations, noting that ?Auditing Standard No. 2 has not worked well for small companies.?

He said that during the coming comment period, he?d like to hear from investors in microcap companies under $250 million, noting that in the intial comment periods, most investors had holdings in billion dollar companies. He suggested Section 404 should be ?voluntary? for smaller companies ?if they believe the costs are worth the benefits.?

SEC Today quoted Steven Bochner, a partner in Wilson Sonsini Goodrich & Rosati, as saying Section 404 is simply a ?regressive tax? on small businesses and their investors, and said committee members should ?keep their courage up.?

During the year-long series of meetings and public comment, the advisory committee learned that a large proportion of public company shareholders might suffer financial problems if companies that could not afford compliance were to delist, or ?go dark,? and the committee?s proposals are in part an attempt to prevent this from happening.

The members of the Advisory Committee are:

Patrick C. Barry, Chief Financial Officer and Chief Operating Officer, Bluefly, Inc. (NASDAQ: BFLY), New York, N.Y, Mr. Barry's company markets designer apparel and home accessories through the Internet at discount prices. BlueFly has a market capitalization of $20 million. Mr. Barry is a Certified Public Accountant with an M.B.A. from Columbia University. He will represent microcap, emerging technology and retailing companies.

Steven E. Bochner, Partner in the law firm of Wilson Sonsini Goodrich & Rosati, Palo Alto, Calif. Mr. Bochner has more than two decades of experience practicing corporate and securities law in Silicon Valley. He received his J.D. from Boalt Hall of the University of California, Berkeley. He will represent emerging growth companies, venture capital funds and lawyers working with these types of clients.

Richard D. Brounstein, Executive Vice President and Chief Financial Officer, Calypte Biomedical Corp. (Amex: HIV), Pleasanton, Calif. Mr. Brounstein's company has a market capitalization of $60 million and recently moved its primary trading market from the Over the Counter Bulletin Board to the American Stock Exchange. He is a Certified Public Accountant with an M.B.A from Michigan State University. He will represent microcap companies and companies in the life sciences industry.

C.R. "Rusty" Cloutier, President and Chief Executive Officer, MidSouth Bancorp, Inc. (Amex: MSL), Lafayette, Louisiana. Mr. Cloutier's bank has capital of $50 million and a market capitalization of $126 million. He will represent smaller public entities in the banking and thrift industries.

James A. "Drew" Connolly III, President, IBA Capital Funding, Perrineville, N.J. Mr. Connolly was a founding member of the CEO Council, an organization of executives of smaller public companies. He works as a capital formation specialist with smaller public companies whose securities are traded over the counter and private companies seeking to access the public capital markets. He also invests in these companies. He will represent smaller over the counter companies and professionals who work with them, as well as investors in these companies.

Connolly is also director of corporate development for Investrend Research (

E. David Coolidge, III, Vice Chairman, William Blair & company, Chicago, Ill. Mr. Coolidge is the former CEO of William Blair and manager of its Corporate Finance Department. The firm has substantial investment banking experience advising small and mid-cap public companies. Mr. Coolidge will represent investment banking firms that advise smaller public companies, as well as the companies they advise.

Alex Davern, Chief Financial Officer and Senior Vice President of Manufacturing and Information Technology Operations, National Instruments Corp. (NASDAQ: NATI), Austin, Texas. Mr. Davern is chairman of the working group of the American Electronics Association ("AeA") on Section 404 of the Sarbanes-Oxley Act. He also serves on the board of directors and is chair of audit committee of SigmaTel Inc. Mr. Davern has a post-graduate diploma in professional accounting from the University of Dublin. He will represent smaller technology companies, which comprise a large portion the AeA's membership, and directors of public companies.

Joseph "Leroy" Dennis, Executive Partner, McGladrey & Pullen, Minneapolis, Minn. Mr. Dennis's firm is one of the prominent "second tier" public accounting firms, which frequently provide auditing services to smaller public and private companies. His firm's client base includes a substantial number of publicly traded financial institutions. He will represent middle market accounting firms, smaller public and private companies and publicly traded financial institutions.

Janet Dolan, Chief Executive Officer, Tennant company (NYSE: TNC), Minneapolis, Minn. Ms. Dolan's company manufactures industrial and commercial floor maintenance applications. It has a market capitalization of $355 million. She has been an advocate of assuring that the costs of compliance with the Sarbanes-Oxley Act are commensurate with the benefits, especially for smaller public companies. Ms. Dolan will represent mid-sized smaller public companies, especially those in manufacturing industries.

Richard M. Jaffee, Chairman of the Board, Oil-Dri Corporation of America (NYSE: ODC), Chicago, Ill. Mr. Jaffee is the retired President and CEO of Oil-Dri, a producer of sorbent products, such as cat litter, with a market capitalization of $75 million. He will represent microcap companies, especially those in basic industries.

Mark Jensen, National Director, Venture Capital Services, Deloitte & Touche, San Jose, Calif. The clients of Mr. Jensen's firm, a "Big Four" accounting firm, include numerous smaller public companies. Mr. Jensen himself has a diverse background in venture capital. He is a Certified Public Accountant, has worked on numerous initial public offerings and other securities offerings, and has served as audit partner for numerous companies in the venture capital, life sciences and information technology industries. He will represent emerging growth companies, venture capital funds and their auditors.

Deborah D. Lambert, Co-Founder, Johnson Lambert & Co., Raleigh, N.C. Ms. Lambert is Chairperson of the task force of the Council of Sponsoring Organizations of the Treadway Commission that is studying implementation for smaller companies of COSO's framework on internal control for financial reporting. She is also on the board of directors of the American Institute of Certified Public Accountants. Ms. Lambert will represent smaller public accounting firms and the companies they serve.

Richard M. Leisner, Partner in the law firm of Trenam Kemker, Tampa, Fla. Mr. Leisner is a senior securities lawyer specializing in providing legal services to growing companies in capital formation and other corporate transactions and on ongoing SEC reporting issues. He has been active in the American Bar Association and is the former Chairperson of the Small Business Committee of the ABA's Business Law Section. Mr. Leisner will represent emerging growth companies and lawyers working with these types of companies.

Robert E. Robotti, President and Managing Director, Robotti & company, LLC, New York, N.Y. Mr. Robotti's firm provides broker-dealer and investment advisory services relating to small to mid-cap companies. His firm also invests in these companies. He will represent investors in small to mid-cap companies as well as the interests of financial services firms active in the markets for the securities of these companies.

Scott R. Royster, Executive Vice President & Chief Financial Officer, Radio One, Inc. (NASDAQ: ROIAK), Washington, D.C. Mr. Royster has been Chief Financial Officer of Radio One, the nation's seventh largest radio broadcasting company, since 1996. The company primarily focuses on African-American and urban listeners. Before joining Radio One, Mr. Royster was a principal in private equity and private capital investment firms and an analyst with Chemical Bank/Chemical Venture Partners. He has an M.B.A. from Harvard Business School. He will represent rapidly growing smaller public companies and telecommunications companies.

Pastora San Juan Cafferty, Professor, School of Social Service Administration, University of Chicago, Chicago, Ill. Professor San Juan Cafferty sits on the boards of Harris Bancorp, Waste Management, Inc., People's Energy Corporation and Kimberly Clark Corporation. Her fields of special interest include cultural diversity, race and ethnicity in the context of American politics and government. Professor San Juan Cafferty will represent directors of public companies.

Kurt Schacht, Executive Director, CFA Centre for Financial Market Integrity, Charlottesville, Va. Mr. Schacht has been involved in the investment management business since 1990, serving as COO for a retail mutual complex, General Counsel and COO for a hedge fund, and chief legal officer for the State of Wisconsin Investment Board. Mr. Schacht will represent investors in smaller public companies.

Ted Schlein, Managing Partner in the firm of Kleiner Perkins Caufield & Byers, Menlo Park, Calif. Mr. Schlein sits on the board of directors of the National Venture Capital Association. He has been with KPCB, a premier venture capital firm, since 1996. He is credited with establishing Symantec Corporation in the utilities and antivirus markets before joining KPCB. Mr. Schlein will represent venture capitalists, companies funded by venture capitalists, technology companies and investors in venture-backed companies.

James C. Thyen, President and CEO, Kimball International, Inc. (NASDAQ: KBALB), Jasper, Ind. Mr. Thyen has served in various financial and executive capacities since he joined Kimball in 1966. The company manufactures furniture, cabinets, and related components for the office, hospitality, entertainment and retail infrastructure markets and electronic contract assemblies for the durable electronics markets. It has a market capitalization of $354 million. Mr. Thyen serves as Co-Chair of the advisory committee and represents mid-sized smaller public companies on the committee, especially manufacturing companies and companies in highly competitive markets.

John B. Veihmeyer, Mid-Atlantic Area Managing Partner for Audit and Risk Advisory Services of the accounting firm of KPMG LLP, Washington, D.C. The clients of Mr. Veihmeyer's firm, a "Big Four" accounting firm, include numerous smaller public companies, including many technology companies. He will represent larger public accounting firms and the smaller companies they serve.

Herbert S. Wander, Partner in the law firm of Katten Muchin Rosenman, LLP, Chicago, Ill. Mr. Wander is a Chicago lawyer who concentrates on business law, especially corporate governance, securities law and merger and acquisition transactions. Much of his practice has focused on companies classified as small and mid-cap. Mr. Wander serves as Co-Chair of the advisory committee and represents smaller public companies served by firms like his, as well as representing lawyers working with these types of companies.

The official observers of the advisory committee named by previous SEC Chair William Donaldson are:

George J. Batavick, Member, Financial Accounting Standards Board, Norwalk, Conn. Mr. Batavick is the Board Collaborator for the FASB Small Business Task Force.

Daniel L. Goelzer, Member, Public company Accounting Oversight Board, Washington, D.C. Mr. Goelzer served as General Counsel of the SEC from 1983 to 1990. He is a Certified Public Accountant in addition to being a lawyer.

Jack E. Herstein, Assistant Director, Nebraska Bureau of Securities, Lincoln, Neb. Mr. Herstein is serving as an official observer representing the interests of the North American Securities Administrators Association (NASAA), the organization of state securities regulators.

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