Hearing: Sarbanes-Oxley Section 404: What Is The Proper Balance Between

Statement

Hearing: Sarbanes-Oxley Section 404: What Is The Proper Balance Between
Investor Protection And Capital Formation For Small Public Companies

Thank you, Mr. Chairman. This hearing to review the recommendations of the SEC's Advisory Committee has been a long time in coming.

Small businesses continue to face barriers that hinder their ability to remain competitive and strong. The skyrocketing costs of health insurance and start-up capital pose many challenges for entrepreneurs - but soaring regulatory and compliance burdens have consistently been one of their number one concerns.

Almost every single small business owner and association that has testified before this Committee has put reducing the regulatory burden at the top of their list for legislative change. That is no different with the Sarbanes-Oxley Act - as Democrats on the Committee have been hearing from small business owners for nearly two years now. Unfortunately, the situation does not seem to be getting any better.

The Sarbanes-Oxley Act was intended to strengthen the corporate governance practices of the business community. But, what we have heard is that this comes with a cost - and a particularly steep cost at that. The auditing standards, disclosure requirements, and corporate governance rules of the Act have added significantly to the operating costs of small companies - many who have gotten stuck in the fray.

Democratic Members of the Committee held a roundtable back in October, so that we could hear directly from the small business community on the impact of these reforms. A number of small firms we spoke with agree that it is difficult not to support the intentions of Sarbanes-Oxley - most notably, strong corporate governance and shareholder accountability. Yet for the 14,000 publicly traded companies - the majority of which are smaller firms - Section 404 of the Act poses a great burden to their future economic vitality.

Numerous studies and surveys point to the staggering compliance costs of Section 404 as a major burden on small companies. In June 2003, the SEC estimated the cost of implementing Section 404 on all registrants at approximately $1.24 billion - or $91,000 per registrant.

Yet time has told that the SEC vastly underestimated its calculations. Recent surveys show that small companies are paying an average of nearly $1 million to comply with Section 404 - and this is simply unacceptable.

Even though some studies show these costs have declined, they are still significant and are bearing a disproportionate burden on small firms. The compliance cost of Section 404 for small companies is approaching 3 percent of revenue - while it is less than one-tenth of one percent for larger companies.

Adding to concern is new evidence showing numerous small companies, suffering under the weight of costly regulations, have begun to look abroad to go public. There are currently 37 U.S. companies listed on the AIM run by the London Stock Exchange - 19 companies alone that have been listed within the past year.

These so-called "Sarbanes-Oxley Free Zones" have freed some small firms from the strict capital market regulations seen here in the U.S. Both Sarbanes-Oxley and Section 404 have been cited as primary drivers in this development - which are in turn hurting the American economy.

Clearly, there is no end in sight to the burden that so many of our nation's small firms are forced to face. My Democratic colleagues and I have cited many of these concerns in two recent comment letters to the SEC.

I am pleased though with the work the SEC Advisory Committee has done toward finding a solution that truly eases the burden and provides relief for small companies. With the recent release of the Committee's recommendations, I am hopeful these will become the basis for a real regulatory reform proposal.

I know that much uncertainty surrounds the SEC's review and consideration of the Advisory Committee's recommendations. However this situation is resolved, I urge the SEC to address the issue straight on - and provide smaller companies with definitive relief from Section 404 sooner rather than later.

I look forward to the testimony of the witnesses today.

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