The House Financial Services Committee will vote Wednesday on a critical amendment to an investor-protection bill that would exempt small and mid-size companies from audits required under the Sarbanes-Oxley corporate-reform law.
The provision, sponsored by Reps. Scott Garrett (R., N.J.) and John Adler (D., N.J.), has the support of the White House.
Committee Chairman Barney Frank (D., Mass.) said White House Chief of Staff Rahm Emanuel negotiated with Adler on behalf of the White House and the Treasury Department to avoid a more damaging amendment that would have exempted firms already covered by Sarbanes-Oxley--those with market capitalization of less than $700 million.
"Mr. Adler was persuaded that it would be better public policy to do a $75 million forever carve-out," Frank told reporters at a press conference. Sarbanes-Oxley requirements already are suspended for those companies, he added.
Small companies claim that internal controls mandated by Sarbanes-Oxley are too onerous for them. But Securities and Exchange Commission Chairman Mary Schapiro wants all companies to start outside audits of their controls beginning next June.
If the amendment becomes law, that won't be possible. But Frank noted that lawmakers could address the exemption in the future. "It is permanent only to the extent that a future Congress could not repeal it," he said.
It isn't clear how the amendment will fare in the committee. Frank and Capital Markets Subcommittee Chairman Paul Kanjorski (D., Pa.) oppose it.
Kanjorski said he hoped the bill won't be "precipitously watered down," but the move to exempt smaller companies signals there could be further efforts like that as the bill moves through Congress. Several Democrats will support the exemption, and the vote will be close, he said.
Kanjorski also said further moves for exemptions could be "extremely dangerous" to the overall effort.
Barbara Roper, investor-protection director for the Consumer Federation of America, sent a letter to the committee Tuesday saying the amendment would eliminate auditing requirements for "roughly half of all public companies with market capitalizations of less than $75 million."
Proponents of the exemption say it doesn't change anything about the current system. The SEC has repeatedly extended the deadline for non-accelerated filers to begin providing audited assessments of their financial reporting internal controls, according to Garrett, "an acknowledgement of continued concern about compliance costs."
The final committee vote on the bill also is slated to take place Wednesday. It would allow the SEC to establish a harmonized fiduciary standard for stockbrokers and advisers who offer financial advice, give the SEC the ability to pay informants who provide key details in enforcement cases and empower the SEC to ban brokers from requiring customers to sign mandatory arbitration clauses.
Also on deck for a committee vote Wednesday is an amendment backed by Rep. Maxine Waters (D., Calif.) ensuring the SEC has the legal authority to impose new proxy-access rules to bolster shareholders' ability to nominate directors to corporate boards. The SEC plans to issue new proxy rules next year, but those rules are almost certain to face a court challenge.
Questions also remain over an amendment hastily approved last week that would permit the SEC to delegate investment-advisor enforcement to self-regulatory bodies like the Financial Industry Regulatory Authority, or Finra.
Kanjorski said lawmakers are discussing ways to tweak that provision, but he didn't elaborate.
A handful of investor-protection advocates sent a letter to the committee Monday on the amendment, sponsored by the committee's ranking member, Spencer Bachus (R., Ala.). The letter said the proposal would make Finra "the main arbiter of how fiduciary duty is applied to conduct by brokers." Signatories included the Consumer Federation of America, the Investment Advisor Association, and Shareowners.org.
The North American Securities Administrators Association sent a separate letter saying regulation should remain a government function.
Finra said the provision would bolster examination of investment advisors. "This part of the bill would simply allow Finra to put more boots on the ground, subject to SEC oversight, for those firms already regulated by FINRA and their associated persons," a Finra spokeswoman said.
According to Finra, only 9% of investment advisor firms are expected to be examined by the SEC next year.
-By Fawn Johnson, Dow Jones Newswires; 202-862-9263; fawn.johnson@dowjones.com