- Small publicly held banks and bank holding companies should be exempt from the internal control attestation and audit requirements of Section 404(b) of Sarbanes-Oxley Act as well as some of the reporting requirements of the Securities Exchange Act of 1934. The market capitalization threshold for exemption should be raised to at least $350 million.
Exemptions Under the Dodd-Frank Act
ICBA supports sound corporate governance practices for public companies, which are essential to maintaining investor confidence. However, the corporate governance provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act disproportionately burden community banks, community bank holding companies and other small issuers. The SEC should use the authority expressly delegated to it by Congress to permanently exempt community banks. For instance, the SEC should completely exempt smaller reporting companies like publicly held community banks from the pay versus performance rules which require companies to disclose the relationship between executive compensation and the company’s total shareholder return. These disclosure requirements would be burdensome for publicly held community banks and would provide little practical utility to investors. ICBA also believes that Institutional Shareholders Services, which provides proxy advisory services and consulting to publicly held companies, should be more transparent and should disclose all potential conflicts. ICBA supports legislation in the House that would require the registration of proxy advisory firms with the SEC and the disclosure of proxy firms’ potential conflicts of interest and codes of ethics.
SOX 404(b) Exemption
ICBA supports legislation that would increase the SOX 404(b) exemption to at least $350 million of market capitalization for banks and bank holding companies. The 2002 failures of Enron and WorldCom raised public and investor concern about corporate governance and executive compensation, resulting in the Sarbanes-Oxley Act of 2002. The most notable provision of the Act is Section 404(b) which requires an outside auditor to attest to the internal controls of a publicly held company. ICBA has advocated for an exemption from this requirement for community banks because of the unwarranted burden and expense it creates. Implementation of Section 404(b) for small issuers was repeatedly deferred until the Dodd-Frank Act created a permanent exemption for issuers with market capitalization of less than $75 million. ICBA is pleased with this outcome but believes that the market capitalization threshold should be set at a higher amount—at least $350 million. Community banks are already subject to substantial supervision and regulation by the banking regulators and should not be subject to the internal attestation requirements of SOX 404(b). Furthermore, ICBA supports changing the threshold in the “accelerated filer” definition that requires, among other things, that filers provide the auditor’s attestation of management’s assessment of internal control over financial reporting. Otherwise, companies with $75 million or more of public float that qualify as “small reporting companies” will remain subject to the requirements that apply to accelerated filers, including the timing of the filing of periodic reports and the requirement that accelerated filers provide the auditor’s attestation of management’s assessment of internal control over financial reporting as required under SOX 404(b).
Staff Contact: Chris Cole