SEC Reduces Disclosure Requirements for Small Public Companies

2/15/2008

Recent rule changes by the Securities and Exchange Commission will translate into reduced disclosure requirements and increased cost savings for smaller reporting companies, according to a partner with Warner Norcross & Judd LLP.

The new rules, which went into effect Feb. 4, expand the number of companies able to qualify as a "smaller reporting company." They also reduce or eliminate disclosure requirements related to financial statements, management's discussion and analysis of financial conditions and results of operations, executive compensation, stock performance, market risk and other factors.

"With these new rules, the SEC took steps to mitigate the financial burden that smaller companies feel when trying to comply with reporting requirements," said Jeffrey A. Ott, a partner at the Firm and chair of its Reporting Companies and Registered Offerings Group. "The reductions in disclosure requirements will be helpful to smaller companies from a cost perspective while still ensuring the flow of critical operating and performance information to shareholders.

"Public companies with a public equity float between $25 million and $75 million will benefit from the new rules. In Michigan, community banks are likely to be among the industry groups that benefit the most."

Ott, who concentrates his practice in securities and business law, with an emphasis on financial institutions, noted that the new SEC rules:

• Increase the qualifying cap: Companies with a public equity float of less than $75 million now qualify under the "smaller reporting company" rules, which simplify reporting requirements. Prior to Feb. 4, companies with a public float of less than $25 million were considered “small business issuers,” Ott noted. For companies on a calendar year, the new rules will apply to their 2007 annual report, which must be filed in early 2008.
  
  
• Reduce MD&A disclosures: Ott said that smaller reporting companies need only submit two years of audited balance sheets and statements of income, changes in shareholders' equity and cash flows. Large companies, on the other hand, must file two years of balance sheets and three years of all other statements. "Eliminating one year of financial statement disclosure will flow through to the MD&A required by the SEC, which reduces disclosure burdens – and the related costs," Ott explained.
  
  
• Reduce executive compensation disclosures: Under the new rules, smaller reporting companies do not have to provide a compensation discussion and analysis. Additionally, Ott said that only two years of compensation, rather than three, are required for the summary compensation table. Compensation information for the top three most highly compensated officers, rather than five, is required. Finally, the relaxed rules eliminate four compensation tables.
  
  
• Eliminate the stock price performance graph: Smaller reporting companies are not required to provide a five-year performance graph showing their stock price performance compared to market or industry indices or peer groups.
  
  
• Eliminate risk discussion: While large companies are required to make disclosures about general risk factors and specific market risks in their annual reports, the new SEC rules eliminate the requirement for smaller reporting companies.

"Smaller reporting companies may choose to take advantage of some or all of these changes," Ott said. "If they decide to take an item-by-item approach, though, they must choose carefully. The SEC wants companies to provide disclosures that give shareholders the ability to make period-to-period comparisons.

"Companies who may qualify for these new reporting rules should contact securities counsel for advice on how to best take advantage of these reduced requirements."

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About Warner Norcross & Judd

Warner Norcross & Judd LLP is one of the leading law firms in Michigan. With more than 200 attorneys in Grand Rapids, Southfield, Sterling Heights, Lansing, Holland and Muskegon, Warner Norcross is a full-service provider of legal services. Nearly half of our partners are listed in the 2007 edition of The Best Lawyers in America. Warner Norcross was also named the best corporate law firm in West Michigan by Corporate Board Member magazine for the third year in a row. Warner Norcross has been recognized as a national leader in client service among law firms by BTI Consulting, as one of the nation’s leading employment law firms by Workforce Management, as one of the 101 Best & Brightest Companies to Work For in both West Michigan and Metro Detroit and as one of the Best Michigan Businesses by Corp! Magazine. The Firm represents local, statewide, regional, national and international clients in all areas of business and civil law.


Mary Ann Sabo

Sabo Public Relations
T 616.485.1432