News From the
Committee on Small Business
Nydia M. Velázquez, Ranking Democratic Member

For Immediate Release
May 3, 2006

CONTACT: Kate Davis, Allyson Ivins, (202) 225-4038

Small Companies Struggle under Weight of Sarbanes-Oxley Requirements
Democrats work to reduce Section 404 compliance costs for small firms

WASHINGTON - Yesterday, Democratic Members of the House Small Business Committee sent a letter to the Securities and Exchange Commission (SEC) expressing support for the some of the recent recommendations released by the Advisory Committee on Smaller Public Companies to help provide relief to small firms. During a Committee hearing today to review these proposals, Committee Democrats highlighted that small companies have been unduly burdened by the staggering compliance costs associated with Section 404 of the Sarbanes-Oxley Act.

"This Act was intended to strengthen the corporate governance practices of the business community, but this positive change has come with a cost - and a particularly steep cost at that," said Congresswoman Nydia M. Velázquez, Ranking Democrat on the House Small Business Committee. "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."

Since the Sarbanes-Oxley Act was enacted in 2002, small firms have struggled with the Section 404 provisions, particularly the compliance and regulatory burdens. Recent estimates show that smaller companies are paying an average of nearly $1 million to comply with Section 404 - substantially higher than a June 2003 SEC projection estimating the cost at approximately $91,000 per registrant. Other studies report that small firms are also disproportionately bearing the burden of Section 404. The reported compliance cost can approach 3 percent of revenue for a small company, while it is only about one-tenth of one percent for larger firms.

The letter released by Democrats on the Committee responds to the Advisory Committee's policy recommendations for reducing the compliance burden and providing relief to small firms. Democratic Members have been following this issue closely for nearly two years, and held a roundtable discussion last October with the business community and industry leaders to discuss the impact of the Sarbanes-Oxley Act. Participants discussed the "one-size-fits-all" approach used to implement Section 404, as well as the challenges it has created for smaller companies seeking access to the capital markers. Congresswoman Velázquez is hopeful that the SEC will take the Advisory Committee's recommendations into account, and said "these efforts shows great promise in producing a result that will provide balance between investor concerns and the needs of small firms."

"Action needs to be taken to reduce the unintended consequences of this compliance burden on our nation's smaller companies," Congresswoman Velázquez said. "Clearly, Sarbanes-Oxley has been a valuable tool in focusing management on corporate governance and providing investors with greater confidence in the markets - but many firms have been reeling from the costs associated with compliance. However this situation is resolved, I urge the SEC to address the issue straight on - and provide small companies with definitive relief from Section 404 sooner rather than later.

Read a copy of the letter sent to the SEC.

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