In its final meeting, the advisory committee adopted a report that includes a handful of proposals for easing rules on small companies. The most controversial calls on the agency to override the internal-controls requirement of the Sarbanes-Oxley law, including allowing an estimated 70 percent of public companies to escape from rules requiring that an outside auditor assess internal controls over financial reporting.

"The benefits that are derived by investors are really not worth the costs," said Robert Robotti, the president of Robotti & Company LLC and one of the panelists. All panelists approved the report, although some opposed the internal-controls recommendation.

The vote brings into focus a heated debate over the internal-controls requirement of the 2002 law, enacted in the aftermath of corporate-accounting scandals at Enron Corp. and WorldCom Inc. Smaller companies have complained that the costs of following the law are disproportionately high. Former regulators have warned that investors will be more exposed to fraud if smaller companies are exempt from internal-controls requirements.

A final decision rests with the SEC's five commissioners, some of whom have expressed wariness about granting a complete exemption. Still, advisory committee co-chairman Herbert Wander has suggested that the panel's proposals have been misunderstood. He noted last week that he understands SEC Chairman Christopher Cox to be receptive to the group's recommendations.

The SEC won't act until after it holds a roundtable discussion on May 10. "This will all be done with an open mind by all of us," said John White, the SEC's director of corporation finance.

The advisory committee's proposal would establish two groups of small companies - those with a market capitalization of $128 million or less, based on current stock prices, and annual revenue of no more than $125 million; and another tier with a market capitalization of as much as $787 million and annual revenue of between $10 million and $250 million.

The tiniest group, or microcap companies, would be exempt from filing a management report assessing internal controls over financial reporting, and from hiring an outside auditor to assess those controls. The next smallest group would still have to file a management report each year, but would be exempt from hiring an outside auditor to assess controls. So-called small-cap companies with less than $10 million in revenue would also be relieved of filing management internal-controls reports.

In total, more than 6,000 companies would receive a break, based on data from the SEC's office of economic analysis. The microcap companies receiving wholesale exemptions would be required to strengthen some corporate-governance practices.

The SEC faces the possibility of a legal challenge if it approves an exemption. Because the internal-controls requirement of Sarbanes-Oxley added to, rather than modified existing securities laws, it is debatable whether the agency may wield the powers of exemption it holds under the securities laws.

Sen. Paul Sarbanes, D-Md., and Rep. Michael G. Oxley, R-Ohio, the authors of the law, themselves disagree over whether the SEC has such authority. Oxley says the SEC does have such power, while Sarbanes says any challenges to the law are on shaky legal footing.

-- SIOBHAN HUGHES (Dow Jones Newswires)