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Regulation: Now For The Overreaction
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Posted by: Jack Ciesielski 9/14/2006 6:46 AM
A whole host of interesting stuff hitting the news over the last few days, all about rolling back Sarbanes-Oxley. First up: the formation of the "Committee on Capital Markets Regulation," which intends to "conduct a major study of how to improve the competitiveness of the U.S. public capital markets." Report expected in November.

Formed by - who? The announcement doesn't say; the title has a nice regulator-sponsored ring to it, but that's about it. The members are certainly well-heeled enough to decide to have a friendly pow-wow and produce a recommendation. Membership includes Glenn Hubbard, Dean of Columbia Business School; Samuel DiPiazza, Global CEO, PricewaterhouseCoopers; Wilbur L. Ross Jr., Chairman & CEO, WL Ross & Co. LLC; and Charles O. Holliday, Chairman & CEO, Dupont, among many others. (There's some investor representation too: Robert Pozen, Chairman, MFS Investment Management; Ken Griffin, President & CEO, Citadel Investment Group LLC; and James Rothenberg, President & Director, Capital Research and Management Co. They're distinctly in the minority, however.)

Nope, no clues as to the group's origin - but the group's purpose is praised by Treasury Secretary Hank Paulson, whose first speech as secretary (at Columbia Business School: see Dean Hubbard, above) was a slap at Sarbanes-Oxley.

(Amusing coincidence, perhaps: the same day that the Committee announces its formation, PricewaterhouseCoopers announces its reentry into the US restructuring advisory business. Sam DiPiazza, committee member, is PwC's CEO.)

Nothing wrong with examining competitiveness - if that's what they do. But given the representation of the committee, it'll be surprising if there isn't much more to their recommendations than to simply roll back regulation. More on their forthcoming report:

"In a November interim report the Committee will include recommendations on:
1. Liability issues affecting public companies and gatekeepers (such as auditors and directors) with a focus on securities class action litigation, criminal enforcement and federal versus state authority.
2. The Sarbanes-Oxley Act, with major emphasis on Section 404, which requires auditors and senior managers to certify the adequacy of internal controls.
3. Overall regulatory processes to allow the United States to do a better job of evaluating changes of law and regulation, prospectively, initially and on an ongoing basis.
4. Shareholder rights."

It's not hard to see where this is likely to go: to Congress, though probably not this year. But as Floyd Norris points out on his blog, "...there is a scenario that might lead to quicker action, during a post-election session of the Congress. There is a pending lawsuit filed by the Free Enterprise Fund challenging the constitutionality of the Public Company Accounting Oversight Board. If a judge were to agree with the premise of the suit, that could create a crisis that would seem to require quick Congressional action. This committee's recommendations would then be available to anyone hoping to reduce the regulatory burden."

If you nose around the news, you find some interesting contrasting news. For instance, CFO.com reports that "Auditing Standard 2 Lite" is in the works already. According to PCAOB board member Bill Gradison, the revised standard "is going to be a much shorter version and will incorporate a lot of the changes that we have focused on in our stress on efficiency." It's one example of how there's already been a reaction to the calls for improvement.

Is the call for "roll-back" as deep-rooted as it sounds when committees like this are being created? Another tidbit from CFO.com makes you wonder if the hue and cry is more isolated than it sounds. In a survey of 213 finance executives, they found that the vast majority found benefits from their Section 404 reviews, and supported the FASB's plans to put pension and lease information directly on balance sheets.

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