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SEC's SarbOx Advisory Panel Meets
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Posted by: Jack Ciesielski 10/25/2005 7:30 AM
As noted in this space on several occasions, the SEC has fashioned an advisory committee to study the costs and benefits of regulation under the Sarbane-Oxley Act. It met in Washington yesterday and again today "to discuss possible recommendations for inclusion in the Committee's final report to the Commission."

No discussion of the discussion that I could find on the SEC website - but there was reporting from Reuters. A couple of excerpts:

"James Connolly, president, IBA Capital Funding noted that Refco Inc.'s prospectus contained internal control warnings that did not stop bankers and investors who backed the initial public offering."

"We need to look at fundamental changes," said Alex Davern, chief financial of National Instruments Corp. "Tweaking around the edges will not achieve the goal."


Let's think about that first comment about Refco. There were "internal control warnings that did not stop bankers and investors." The Section 404 requirements resulted in a warning that was ignored by people who shouldn't have ignored them. Their ignorance of available information speaks more to their ineptitude as bankers and investors rather than indicating there's a problem with the requirement. This is a shameless deflection of blame from those who are responsible for their own actions onto that easy-to-hit target, Section 404.

It's like saying that General Motors could save a lot of money if it didn't put speedometers in its cars because drivers go over the speed limit. Why, it could solve all of their cost problems!

About that second one: "We need to look at fundamental changes." If Alex Davern's name sounds familiar, maybe it's because he was one of the architects of the AeA's white paper “Sarbanes-Oxley Section 404: The ‘Section' of Unintended Consequences and Its Impact on Small Business - A Grassroots Uproar.” The AeA, a high-tech trade association has not exactly been receptive to Sarbanes-Oxley. As the CFO of a nearly $2 billion market cap "small business", you have to wonder just what kind of "fundamental changes" Mr. Davern would like to see.

A quick reality check on some of the praises sung about the small businesses that are supposed to benefit from this committee's work, with the aid of S&P's Research Insight database. At the beginning of October there were 2,516 companies with a market capitalization of $75 million or less - an approximation of the small company threshhold being used by the SEC and this advisory committee. The interesting thing is this: if the Research Insight database is accurate - and I have no reason to believe otherwise - there are plenty of companies that don't have financial data for the years 1995 (743 of them), 1996 (658), and 1997 (601). The 1997 figures represent about 24% of all the companies.

What's interesting about that? If they aren't represented in the database, it's because they weren't required to publish financial data that far back when they went public. That means that quite a few of the companies that this advisory committee is valiantly championing went public during the late 1990's bubble era, when the markets were pretty non-discriminating and so were underwriting standards. It seems pretty ironic that the SEC is going to so much trouble to carve out a protected class with these firms.


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