The Securities and Exchange Commission is by far the world’s most foremost agency for regulating securities (and the markets they trade on) and protecting investors. It was created by Congress with the intention of making investing more transparent, deterring practices such as manipulation and fraud.
In the wake of Enron, WorldCom and the accounting/governance debacle, the Sarbanes-Oxley bill was passed in 2002. Named after Paul Sarbanes (D-MD) and Michael Oxley (R-OH), the act introduced reforms in several key areas, in an effort to shore up confidence in US markets and reform the accounting industry, which became way too cozy with consulting and business—thereby compromising their integrity and independence as auditors.
Nearly 5 years have passed and the bill has accomplished its goals, but has had several unpleasant secondary and tertiary effects. For instance, the bill has complicated the oversight functions of Congress, the SEC and FASB.
Sar-box has also made it a timely process to stay in compliance with the various provisions and as a result many corporations have formed positions to solely maintain their good standing, creating more corporate red tape.
This has also made many smaller and medium size enterprises reluctant to look to the public markets to raise capital, as the added expense of acquiescing is too expensive and difficult. As a result, New York City has lost its moniker as “Financial Capitol of the World” to London, as more US based companies are looking to list on the AIM or LSE to seek the necessary funding to expand or bulk up their R&D divisions.
The penalty for noncompliance is also quite hefty. While I am not a prosecutor or criminal, the sentence dealt to Bernie Ebbers seems quite steep—as he will likely serve more time than child molesters and violent offenders (including some murder verdicts!).
Requiring CEO’s to sign off on all financials may also not make the amount of sense currently, as it did back in 2001-2002. Many of the best business leaders and innovators are visionaries, not the nuts and bolts type, forcing them to rely on the advice of internal auditors, legal counsel and administrators to certify their quarterly and annual reports. One major unintended consequence is simply a flight of human capital from corporate leadership. Many of our finest influential businesspersons are simply not technocrats and would not be satisfied to be “on the hook” for someone else’s work, when it comes to putting their name on the dotted line. Can you blame them?
I firmly believe that the White House, Capitol Hill, the Securities and Exchange Commission, the Federal (Reserve) Open Market Committee and the FASB need to convene a review of this controversial act. This does not come down to partisanship, politics or power—simply examining the dwindling position of American competitiveness in capital markets and investment. We are ceding investment banking, trading, IDFI (Indirect Foreign Investment for both new listings and ADR’s) entrepreneurial advantage, liquidity—not to mention shaving (who knows how much off) of GDP.
It is up to our Government to literally take the advice of Adam Smith and take their hands off our economy. Protecting the little guy is one thing, impeding growth and commerce is another. Since Chairman Cox has done a brilliant job running the SEC in terms of regulation and protection; he can quite easily cash in some of his political capital, not to mention he has friends and colleagues on both sides of the aisle from his days representing California in the House.
