30 November 2006

BBC: Sarbanes-Oxley ‘hurting the US’

The US should rethink its regulation of firms and bosses to stay competitive, according to a group with close links to Treasury Secretary Henry Paulson. Revising rules under the Sarbanes-Oxley Act would make US markets more attractive, the Committee on Capital Markets Regulation (CCMR) said. Businesses have been critical of legislation brought in after the collapse of Enron and other scandals. They point to high regulatory costs and the fear of legal action and jail.

Mr Paulson said earlier this month that the Sarbanes-Oxley Act did not need changes, but added the US should look at how the rules were being enforced. Critical voices have been gaining strength since the US toughened rules governing corporate governance to reassure investors, following the collapse of energy trading firm Enron and telecoms provider WorldCom. According to the CCMR, there is now too much regulation, and the fear of being involved in litigation and legal battles may be putting foreign companies off listing their shares on US stock markets.

“Firms must choose to come to the US: they do not have to come,” the group said in its 135-page report. “In the shift of regulatory intensity, balance has been lost to the competitive disadvantage of US financial markets. The evidence suggests that balance does need to be restored,” it added. In its report, the CCMR said that US markets attracted 8% of global stock market flotations, or initial public offerings (IPOs). That compares with almost 50% of IPOs in the 1990s, the CCMR said.

All but one of the world's biggest IPOs took place outside of the US this year. Some of the changes could be put down to foreign markets becoming more efficient and improving trading platforms, but much of the shift was due to the US having a more aggressive regulatory and legal environment, the CCMR said.

To redress the balance, the US should limit penalties for companies, rein-in costs, ease capital requirements for foreign firms, improve co-ordination between regulators and revise the Sarbanes-Oxley Act, the group argued. “Taken together, the proposed changes would enhance shareholder value by reducing the cost of capital, increasing expected firm cash flows, and reducing excessive risk aversion of corporate managers, auditors and directors,” it said.

Not everyone was convinced by the CCMR's argument. According to James Cox, a professor at Duke University Law School, “close, empirical analysis doesn't support these reforms”. “It’s just a classic situation of wrapping your ideas in basic fears and then you can sell it to the people,” he said. The influential CCMR is headed by former White House advisor Glenn Hubbard and ex-Goldman Sachs president John Thornton.

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