Securities Law Prof Blog

Editor: Eric C. Chaffee
Univ. of Toledo College of Law

Wednesday, March 14, 2007

Cox Before the Chamber of Commerce

SEC Chair Cox spoke before the Chamber of Commerce today and addressed many of the  issues raised by the Chamber in its Report released on Monday.  Here are some excerpts:

Just a recap of our most recent enforcement actions includes cases alleging secret slush funds; forgery; stock option grants to fictitious employees; falsified corporate documents; self-dealing; self-enrichment; attempted cover-ups; and lying to auditors. Earlier this month we filed the largest insider trading case against Wall Street professionals since the days of Ivan Boesky and Dennis Levine, involving major Wall Street firms as well as hedge funds.

And so, as this Conference focuses on how to improve the competitiveness of America's capital markets — a goal I not only share, but which Congress has charged the SEC to work to achieve — it must be remembered that aggressive law enforcement by the SEC is critical to the continued success of our markets.

Yours is not the first, nor will it be the last, outside group to tell us that there are significant direct and indirect costs that come along with the benefits of Sarbanes-Oxley. The SEC's own analyses of Section 404 of Sarbanes-Oxley are in general agreement with what the Government Accountability Office, the Schumer-Bloomberg report, the Hubbard-Thornton report from the Committee on Capital Markets Regulation, and your own Commission have found: that while a portion of the first-year compliance experience of Sarbanes-Oxley undoubtedly reflected start-up costs — and, in many cases, long-neglected maintenance by companies of their internal control systems and procedures — it is undeniable that much of the cost was attributable to excessive, duplicative, or misdirected efforts.

A good deal of the current focus on capital markets competitiveness is premised on thenotion that foreign jurisdictions have looser regulations. And it's certainly true that Sarbanes-Oxley is being used in marketing campaigns abroad as a reason for foreign companies to list elsewhere. But the truth is that many countries, including the United Kingdom, offer stockholders a very broad set of rights. And many of those same countries are adopting provisions of the Sarbanes-Oxley Act as part of their own regulatory regimes

One of the hallmark accomplishments of Sarbanes-Oxley is that it has implemented the corporate equivalent of President Truman's oft-cited aphorism: "The buck stops here." Thanks to Sarbanes-Oxley, the responsibility for the truthfulness of public company reports and disclosures stop on the desks of our corporate leaders.

Despite the recommendation in your report, and in the Schumer-Bloomberg study, that Congress amend the Sarbanes-Oxley Act, I want to state clearly this morning that I disagree. While of course it's up to the Congress to determine its legislative priorities, both the House and the Senate have formally asked my advice on this point, in hearings on the subject of Sarbanes-Oxley, and I have repeatedly given it. We don't need to change the law, we need to change the way the law is implemented. It is the implementation of the law that has caused the excessive burden, not the law itself. That's an important distinction. I don't believe these important investor protections, which are even now only a few years old, should be opened up for amendment, or that they need to be.

The SEC has the power and the necessary flexibility to implement the law in a way that makes sense for investors and markets. And your input is a valuable tool in helping us make those changes so that Section 404 operates as intended. In particular, we've been able to phase in the application of the internal controls requirements of Section 404, with appropriate deferrals for public companies of different sizes — so that even today, nearly five years after the Act, smaller public companies are not yet required to comply with this provision.

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