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Panel Seeks Regulatory Overhaul December 2006 (SmartPros) — The Committee on Capital Markets Regulation, a group of 22 business leaders that has received support from Treasury Secretary Henry Paulson, released a report on Nov. 30 that calls for an overhaul of the regulatory environment in the United States. The committee outlined 32 specific recommendations in four areas -- shareholder rights, the regulatory process, public and private enforcement, and Section 404 of the Sarbanes-Oxley Act -- "to improve the regulatory system and give U.S. capital markets the competitive boost necessary to respond to the increasingly aggressive efforts of other countries to attract equity capital markets." The recommendations include easing the rules mandated by Sarbanes-Oxley, and reducing the liability of auditors in shareholder lawsuits. The committee has no legal standing, but is comprised of influential business leaders and has support from Paulson, who has publicly criticized that the regulatory environment in the United States is at risk of losing its competitiveness among foreign capital markets. The Securities and Exchange Commission is expected to discuss the paper at a public hearing Dec. 13. Following are highlights of the recommendations from each of the four areas of the report, as outlined in a statement released by the committee: Shareholder Rights Classified boards should be required to obtain shareholder authorization to adopt a poison pill, and if this is not done within three months, the pill should automatically be redeemed. The committee endorsed majority - rather than plurality - voting, which is a cornerstone of shareholder rights, and the committee will study how it may best operate. Shareholders should be given the choice to decide how disputes with their companies should be resolved - through arbitration (with or without class actions) or non-jury trials. The SEC should resolve issues on ballot access caused by a recent court decision. Regulatory Process The SEC and self-regulatory organizations should move to a more risk-based regulatory process, emphasizing the costs and benefits of new rules. In weighing the costs and benefits of new rules, regulators should rely on empirical evidence to the extent possible. Also to the extent possible, regulations should rely on principles-based rules and guidance. The SEC should periodically test existing rules to ensure they still meet reasonable cost/benefit standards. Public enforcement bodies like the SEC, Justice Department and state securities commissioners and attorneys general need to coordinate their activities, providing for federal precedence where enforcement implications are national in scope. There should be more effective communication and cooperation among federal regulators. The President's Working Group on Financial Markets is one natural venue for ensuring such cooperation. Public and Private Enforcement Greater clarity for private litigation under SEC Rule 10b-5, and from the SEC on materiality, scienter (knowledge of wrongdoing) and reliance is needed. Criminal enforcement against companies should be a last resort, reserved for companies that have become criminal enterprises from top to bottom. We should not hold outside directors responsible for corporate malfeasance that they cannot possibly detect. Public enforcement authorities should not be allowed to threaten corporate defendants with denial of their employees' right to due process. The SEC should protect outside board members against liability from relying in good faith on the validity of audited financial statements - otherwise, it will be difficult to attract independent directors to boards. Congress should explore protecting audit firms against catastrophic loss through the provision of caps or safe harbors, as do some European countries and as the European Union is actively considering. Any use of such protection must be balanced against stiff action against those responsible for misconduct. Sarbanes-Oxley The SEC should adopt a more reasonable materiality standard both for internal controls and financial statements. The SEC and the PCAOB should adopt enhanced guidance on auditors' roles and duties in testing for compliance with Section 404. If a revised Section 404 is too burdensome for small companies ($75 million market cap and less), even after the general reforms outline above are implemented, the SEC should recommend to Congress that small companies be exempt from auditor attestation and be subject to a more reasonable standard for management certification. For a full copy of the report, go to http://www.capmktsreg.org. © Copyright 2006 SmartPros Ltd. All rights reserved. |
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