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In the Heat of Indy Chair Debate, U.S. Chamber Launches Study: Sarbanes-Oxley Enforcement Drawing Down' Capital Markets

The wrangle between the Securities and Exchange Commission and the U.S. Chamber of Commerce took an intriguing turn last week when, fast on the heels of filing an anticipated legal brief in the U.S. Court of Appeals opposing the Commission's independent chairman rule, the Chamber launched a bi-partisan study into the impact of state and Federal regulations on the nation's capital markets.

The study, which will be chaired by William Daley of JPMorgan Chase and Robert Steel of Goldman Sachs, will consider the appropriate regulatory framework for the markets. Its premise is that many current rules might be outdated and that others may have been too hastily drafted during a period of extreme regulatory difficulty two years ago.

"Our current system of capital market regulation and oversight is a patchwork quilt of state and Federal laws and regulations," said Chamber President and CEO Thomas Donohue. "This system was put together in a piecemeal fashion with each component developed in reaction to a different set of historical concerns, [including] Sarbanes-Oxley.

"None of it was created with a comprehensive perspective on the size, the complexity and the speed of our current markets, their international scope or their impact on the lives of average Americans," he said, adding that the current regulatory situation poses a real risk to the economy.

But taken against the backdrop of the Chamber's lawsuit against the SEC's independent chairman rule (see MME 8/22/05), which has been alternately hailed as a final solution to conflicts of interest in the mutual fund industry and a costly overreaction to the market-timing scandal that threatens to sink smaller fund shops, the study could be perceived as an action by a special-interest group that's finally grown fed up with new rulemaking.

"The Chamber is trying to get to 50,000 feet to look down on a wide range of rules, but also on a wide range of complaints that are coming from its members," said Charles Lundelius, a senior managing director at FTI Consulting in Washington. "It allows them to recast their argument and bring issues like the independent chairman rule and the raising of capital into perspective."

"If there's a common thread here, it's that Sarbanes-Oxley was passed in a rapid period of time, as was the independent chairman rule, so they might look at proposing that rulemaking be conducted over a longer period," Lundelius said.

The Commission on the Regulation of U.S. Capital Markets in the 21st Century will consist of 16 others from the fields of economics, finance and market regulation. It will primarily examine the proper balance between state and Federal regulation, the desirability of global compatible regulatory regimes, the proper role of stock markets as regulators, and the most appropriate state and Federal enforcement mechanisms. Public and private hearings will cull feedback from across the country. By early 2007, it will issue a report outlining specific legislative and regulatory recommendations to strengthen the markets.

"We're not trying to reinvent the wheel here," said Daley, who is chairman of JPMorgan Chase's Midwest region and a former Secretary of Commerce. "The bottom line will be a series of practical recommendations" to be considered by the White House, the Congress, the regulatory agencies and the general public.

The commission also will not, Donohue said, advance any predetermined conclusions.

"This is not a rescue ranger operation," added Steel, a retired vice chairman of Goldman Sachs, who still serves in an advisory capacity and teaches as a senior fellow at Harvard's Kennedy School of Government.

Donohue said he recently informed SEC Chairman Christopher Cox of the Chamber's plan, and Cox's response was "very positive." Donohue said he expects that Cox will meet with the Chamber's commission. The SEC issued MME this statement: "The Commission always welcomes and actively seeks the public's views to help the Commission protect investors through affective regulation."

Although Donohue refused to cite particular areas of rulemaking that need fixing, he did say that "overregulation is drawing down the system" and that enforcement of Sarbanes-Oxley "clearly needs attention."

"Enforcement people at the SEC and the Justice Department have taken some steps that I don't think were intended by Sarbanes-Oxley," he said. "Sarbanes-Oxley wanted to find people not playing by the rules, but some of the enforcement [measures] make every action a crime." He also said that state attorney generals are taking much too great a role and their threats of indictments have, on occasion, eroded the capital base of financial companies overnight.

The legal brief filed by the Chamber on Nov. 7, which responds to a brief from the SEC filed on Oct. 21, reiterates that in re-affirming the independent chairman rule last summer, the Commission made "gross procedural errors" and that its additional cost/benefit analysis of the independent chairman rule contained "serious analytical shortcomings." Both sides were scheduled to provide their final briefs to the court on Nov. 14. Oral arguments will begin shortly afterwards and a final decision on the rule, which has been suspended by the court, is due in the first quarter of 2006.

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