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SEC Testifies on U.S. Competitiveness: Congress Concerned Regulations Disadvantaging Markets


Increased international competition, proxy votes and Sarbanes-Oxley were a few of the issues discussed during the House Financial Services Committee's review last week of the Securities and Exchange Commission's effectiveness in investor protection and market oversight.

The hearing was the first in more than a decade in which all five SEC commissioners were invited by lawmakers to answer questions about whether the Commission is protecting investors and policing markets without overburdening business with costly rules.

Due to the fact that international markets are becoming increasingly related, many committee members had concerns with excessive and burdensome regulation that might be hindering U.S. competitiveness.

Rep. Ed Royce (R-Calif.) stated, "If we are to remain the market of choice for the world, we must implement less burdensome regulations and legislation." Royce noted that only two of the top 20 global initial public offerings went public in the U.S. last year.

Studies have been released over the past year that advise the SEC and Congress how to deal with increasingly global capital markets, said SEC Chairman Christopher Cox. This is challenging the U.S. and securities regulators around the world to collaborate more closely then ever before, he said.

"Investors have much to gain in a truly global marketplace, but there are many risks and pitfalls, as well," Cox commented.

Rep. Paul Kanjorski (D-Pa.) said that people are constantly bombarded with studies that the U.S. is not a competitive society anymore and questioned how one should respond to it.

"I don't think the sky is falling," said Cox, adding, "At a minimum, things have been overstated." However, there have been studies with useful facts and recommendations, and the SEC is trying to do what it can to keep capital markets competitive, he said.

"We've got to constantly work to earn it," he said.

Commissioner Paul Atkins added that today's market is more competitive and with a click of the mouse, investors can invest abroad.

Regarding section 404 of the 2002 Sarbanes-Oxley Act, a lot of smaller companies are having difficulty complying with the rule. The most contentious and costly aspect of Sarbanes-Oxley, it requires management and the external auditor to report on the adequacy of the company's internal control over financial reporting. Rep. Barney Frank (D-Mass.), chairman of the House panel, questioned whether Congress needs to take any action to help make improvements to Sarbanes-Oxley.

All of commissioners agreed that no additional ruling was needed from Congress regarding Sarbanes-Oxley. Commissioner Annette Nazareth stated that the SEC appropriately addressed section 404 issues, and that was the only part of the rule that seemed to be causing difficulties.

The cost of small businesses to initially comply with the audit rule is high, but committee members questioned how much money it will cost companies in the future. It is not appropriate to guess how much section 404 will reduce compliance costs, Nazareth said. "We will have a base estimate going forward over the next year when the standards go into place," Cox added.

The committee also asked the SEC commissioners if small companies needed more time to comply with the rule, and the commissioners agreed that ample time has been given. "Because we have deferred for the fourth time the external audit requirement for smaller companies, management will have a full extra year to develop its own cost-effective compliance approach," Cox said.

"Sarbanes-Oxley is a great asset for this economy," said Commissioner Roel Campos. "Congress needs to be very careful before any changes are looked at. Foreign investors tell me SOX is not driving capital away. In fact, it is attracting capital."

However, Royce noted that in London, there are advertisements marketing a "Sarbanes-Oxley free zone."

Regulation and legislation have costs, Cox said. No one thinks that regulation is free, and some of the rules are from an ancient statutory system, he said. "Legislation to a lesser extent is within our control, but we are cognizant that we do influence it," he said.

Committee members also questioned the commissioners about class-action lawsuits. This month, 16 Republican House members sent a letter to the SEC regulators to study what they thought to be frivolous securities lawsuits and allegedly improper behavior by plaintiff lawyers.

The prevalence of meritless lawsuits has driven up apparent and actual cost of business and driven away potential investors, Royce stated.

Every shareholder deserves and should be able to get what companies said they are entitled to, Cox commented. He added that regulators must be aware of potential conflicts of interest on the part of who is bringing lawsuits against companies.

Since 2005, the SEC has returned more than $1 billion to injured investors through fair funds, Cox said. Several other large payouts are pending and should be announced shortly, he said.

Another issue discussed at length was proxy rules, which the SEC recently held a roundtable on. Cox said that new rules will be put into place for the next voting proxy season in the fall of 2008. Frank said that the committee will likely hold a hearing on the subject this coming fall.

The SEC is also considering ways to facilitate greater online interaction among shareholders by removing any obstacles in the current rules, such as the ambiguity concerning whether use of an electronic shareholders forum could constitute a proxy solicitation, Cox stated.

A rule is expected to be proposed this summer and will go out for public comment at the end of next month. "We are actively engaged in what the proposal will look like," Cox said.

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