Securities law should embrace, not stifle, risk

Freedom Newspapers

American securities law should be transparent, so investors can see what’s going on with a company, yet not so cumbersome that it harms business. We’re not yet at that ideal balance.

A major problem is the Sarbanes-Oxley legislation Congress passed and President Bush signed in 2002 in the wake of the financial collapse of Enron and Worldcom. The legislation was supposed to “protect investors by improving the accuracy and reliability of corporate disclosures,” according to the Wikipedia encyclopedia, by establishing accounting oversight, independent auditing and more financial disclosure. It was co-authored by Sen. Paul Sarbanes, D-Md., and Michael G. Oxley, R-Ohio.

But some of the reforms were “excessive” and the law, passed in the “hothouse atmosphere” after the Worldcom collapse, “was not a perfect document,” Rep. Oxley told the annual conference of the International Corporate Governance Network on July 7, which was meeting in London, as reported in the Friday Financial Times.

“If I had another crack at it, I would have provided a bit more flexibility for small- and medium-sized companies,” Rep. Oxley also told the newspaper. But, he said, “Congress will not re-visit this issue. The SEC reform (on smaller companies) is not going to happen either.”

If true, that’s too bad. This bill is in serious need of reform, which now even one of its authors seems to be conceding.

Sarbanes-Oxley has had “a very powerful effect on business,” William Niskanen said; he’s chairman of the Cato Institute and was acting chairman of President Reagan’s Council of Economic Advisers. Niskanen said he’s finishing work on a book that will call for repealing Sarbanes-Oxley because the costs of compliance have proved too much for American businesses, which are becoming “risk-averse.”

“The matter causing the greatest increase in risk-averse behavior is the increase in criminal penalties,” he said. “CEOs have to attest to the accuracy of reports,” with even mistakes by underlings making them liable to be penalized, including time in prison.

If Congress does not repeal or at least reform Sarbanes-Oxley, Niskanen said some help might come from Rep. Chris Cox, R-Newport Beach, Calif., should he be confirmed as chairman of the Securities and Exchange Commission. Rep. Cox, long an opponent of excessive regulations, might well work to reduce onerous regulations, including Sarbanes-Oxley, while maintaining adequate investor safeguards. We hope that’s the case. In addition, we urge members of Congress to work for serious reform of Sarbanes-Oxley.

The immense and intense global competition American now faces on every front points up the need for reform — or even repeal — of the legislation. If investors cannot make money investing in American firms because Sarbanes-Oxley has made those firms risk-averse, then the money will just go to companies in countries where risks are welcomed and rewarded.