In the past weeks, extensions to compliance dates have been given by the US’s SEC to small and overseas companies (see Regulatory News 15th August). At the same time we see potential polarity of positions being taken by the SEC’s Christopher Cox and the new US Treasury Secretary, Hank Paulson (see Newsletter 4, August 2006). Can the SEC steer SOX through these troubled waters?
At one extreme there is an alliance of small US companies and Wall Street investment banks supported by US exchanges. Small companies complain that SOX Section 404 is costing them millions – a recent survey quoted an average of $4.4M for a medium sized company – and that this impacts their profitability and growth. Wall Street and the exchanges have to deal with the fact that new public issuing of shares by overseas companies in US markets has all but dried up. The result is transference of fee incomes to Europe and Asia – and sometimes to non-US investment banks - and attempts by NYSE and NASDAQ to buy into European exchanges. The other extreme is the politicians’ and governments’ belief that American investors need to be protected against fraud. They understand that the US public will not accept another Enron or Tyco and that more falsification of public account details will lead to a backlash from voters.
In the midst of this, Christopher Cox, the SEC’s Chairman, is having to steer a narrow course designed to satisfy all parties. He has made some temporary concessions, in further delaying the implementation of SOX for small US companies and all but the largest foreign issuers, as well as delaying compliance for a year for new issuers, but these concessions have met with little warmth. More relevant is the statement that the SEC would “continue the Commission's efforts to be sensitive and responsive to the particular needs of smaller public companies and foreign private issuers, and to minimize the burdens that Section 404 may impose on them.”
Cox also has to compete with implied criticism from other parts of Washington, notably Hank Paulson, the new US Treasury Secretary. All this also comes at a time when the SEC, together with the other US regulators, is struggling to get Basel II accepted in the USA. Wall Street banks may feel they have got him on the defensive on both regulations. Possibly in order to ease relationships with Wall Street and the exchanges, Cox has recruited a markets specialist, Erik Sirri, as the SEC’s new Director of Market Regulation. However, Cox is the man with the ultimate authority on SOX - and appears to have the support of the White House. With an election coming up, the Republicans will not want to appear anti-business - but they know the public voter is highly unlikely to tolerate any apparent weakening of investor safeguards.
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