Two influential industry groups are developing proposals that would make it more difficult for investors to file civil suits against companies and accounting firms, while also strengthening protections from criminal cases brought by government prosecutors.
The groups, which have close ties to the Bush administration, hope to limit the liability of accounting firms for the work they do for clients so that individuals are targeted for wrongdoing, not entire companies, the New York Times reported.
One of the groups drafting proposals is the U.S. Chamber of Commerce, which, until recently, was headed by Robert K. Steel, who now serves as Treasury's (DoTs) undersecretary for domestic finance. The other committee was formed by Harvard Law professor Hal S. Scott, along with R. Glenn Hubbard, a former chairman of the Council of Economic Advisers (CEA) for President Bush, and John L. Thornton, a former president of Goldman Sachs, where he worked with Treasury Secretary Henry M. Paulson Jr., the Times reported.
When that group was formed in September, Paulson issued an encouraging statement: “I am pleased to learn the Committee on Capital Markets Regulation, an independent group of highly respected leaders in each of their fields, will examine the competitiveness of the U.S. public capital markets. This issue is important to the future of the American economy and a priority for me. I look forward to reviewing their findings and ideas.”
Jennifer Zuccarelli, a spokeswoman at the Treasury Department, said on Friday that no decision had been made about which recommendations would be supported by the administration.
The groups are specifically targeting Section 404 of the Sarbanes-Oxley (SOX) corporate reform legislation of 2002. Section 404 requires audits of companies' internal controls. Members of the two committees say Section 404, combined with a greater threat of investor lawsuits and government prosecutions, has made it harder for American markets to compete. They cite the increase in stock offerings abroad as evidence.
Critics do not believe accounting rules are responsible for that trend, and they worry that comments by Paulson suggest that he may take corporate reform backward.
He told Bloomberg News that Sarbanes-Oxley had done some good, but it had added to “an atmosphere that has made it more burdensome for companies to operate.” He also said, “Often the pendulum swings too far and we need to go through a period of readjustment.”
James D. Cox, a securities and corporate law professor at Duke Law School, told the TImes: “This is an escalation of the culture war against regulation." Many of the proposals, if adopted, “would be a dark day for investors,” he said, adding that the effect would be that “very few people would be prosecuted.”
Another contentious issue is a proposal to eliminate the use of a long-established rule that allows shareholders to sue companies for fraud. If the Securities and Exchange Commission (SEC) adopts the groups' proposed change, only the commission itself could bring such lawsuits against corporations.
“It would be a shocking turning back to say only the commission can bring fraud cases,” said former SEC Commissioner Harvey J. Goldschmid, a Columbia University law professor. “Private enforcement is a necessary supplement to the work that the SEC does. It is also a safety valve against the potential capture of the agency by industry.”
Members of the two groups say they will release their recommendations after the November elections.