Last week’s dramatic shift in power in Washington—with Democrats regaining both chambers of Congress—could change the tone of debate on corporate-governance issues and has renewed hopes that Congress might relax aspects of Sarbanes-Oxley.
But Beltway-watchers who spoke with Compliance Week say they aren’t anticipating wholesale legislative changes on SOX or other compliance matters.
Phan
“I doubt there will be new legislation or even changes to existing ones,” says Phil Phan, professor at the Lally School of Management & Technology. “Congress will be spending the next two years … undoing some Republican-led appropriations to prepare for 2008. [They’ll have] no time for fine details in legislation like corporate governance.”
Stuart Berger, a principal with Sax Macy Fromm & Co., says he expects to see “a lot of rhetoric, but don’t think we’ll see any reforms. It’s going to be very difficult to get any significant legislation passed in the next two years.”
While key Democrats have expressed support for modifying burdensome aspects of SOX, other business-friendly proposals—such as limiting the liability of auditing firms or clamping down on class-action lawsuits—are not expected to be welcomed warmly by newly empowered Democrats.
Litigation reform is reportedly a top priority of the so-called Paulson Committee, a group of influential business executives that earlier this fall announced the creation of an independent task force to review America’s competitive edge in global capital markets. With the blessings of U.S. Treasury Secretary Hank Paulson, the committee says it will release a preliminary study of suggested reforms by the end of the month; early rumors say it will call for a relaxation of SOX compliance burdens and urge the Securities and Exchange Commission to “de-identify” a right to private shareholder actions under Rule 10b-5 of the Securities Exchange Act.
“My sense is that it will be harder for businesses to get some of the relief they had longed for,” says Lee Schreter, with the law firm Littler Mendelson. “[These initiatives] are not going to go as well as people had expected or hoped had the outcome of the election taken a slightly different turn.”
The one thing Democrats are expected to do is hold lots of hearings, notes Anthony Zecca, the partner-in-charge at accounting firm J.H. Cohn’s Section 404 compliance group.
Congressional hearings “are not necessarily a bad thing either,” says Zecca. “There are a lot of abuses. The ethical climate in a lot of executive suites is not what it should be. I would expect that there would be hearings on the abuses that are really happening. Sarbanes-Oxley will be swept into that. [Congress] could also magnify or put a spotlight on the issue of what Sarbanes-Oxley was intended to do.”
Frank In, Oxley Out
“There’s a very short window of opportunity before you start to campaign over again. I certainly see holding hearings on executive compensation and those types of issues. But whether you’re going to get any real drastic reforms, I don’t know.”
— Stuart Berger, Sax Macy Fromm & Co.
As a result of election, Rep. Barney Frank of Massachusetts is in line to assume the leadership of the House Committee on Financial Services. He replaces Republican Congressman Michael Oxley, who is retiring anyway.
Frank has been vocal about issues such as executive pay and even introduced legislation in 2005 that would give shareholders a vote on how much company management earns. That proposal would face brighter prospects in a Democratic House, but whether the votes are actually there to get such a bill through Congress—and whether Frank would re-introduce the measure at all—is another question.
“There’s a very short window of opportunity before you start to campaign over again,” Berger says. “I certainly see [Frank] holding hearings on executive compensation and those types of issues. But whether you’re going to get any real drastic reforms, I don’t know.”
Despite his liberal pedigree, Frank is not perceived as hostile to the concerns of Corporate America, Berger says. “Frank is very astute in the financial arena; he has a very good grasp of the issues.”
Compliance Week’s efforts to reach Frank were unsuccessful. But in a speech last Wednesday to the Greater Boston Chamber of Commerce, Frank restated his support for relaxing burdensome aspects of SOX without gutting the statute entirely.
Mosimann
Roland Mosimann, chief executive officer of Business Intelligence International, says that Frank “has a chance to come down on the side of small business” by championing efforts to ease SOX burdens on smaller companies. “But in this climate it would be very hard for [any politician] to peel that much back.”
More Oversight Of SEC
Most observers believe any significant relaxation of SOX requirements will come from the regulatory agencies themselves, not Congress. Democrats “can certainly put the administration under closer scrutiny for some of the regulatory changes that they may be thinking about making,” Schreter says. “But it could be much ado about nothing.”
Berger
Berger notes that SEC Chairman Christopher Cox “already has a track record of being pretty tough, so I’m not sure how much pressure Congress could put on the Commission.”
Claudia Allen, chair of the corporate-governance practice group at the law firm Neal Gerber & Eisenberg, says that Frank “seems to be in favor of letting the SEC and [other agencies] adjust their own rules rather than having Congress step in.”
And Allen also notes that another high-ranking Democrat, Sen. Charles Schumer of New York, co-authored a recent opinion piece in The Wall Street Journal pointing out that excessive regulation could impair New York’s preeminence in financial services.
Indeed, both the SEC and the Public Company Accounting Oversight Board are rushing to provide more guidance on compliance with Sarbanes-Oxley—and particularly on how companies should confront Section 404’s required audit of internal controls over financial reporting—by the end of the year. That much-anticipated guidance may blunt some of the calls for Congress to play a stronger role in SOX compliance and its exorbitant costs.
“What the new guidelines that the PCAOB are working on and what the SEC will be promoting are supposed to do is give more arguments, more guidelines, more power to the companies in enforcing their judgment vis-à-vis the auditors,” Mosimann says.
Other Priorities For Democrats
Marne Gordan, director of regulatory compliance for Cybertrust, says one area where legislation might be possible—particularly now that the Democrats control the Senate—is notification of breaches to data privacy.
Sen. Dianne Feinstein, D-Calif., has sponsored a privacy-breach bill that would set a national standard of when companies must disclose a breach of data privacy, rather than the state-by-state regulatory quilt that exists today. What’s more, Feinstein’s bill would, for the first time, address issues of prevention rather than just notification. And, notably, California has been a leader in breach disclosure rules at the state level.
“If the Democrats have the Senate, that would give [Feinstein] an impetus to reintroduce her bill,” Gordan says. But Gordan adds that information security “is not a sexy political issue” and that congressional action is probably not likely unless a few more large-scale losses of consumer data streak into the headlines.
Lovejoy
Kris Lovejoy, chief technology officer of Consul risk management, agrees that there may be “some movement on omnibus privacy legislation” but says that Democrats may well have other priorities.
“Once they figure out what they want to do with Iraq, potentially they might tackle other issues,” Lovejoy says, but “the Democratic constituency just doesn’t care that much about things like corporate governance and Sarbanes-Oxley.”
Geneson
David Geneson, a partner at Washington law firm Sheppard, Mullin, Richter & Hampton, is another who suspects most of the Democrats’ agenda will be consumed by the Iraq war. Frank and other lawmakers in charge of oversight committees “might want to crank up a hearing here or there—but I’m not sure it would be anything more than a flash-in-the-pan, a two-day news cycle story,” Geneson says. “I don’t see the Democrats having enough power to change much.”
And Ronald Kucic, director of the School of Accountancy at the University of Denver’s Daniels College of Business, sums it up when he says that, absent some kind of major corporate controversy, the most noticeable change with Democrats in power on Capitol Hill is likely to be one of tone. “There are bigger issues for Democrats—although that could all change tomorrow if there’s some new Enron-type scandal.”
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