Speech by SEC Commissioner Atkins

By: Cydney Posner

More SOX retrenching noises from another SEC commissioner: Paul Atkins, a Republican appointee, recently delivered a speech to the Atlanta Chapter of the National Association of Corporate Directors, in which he suggests that, like corporations, regulators may need to do a little soul-searching: "We must determine whether the measures that we have implemented serve their intended purpose of protecting investors and at what cost. We must be particularly vigilant because the SEC, in implementing Sarbanes-Oxley and in other recent regulatory actions, has in some ways stepped outside its traditional sphere of regulatory activity, and, as a result, has come into conflict with other established regulatory frameworks."

After recognizing some of the benefits of SOX--setting best practices, making board members more inquisitive--he expressed a number of concerns with the direction of recent regulation:

• that the American economy could become unduly encumbered by a web of regulations that stifles investment, innovation and entrepreneurship.
• that SOX 404 may get out of hand without commensurate benefit: "It has easily proven to be the most expensive and most burdensome piece of Sarbanes-Oxley. Importantly, if it achieves its objectives, it could be one of the most valuable parts of the Act. From my days at an accounting firm, I am probably the only one of the SEC commissioners who has ever actually done a control review for a company. I have seen how, especially in troubled situations, a control review can take on a life of its own and balloon into a massive project, with volumes of documents and flow-charts that seem obsolete as soon as they are printed and distributed simply because a corporation is a dynamic, ever-changing entity. This paperwork sometimes provides little practical benefit, except to the accounting firm’s bottom line. I hope that Section 404 doesn’t lead us in this direction." He then went on to note that, last year, 582 companies disclosed material weaknesses or significant deficiencies in internal controls, and questioned what the implications of those weaknesses or deficiencies should be: "Should these disclosures trigger a significant market impact? Are these problems already priced into the stock? What are investors supposed to make of these disclosures? What criteria are used to constitute a material weakness and are those criteria applied consistently across all companies?"
• that the SEC must take very seriously its oversight responsibility of the PCAOB.
• that issuers may be constrained to adhere to a single, predetermined corporate governance model as a result of SOX's federalization of a number of corporate governance matters: "we must continue to acknowledge that a variety of approaches to corporate governance is acceptable and indeed desirable. Flexibility encourages innovation."
• that, frustrated by a few instances of incompetence or venality, the SEC might devise overly-technical prescriptions for corporate gatekeepers such as directors, attorneys, accountants and audit personnel: "For example, the SEC narrowly averted an unfortunate result with what began as an overly restrictive definition of 'financial expert' of an audit committee. These sorts of technical prescriptions and other concerns could prevent or dissuade talented professionals from serving in a gatekeeper capacity for public corporations. In this regard, especially for directors, is the concern of a growing paperwork burden in the boardroom and a fear of personal liability."
• that enforcement actions will be used in a counterproductive way to supplement rules. If rules were not clearly articulated in the first place, "questions of fairness arise for those subject to arguably new standards of conduct imposed after the fact through an enforcement proceeding."
• that, in the name of deterrence, heavier fines are levied against corporations, in part for the public relations effect, with management all too willing to offer up the money of shareholders, who were the real victims of the securities fraud. "But, individuals commit fraud; corporations don’t. We also have to guard against criminalizing business decisions by looking at them through the regulator’s lens of 20/20 hindsight... By imposing such fines, are we not punishing the very people who might have already [been] punished through the marketplace when the stock price was clobbered?"
• that regulators might come to view themselves as "an extension of the plaintiffs’ bar, with similar philosophies and tactics." The SEC is working under new authority under SOX to direct fines to special restitution funds. "This only heightens the conundrum that we face. Basically, we fine the corporation in order to put the fine into a fund to reimburse the shareholders who were just themselves fined."

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