| The
SEC: Still the Investor’s Advocate?
NOVEMBER 2007
- The U.S. Congress created the Securities and Exchange Commission
(SEC) as part of the Securities Exchange Act of 1934. In the aftermath
of the stock market crash of 1929, the SEC was intended to restore
investor confidence in our capital markets. Sixty-eight years after
the SEC was created, Congress passed the Sarbanes-Oxley Act of 2002
(SOX), as a result of another market crisis and with the same good
intentions. In
the five years since SOX was passed, however, many business groups
have voiced opposition to certain aspects of this legislation
based on the cost of compliance that allegedly hinders their ability
to effectively compete in the global marketplace. The U.S. Chamber
of Commerce, a global business federation representing approximately
three million businesses and organizations, created the Center
for Capital Markets Competitiveness, and their lobbying efforts
seem to have captured the ear of regulators and legislators.
Shareholders,
on the other hand, have not been as successful in mobilizing and
galvanizing the investing community around a common interest:
investor protection. What has the SEC done lately to earn its
title “The Investor’s Advocate”? Here’s
what the SEC has been up to:
Deferral
of SOX Section 404 Implementation
In December
2006, the SEC deferred the implementation of SOX section 404,
which requires an annual evaluation and report by management on
the effectiveness of a company’s internal controls and procedures,
for nonaccelerated filers (public companies with less than $75
million of market capitalization). This is the fourth year that
implementation for nonaccelerated filers has been delayed. The
effective compliance date for smaller public companies is currently
expected to be implemented in two stages: 1) the management report
on internal control over financial reporting is required for the
company’s annual report for fiscal years ending on or after
December 15, 2007; and 2) the auditor’s attestation report
on internal control over financial reporting is required for fiscal
years ending on or after December 15, 2008.
Any company
that accesses money from the capital markets should have a good
internal control system that is verified by an independent CPA.
This includes smaller public companies that have an equal, if
not greater, incidence of fraud as compared to larger companies.
The internal control provisions of SOX section 404 are essential
to providing reliable financial statements and protecting investors’
interests.
Proposals
on Shareholder Proxy Access
The SEC has
issued two proposals on the topic of shareholder proxy access
(Release 34-56160, “Shareholder Proposals”; and Release
34-56161, “Shareholder Proposals Relating to the Election
of Directors”). One requires that investors own 5% of a
company’s shares for a minimum of one year in order to propose
changes to a company’s bylaws, and it allows shareholder
director nominees to appear on the company proxy. The other effectively
reverses what is referred to as the AIG ruling, which prohibited
excluding shareholder proposals relating to director election
procedures from the proxy. Comments on these proposals were accepted
through October 2.
The SEC received
more than 20,000 comment letters, the majority overwhelmingly
against restricting shareholder access. Most would agree that
unless boards are held accountable to their shareholders, the
goal of fairness and transparency in our capital markets is just
an illusion. Some comment letters reasoned that effective communication
between a company’s management and its shareholders could
reduce the kind of unnecessary litigation that business groups
are trying to limit. One letter from a coalition of some of the
largest institutional investment organizations in the world stated:
The harsh
reality is that U.S. corporate governance practices are on a
relative decline compared to other leading markets … It
cannot be emphasized enough how difficult it is for investors
based outside the U.S. to come to grips with the fact that shareholders
of U.S. companies lack basic rights which they take for granted
… Both in principle and in practice, the American board
election procedure is outdated and detrimental to the maximization
of long-term shareholder value.
Whose
Interests Are Represented?
Has the deferral
of SOX section 404 implementation for small businesses avoided
unneccessary audit costs, or has it delayed the discovery of internal
control problems? Do the SEC’s proposals on shareholder
proxy access go too far, or do they not go far enough?
Perhaps it
is time for our regulators and legislators to realize that they
have been sold a bill of goods by American business lobbyists
when they blame SOX for putting the U.S. market at a competitive
disadvantage.
So, does
the SEC still deserve the title “The Investor’s Advocate”?
You tell me.
Mary-Jo
Kranacher, MBA, CPA, CFE
Editor-in-Chief
mkranacher@nysscpa.org
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