The SEC: Still the Investor’s Advocate?

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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