Eases Regulations on Business
By Stephen Labaton New
Thursday, December 14, 2006
WASHINGTON — Responding to criticism that regulators had
overreacted to years of major corporate scandals, the
Securities and Exchange Commission on Wednesday issued a
flurry of deregulatory orders and proposals intended to
lower costs to public companies. It said the moves would
not reduce investor protection.
In a daylong proceeding, the commission proposed a loose
interpretation for smaller companies of an auditing
provision of the Sarbanes-Oxley Act of 2002 that has come
under attack from many companies.
It also proposed a rule to make it easier for foreign
companies to withdraw their securities from American
markets. A number of companies have asked to withdraw, and
officials said the current rules discouraged companies from
listing on United States exchanges if they did not have the
option of withdrawing later.
“We hope these proposals, when combined, will make the U.S.
markets more attractive and we will get more companies
here,” said John W. White, director of the commission’s
division of corporation finance.
Among other noteworthy proposals the S.E.C. issued was one
that would increase the financial qualifications for
investors in hedge funds, to a net worth of $2.5 million
from the current standard of $1 million. Officials said the
proposal had the effect of adjusting the original rule for
inflation, just as hedge funds are becoming more popular
among some less wealthy people. The agency also proposed a
new provision on fraud to protect hedge fund investors.
Some officials said the two proposals could blunt attempts
to impose other tougher regulations or disclosure
requirements on hedge funds. Six months ago, a federal
appeals court said the commission exceeded its authority
when it tried to force hedge fund managers to register with
The SEC also adopted a rule that would save corporations the
expense of mailing financial reports and proxy statements by
enabling them to communicate with the vast majority of their
investors through the Internet. (Investors can continue to
receive paper copies of proxies and other material through
the mail if they request them.)
And it proposed rules that would make it easier and less
costly for banks to offer brokerage services.
Taken together, the proposals and rules are expected to
provide enormous savings for public companies and Wall
Street investment houses. Senior officials at the
commission said the proposals and rules would not reduce the
regulatory protections already afforded to investors.
The SEC’s deregulatory push came a day after the Justice
Department, in response to similar complaints, imposed new
limits on federal prosecutors in white-collar corruption
cases. Under those new guidelines, prosecutors in the field
will now have to obtain permission from senior officials
before trying to get companies that are under investigation
to waive their attorney-client privilege.
In weighing whether to seek the indictment of a company, the
prosecutors will also no longer be permitted to consider
whether the company is paying the legal fees of an employee
involved in the inquiry.
In recent weeks, Bush administration officials and business
groups have criticized some of the changes in corporate law,
securities rules and criminal procedures that were enacted
in the wake of accounting frauds five years ago at Enron,
WorldCom and other highflying companies.
It remains to be seen whether the decisions by the
commission and the Justice Department will take political
pressure off Congress to go further, or whether the business
groups that have been critical of the SEC rules and the
Justice Department’s approach will be able to persuade
lawmakers to retrench further.
The commission’s votes on all the measures Wednesday were
unanimous, testimony to both the changed regulatory climate
and the political skills of the agency’s chairman,
Christopher Cox, a former Republican member of Congress. He
tailored the changes to avoid the divisiveness that had
troubled the tenure of his predecessor.
Mr. Cox said the unifying theme of the proposals and the new
rules was to increase the competitiveness and transparency
of companies and markets.
“If America’s markets aren’t competitive, investors lose,”
he said. “If America’s markets are not transparent and
open, investors lose.”
Like the decision at the Justice Department, the changes
announced by the commission on Wednesday fell short of what
some companies and groups had sought. In the case of the
auditing rules, for instance, many businesses had sought an
exemption from the requirements of Section 404 of the
Sarbanes-Oxley Act. That provision requires public
companies to assess the controls they have put in place to
ensure that their financial reports are reliable.
Instead of a blanket exemption, officials said, the proposed
guidance would give many small companies a powerful new tool
in restricting their auditors from engaging in what the
executives viewed as expensive and unnecessary audits of
financial controls that had minimum impact on financial
statements. A companion new auditing standard is to be
proposed next week by the Public Company Accounting
Under the guidance proposed by the SEC, executives would
evaluate the design of only those financial controls that
might carry the risk of having a material impact on
financial statements. Commission officials emphasized that
the guidance is being drafted to be less onerous on smaller
or less intricate companies.
“Companies of all sizes and complexities will be able to
conduct their evaluations more effectively and efficiently
by following the proposed guidance,” Mr. Cox said. “As
smaller companies have less complex internal control systems
than larger companies, this approach enables smaller
companies, in particular, to scale and tailor their
evaluation methods and procedures to fit their own facts and