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Monday, January 03, 2005

Trade Groups, Firms Push to Ease Tough Federal Scrutiny

By Carrie JohnsonWashington Post Staff WriterMonday, January 3, 2005; Page A01

Two-and-a-half years after Congress passed the most sweeping corporate reforms since the Great Depression, trade groups are maneuvering to revise them, arguing that they are too expensive, too time-consuming and too much trouble for small businesses.

In recent weeks industry coalitions including the trade group AeA, formerly known as the American Electronics Association, and the American Bankers Association have asked their members to gather complaints about costly provisions that require them to tune-up their financial systems to help uncover fraud and mistakes. The effort is part of a broader campaign planned for this year to modify the Sarbanes-Oxley Act, passed after financial blowups at Enron Corp. and WorldCom Inc. cost investors billions of dollars and exposed serious lapses in the way companies are governed.

Mutual fund giant Fidelity Investments persuaded Sen. Judd Gregg (R-N.H.) to insert language into a conference report in November on a fast-moving spending bill, directing the Securities and Exchange Commission to justify a new rule that forces fund companies to appoint directors without ties to management. The U.S. Chamber of Commerce has hauled the SEC into court over the rule.

Separately, opponents of a plan released last month that requires companies to treat stock options as an expense, a move that could sharply cut reported profits at technology companies, vowed to blanket Congress and the SEC early this year to prevent the plan from taking effect, as planned, in June. They will point to a series of letters from 53 senators from both parties to help support their position.

"I am worried about push-back and the search for an opportunity to roll back parts of Sarbanes-Oxley," SEC Commissioner Roel C. Campos said in an interview. "I think those efforts are misguided."

For their part, leaders of the push to revisit these issues say some of the measures went too far and have consequences that their supporters never anticipated.

"This is not a corporate-America-pushing-back issue. There are problems here," said David Hirschmann, a senior vice president at the U.S. Chamber of Commerce.

Congress passed the law named after Sen. Paul S. Sarbanes (D-Md.) and Republican Rep. Michael G. Oxley (R-Ohio) in 2002. It required chief executives to attest to the accuracy of corporate financial statements and required companies to certify that controls were in place to prevent fraud.

Lobbyists and consumer advocates both say that persuading lawmakers to reopen broader debate on the complex legislation will be a difficult task. For one thing, fresh disclosures continue to surface about fraudulent practices on Wall Street and in the insurance sector. So, in the words of a technology industry advocate, business interests are focusing with laser-like intensity on the negative effect the law has had on small businesses, which say they lack resources to pay multimillion dollar audit fees.

Hirschmann said his group is polling its members and plans to present Congress and the SEC with a list of several "technical corrections" to the law. The technical corrections would be akin to changes made in complex tax legislation after it is passed, he explained.

"Why wouldn't you doctor something as major as this?" Hirschmann said. "Did regulators really intend for companies to put off buying IT systems? Did they really intend to create an environment in which companies are putting off acquisitions in the fourth quarter?"

Officials at Fidelity, which is fighting the SEC's mutual funds chairman rule and a separate proposal to alter the way stock market trades are conducted, said the regulatory pendulum has swung too far and swept up companies that have a clean record.

"There's always been a healthy balance between what the government compels and what the market allows," Fidelity general counsel Eric D. Roiter said in an interview last year. "We saw that balance was getting off-kilter."

Representatives at the Consumer Federation of America and the labor group AFL-CIO, which strongly supported the law and other recent measures designed to give shareholders more power or to prevent fraud, say they are girding to fight any efforts at rolling back changes this year.

For now, several key lawmakers, including Oxley, say that the chances of formally revisiting the massive law in its entirety are low. Jesse Jacobs, a spokesman for Sarbanes, said that opponents of other controversial business reforms, including legislation passed after the savings and loan crisis, never successfully introduced technical corrections.

"We believe the problem is not with the law," Jacobs said. "It's with the implementation. The SEC and the accounting oversight board have been more than willing to sit down and listen to concerns."

The SEC already has budged, extending deadlines for complying with the new rules on financial safeguards after a torrent of business complaints. And there could be more concessions to come. SEC officials announced two weeks ago they had formed an advisory committee to examine how small businesses disproportionately may bear costs of the changes. The panel will forward its recommendations about rule changes to the agency, and possibly onto Congress, this year.

Senate Banking Committee Chairman Richard C. Shelby (R-Ala.) said in an interview that he supports the mission of Sarbanes-Oxley, but that he would continue to hold oversight hearings to learn how well the law is working. If fixes need to be made, Shelby said, he will work closely with the SEC and the new oversight board for audit firms.

Rep. Barney Frank (D-Mass.), ranking minority member of the House Financial Services Committee, urged consumer groups and investors to remain "vigilant."

"Nothing's going to be slipped through," Frank said in an interview. "Everything will be subject to a full debate. I can guarantee people nothing will be done without full debate and vote."

Frank and Oxley sent a letter to the appropriations committee, calling the Fidelity-sponsored mutual fund provision included in the conference report, without debate, "imprudent."
Consumer advocates say they are particularly concerned about attempts during the summer to thwart a plan to require companies to count stock options as an expense. Those attempts were made even after Congress affirmed the independence of the Financial Accounting Standards Board, the group that is issuing the standard, in the 2002 law. An anti-options expensing bill passed the House of Representatives 312 to 111 but stalled in the Senate. Jeff Peck, the lead lobbyist for technology companies which oppose options expensing, said his group will turn up the heat both on the Hill and at the SEC early this year.

Officials at other trade groups also said they were mobilizing to take their arguments to the five-member SEC, which passed rules implementing many of the provisions of the Sarbanes-Oxley Act. The commission consists of three Republican appointees and two Democrats. The membership of the panel is expected to change this year.

Former Columbia University law professor Harvey J. Goldschmid, who has led efforts on behalf of shareholder activists, has said he will return to the faculty sometime between May and August. Consumer advocates and business groups alike are watching for hints about who may replace him and whether that person will carry the same intellectual and political weight of Goldschmid, a widely respected former SEC general counsel. No list of possible replacements exists yet, according to Senate aides.

The SEC's Campos, whose term expires in June, said he hopes to be renominated. He added that leaving even one spot vacant on the commission this year could produce gridlock, since several important issues last year were decided by a 3 to 2 vote.

For most of the past two years, the Republican chairman William H. Donaldson, has cast his vote with the two Democratic members, on controversial topics including mutual fund governance. Donaldson, 73, a longtime friend of the Bush family, has said he intends to remain at the SEC for at least another year.

In the past few weeks, however, Donaldson has thrown his support behind certain arguments advanced by his Republican colleagues, recently casting the deciding vote to scuttle a staff recommendation to file civil charges against Gary Winnick, the founder of telecommunications company Global Crossing Ltd. Winnick had reached a tentative deal with the staff to pay a $1 million fine without admitting or denying responsibility.

The chairman also is likely to be the key vote in an appeal lodged last week by several union-backed pension funds trying to expand the power of investors to nominate board candidates at Walt Disney Co. SEC staffers, in an unusual move, reversed themselves last week and ruled that Disney could exclude the shareholder resolution from its 2005 proxy ballot just three weeks after declaring otherwise. Disney's lawyer had sent multiple letters to the five commissioners pleading for a turnaround. The staff changed its ruling before the commission formally acted. Now the Disney appeal and the fate of a broader, year-old proposal to give large investors more input in board choices rest with the commission. Whether shareholders should have more input into the board election process is the single most contentious issue the agency will face this year.

An official at one trade group who declined to be identified because of the sensitivity of the issue, said that business interests had some anxiety about Donaldson's regulatory approach last year but that it would be self-defeating to push to replace him now. Instead, the official said, lobbyists have been talking with the White House about the general type of candidate they would like to see fill slots on the commission when they naturally come up this year. Last month, a White House spokesman said President Bush "appreciates" the job Donaldson is doing to help clean up the markets.

"If he goes, the chances we'd see a chairman with his kind of agenda is very slim," said Barbara L. Roper, director of investor protection at the Consumer Federation of America. "At best you get an SEC that doesn't get anything done, and at worst you get an SEC that may be dismantling some of the work of the last few years."

Over the past several months, the agency increasingly has been beset by philosophical differences over the scope of its work and the penalties it imposes on errant companies. Last month, Republican appointees Paul S. Atkins and Cynthia A. Glassman blasted their colleagues for passing "unjustified" rules without fully considering their cost. They also have begun to speak out against multimillion dollar civil penalties the enforcement division has extracted from companies, arguing that the fines penalize shareholders rather than the individual executives responsible for fraud.

"The commission . . . should not regulate for the sake of regulation," Glassman said in a speech to pension fund groups in California last month. "Where markets are functioning we should let them work without unnecessary interference."

The Chamber of Commerce's Hirschmann said the combination of the 2002 law, increasingly aggressive enforcement by the SEC and New York Attorney General Eliot L. Spitzer, and numerous lawsuits by class action lawyers all are fueling the concern among businesses.
Harvey L. Pitt, a former SEC chairman, said that industries under fire had themselves, at least in part, to blame.

"What business should be concerned with is the attitude on the part of the SEC that regulation is the solution to all financial market problems. It isn't, and it shouldn't be," he said. "If these industries had taken the lead in detecting their own conflicting practices, and then resolving them, there wouldn't be anything for Elliot Spitzer or the SEC to do."

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