Paulson Says Business Is Over-Regulated
Tuesday, November 21, 2006
Treasury Secretary Henry M. Paulson Jr. yesterday criticized the nation's "ever-expanding rulebook" and its burdensome legal system for constraining the economy but rejected wholesale revisions to a corporate accountability law under attack from business groups.
Paulson, a former chairman of the investment bank Goldman Sachs, called for striking a regulatory balance as he delivered his first major policy address on the subject since joining the government in July. "Excessive regulation slows innovation, imposes needless costs on investors, and stifles competitiveness and job creation," he said in a speech to the Economic Club of New York.
But under questioning, Paulson stood behind the controversial Sarbanes-Oxley law, passed in 2002 after financial scandals rocked the stock market and devastated investor confidence. Policymakers do not need to reopen the law, Paulson said. Instead, he expressed confidence in the work of securities regulators and accounting industry overseers, who are racing to make audit rules more flexible for small businesses that have complained about the regulations' cost. The eagerly awaited proposed revisions are to be unveiled within weeks, Christopher Cox, chairman of the Securities and Exchange Commission, has said.
"I don't think there is a single principle in [Sarbanes-Oxley] that is ill-founded," Paulson said after the speech.
Paulson's remarks come as trade groups such as the U.S. Chamber of Commerce exhort lawmakers and regulators to retool corporate rules, which they contend are leading fewer companies to list on U.S. exchanges. A chamber-affiliated coalition led by William M. Daley, who was an official during Bill Clinton's presidency, and A.B. Culvahouse, counsel to former president Reagan, issued data yesterday that they said reflected a decade-long decline in market share of corporate listings in the United States.
Some consumer advocates warn that tighter rules make for a convenient scapegoat. Barbara Roper of the Consumer Federation of America pointed to other factors, including steep investment banking fees and changes in the global economy, for the dip in U.S. public offerings.
Business groups insist the changes would combat what they say is an overly onerous application of the law. "No one is talking about a wholesale rollback," said Robert S. Nichols, president of the Financial Services Forum, a coalition of large banks for which Paulson once served as chairman. "That would be a very serious mistake in our view. It's a matter of discussing the implementation and execution."
In his speech, Paulson sought to take the debate beyond recent corporate reforms and into broader terrain. He singled out class-action lawsuits as an Achilles' heel in the legal system, which he contended have "gone beyond protection" of investors and now hamper business competition.
Statistics compiled by NERA Economic Consulting suggest that the number of class-action lawsuits filed against corporations and executives has plummeted in the past two years, especially since the indictment of the law firm Milberg Weiss Bershad & Schulman, which had been a leader in filing plaintiff cases before being charged with improperly paying people to serve as clients.
"Investors already are getting pennies on the dollar for massive losses they suffered in recent scandals," said Roper, of the consumer group. "I don't think you can sell that message after the experience we've been through."
Separately, Paulson called for more "constructive" dialogue among prosecutors and corporate executives, citing possible changes to the Justice Department's guidelines on charging companies with crimes. The 2002 prosecution of accounting firm Arthur Andersen for charges of obstructing justice helped push it out of business, an issue that Paulson said has reduced choice and competition in the auditing industry.
An unusual coalition including the American Civil Liberties Union and the U.S. Chamber of Commerce testified before Congress this year in support of relaxing parts of the Justice guidelines, known as the Thompson memo, named after former deputy attorney general Larry D. Thompson.
Paulson said he would host a conference early next year to explore problematic rules, accounting and legal issues and to lay a foundation for possible new initiatives within the executive branch and Congress. Last week, Sen. Christopher J. Dodd (D-Conn.), who is set to lead the Senate Banking Committee when Congress returns in January, expressed skepticism that the Sarbanes-Oxley law had hampered U.S. competitiveness.
But the wider topic appears to have drawn some bipartisan support. Sen. Charles E. Schumer (D-N.Y.), whose constituents include many Wall Street executives, yesterday referred to "a growing consensus . . . that we need to do a complete and comprehensive review of America's and New York's worldwide competitive position in financial services."