CONGRESS SHOULD PROTECT IMPORTANT INVESTOR PROTECTIONS NOT WEAKEN THEM UNDER THE VEIL OF “US COMPETITIVENESS”
United States Treasury Secretary Henry Paulson and his quasi-secret Committee on Capital Markets in consultation with Securities and Exchange Commission Chairman Christopher Cox, are crafting a plan to make the United States a more “competitive” place to conduct business and raise capital versus rival capital markets in Europe and Asia. This plan, which they have not shared with the Congress, is using the veil of “US Competitiveness” to advocate, among other things, that shareholder and investor’s ability to hold corporations accountable for their misconduct by utilizing the civil justice system should be curtailed. The Secretary and his business allies, and corporate interests argue, wrongly, that excessive civil litigation and over-zealous regulation are harming the global competitiveness of the U.S. securities markets. Nothing could be further from the truth. While still fresh off the corporate scandals of Enron and Worldcom, not to mention the almost daily drum beat of CEO back-dating stock options scandals, and new corporate accounting scandals, Congress must act to protect shareholder and investor’s ability to hold corporate wrongdoers accountable not weaken or abrogate them.
- For Over Seventy Years United States law has Protected Shareholders, Pensioners, and Investors from fraud and corporate misconduct. When Congress passed, and President Franklin Delano Roosevelt signed, the Securities Act of 1933 and the Securities and Exchange Act of 1934, it signaled to the world that shareholders, pensioners, and investors in the United States would be protected from corporate malfeasance and fraud. It also entrusted to a newly formed Securities and Exchange Commission (S.E.C.) the role of enforcing those protections on behalf of shareholders, pensioners, and investors. The Acts, as well as subsequently promulgated S.E.C. rules, also afford the ability of shareholders, pensioners, and investors to hold corporations and their executives accountable for their misconduct in the civil justice system. This decade’s old legal framework has served the interests of shareholders, pensioners, and investors very well, while at the same time making U.S. markets stronger and more transparent. Recent activity and statements of both Secretary Paulson and S.E.C. Chairman Cox and their corporate allies suggest that these protections are in serious jeopardy of being dismantled.
- Congress has responded to Securities Litigation issues in the United States. In 1995 as part of Speaker Newt Gingrich’s “Contract with America” Congress passed the Private Securities Litigation Reform Act (PSLRA) (15 U.S.C. § 78u et seq.) which was enacted over President Clinton’s veto. Ostensibly the PSLRA was passed to address concerns that the corporate community had with “excessive” shareholder, pensioner, and investor class action lawsuits, which were unnecessarily weakening corporations and stifling innovation. While many believed and still believe that those arguments are unfounded, the resulting effect of the law’s enactment has been annual declines in the number of such lawsuits. One of the Act’s authors has stated that the law is working as intended and should not be modified.
- U.S. Markets Remain the Strongest in the World. U.S. markets are unrivaled in their ability to attract capital, provide a safe and profitable place to invest, and to provide businesses with access to low-cost capital with which to grow and innovate. In fact the U.S. stock markets are incredibly strong and have hit record highs and the U.S. service economy has been creating thousands of jobs. It does not follow, however, that excessive litigation or regulation are behind the trend of the U.S. losing capital market share to places like London and Hong Kong. In fact, U.S. markets derive a significant competitive advantage from their unparalleled investor protections.
- The Politization of U.S. Markets is at the Core of the “US Competitiveness” issue. Decades before the enactment of the Sarbanes-Oxley legislation and notwithstanding the PSLRA, a select group of policy makers, lead by then Congressman Christopher Cox, used their oversight and legislative influence to shift U.S. regulatory policy regarding foreign investment in the United States to achieve political aims. Referred to by academics as the “capital markets sanctions campaign” this policy led many foreign investors to begin directing their investments to other markets out of fear of U.S political repercussions. Thus the movement of capital and its placement, facilitation, and the use of certain financial products moved away from the U.S. and toward Europe and Asia. The view that U.S markets are too political and unpredictable is still widely held outside the United States.
- The Sarbanes-Oxley law (SOX) has strengthened U.S. markets not weakened them. Another argument being advanced by Secretary Paulson, Chairman Cox, and their corporate allies is that compliance with the barely five year old law is making the U.S markets anti-competitive in its current form. While relief from certain provisions of SOX for truly “small” businesses should be examined, to suggest that companies of much larger size should be “exempt” from certain requirements strains credulity. In fact, while it has been estimated that the entire cost of full SOX compliance for all required companies since 2002, the year SOX was passed, is approximately $20 billion, by way of comparison, the 160 member companies of the Business Roundtable report annual revenues of $4.5 trillion. Further, SOX compliance costs pale by comparison to shareholder, investor, and pension losses in some of the more recent accounting scandals. For example, defrauded Enron investors saw the value of their shares plummet $60 billion – three times the total cost of SOX compliance for all companies since 2002. The Worldcom, Tyco, and Adelphia scandals saw similar losses and who knows what the losses will be when the more recent CEO back-dating stock options scandals are resolved.
- London’s Shareholder and Regulatory Protections are virtually non-existent. Those who blame the U.S. legal and regulatory environment for a loss of competitiveness typically offer London as a model to guide U.S. regulatory reform. Ironically, this comes at a time when some leading institutional investors in London are raising concerns about the adequacy of its market oversight. Not only does London exempt newly listing foreign companies from its common code of corporate governance, it fails to provide the kind of aggressive enforcement of the rules or punishment of wrong-doing that U.S. investors have come to expect. Instead of engaging in a race to the regulatory bottom, the United States should make our markets stronger by maintaining its emphasis on protecting the interests’ shareholders, pensioners, and investors.
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