Monday, March 12, 2007

Blue Ribbon Panel Calls for Major Market Reforms

A blue ribbon panel of the US Chamber of Commerce has issued a far-ranging report on reforming the capital markets and revamping the SEC, as well as capping auditor liability and achieving converged international accounting and audit standards in five years. The panel also calls for the end of corporate quarterly earnings guidance. This could be a seminal report that could lead to major reform of federal securities regulation. Later blogs will more granularly explore other aspects of the report.

The central premise of the report is that the U.S. regulatory structure is deeply rooted in the reforms put in place in the 1930s, a period that was closer in time to the Civil War than it is to today, and thus it must be modernized to ensure that investor and business interests are best served in the global marketplace. The report is from the Commission on the Regulation of US Capital Markets in the 21st Century.

In a very important move, the panel urged Congress to make the freestanding Sarbanes-Oxley Act part of the Securities Exchange Act. With this change, the panel reasons, the SEC would be authorized to tailor its SOX regulations to account for practical variations among registrants, such as modifications for small company compliance with internal control requirements and an exemption from Section 404 for foreign registrants where comparable home-country requirements exist. The SEC could also then coordinate with bank regulators on the implementation of SOX, especially Section 404, as it applies to publicly traded banks subject to
similar bank regulatory requirements.

Further, in order to prevent the catastrophic loss of a major audit firm, the panel urges the SEC to work with Treasury to place the issue of developing a framework for support of multinational accounting firms on the agenda of the G-8. This framework could take many forms, including backup insurance sponsored by G-8 countries or international financial organizations.

Congress is asked to enact legislation creating the option of a federal charter for more than 10 to 15 of the largest national audit firms, which would include their ability to raise capital from shareholders other than audit partners of such firms, subject to addressing concerns about audit independence