Regulators in retreat

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The compliance revolution has eaten its own. The US Securities and Exchange Commission’s new annual report boasts of its successful efforts to address “material weaknesses” in its internal controls, including a “strong improvement” in “password management”. It may mark the high tide of the sea of regulation that followed US corporate scandals.

It is now clear that Europe sees financial market regulation as a source of competitive advantage. On Thursday, the UK government proposed a law allowing the Financial Services Authority to ring-fence the London Stock Exchange, which is being pursued by Nasdaq, against “disproportionate” regulation – code for American laws in general and the Sarbanes-Oxley Act in particular. Euronext, as a condition of its takeover by the New York Stock Exchange, is insisting on the creation of a Dutch-based foundation empowered to repatriate Euronext’s assets in the event of any “extra-territorial” US legislation.

Meanwhile, the US backlash against Sarbox continues with complaints from, among others, Michael Bloomberg, New York City mayor, and John Thain, NYSE chief executive. There has even been coded criticism from Hank Paulson, who in his first big speech as Treasury secretary noted that sometimes the regulatory “pendulum swings too far”. Still, with Democrats due to replace the present chairman of the House committee on financial services – none other than Michael Oxley – and the chairman of the Senate banking committee, it is not yet clear if the appetite to amend the legislation itself exists.

What is evident is that the SEC and Public Company Accounting Oversight Board will rewrite their Sarbox guidance for management and auditors, including section 404 on internal controls, which Harvey Pitt, former SEC chairman, notes leaves companies “afraid to use logic and common sense”. Reducing the
burden on small companies is a priority. Financial regulation, as well as the stock market, moves in cycles.

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