The Shadow Chancellor's Notebook by Orlando Plumbe

Greenspan predicts US governance revamp

Link: FT.com / World / US - Greenspan predicts US governance revamp.

Alan Greenspan, former chairman of the US Federal Reserve, predicted yesterday the US would make "changes" to the burdensome financial and corporate governance requirements driving companies out of US markets.

Law.com - Ken Starr Signs On for Constitutional Challenge to SOX

Link: Law.com - Ken Starr Signs On for Constitutional Challenge to SOX.

A law that reshaped the accounting industry after a wave of corporate scandals is being challenged on constitutional grounds by pro-business conservatives. Their big-guns legal team includes Kenneth Starr, best known as the special prosecutor in the Monica Lewinsky affair. Bitterly opposed to the sweeping anti-fraud law, they are challenging the board it established to oversee the accounting industry, arguing that it violates the Constitution's mandated separation of powers among the three branches of government.

SEC to Propose Overhaul of Rules On Executive Pay

Link: WSJ.com - SEC to Propose Overhaul of Rules On Executive Pay.

The Securities and Exchange Commission, responding to rising criticism of soaring -- and partially hidden -- executive pay, is poised to propose the most sweeping overhaul of pay disclosure rules in 14 years, seeking to push companies to divulge much more about their top executives' perquisites, retirement benefits and total compensation.

Who Is Watching the Watchdog?

Link: WSJ.com - Who Is Watching the Watchdog?.

But outside the courtroom, some are discovering that the SEC's hedge fund scheme is actually so broad it could likely ensnare two other investing segments crucial to dynamic growth: venture capital and private equity. Last year, for example, the National Venture Capital Association (NVCA) wrote to the SEC that the hedge fund regulations "create a risk of future burdensome regulation on venture capital."

SEC's Cox Wants Simpler Rules, More Competition for Accounting

Link: WSJ.com - SEC's Cox Wants Simpler Rules, More Competition for Accounting.

Addressing a meeting of the American Institute of Certified Public Accountants, Mr. Cox called for clearer, more straightforward accounting rules, saying that would benefit investors, public companies and accountants.

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SEC Commissioner Paul Atkins, who also addressed the meeting, acknowledged that regulators were surprised by the cost of internal-control rules that took effect for the largest U.S. companies last year, and he said he hopes such costs will be lower this year.

Katrina and SOX

From The University of Chicago Law School Faculty Blog:

Crudely, Enron = Katrina. Here too we see primarily a federal response. Within months of the Enron bankruptcy, Congress passed the Sarbanes-Oxley Act of 2002, which federalized many important corporate law issues that had heretofore been governed by the states. For example, section 404 of the Act mandates comprehensive (read: expensive and not sure to work) internal controls requirements without regard to differences in size and scope across firms and without regard to the substantial case law in states such as Delaware on the subject. (On the former part, one might have expected a state-law solution to internal controls to be more flexible to the needs of various firms through an enabling default rule approach as opposed to the federal, command and control approach.) A similar intrusion into state law can be seen on a range of issues from board composition to executive liability for financial reports.

WSJ.com - The Follies of Regulation

Link: WSJ.com - The Follies of Regulation.

Addressing the question of exorbitant executive compensation -- which has become the focal point of the American public's concern about corporate governance -- Mr. Cox last week raised the venerable battle standard of the SEC: full disclosure. That is too bad; the regulatory philosophy of full disclosure has been tried for over 70 years and been found sadly wanting as a way to protect shareholders from corporate and financial abuses.

Pendulum Swinginf back--A Scholalrly Assessment of SOX

Link: Yale Law Journal | R. Romano, The Sarbanes-Oxley Act and the Making of Quack Corporate Governance.

The empirical literature provides a metric for evaluating whether specific provisions can be most accurately characterized as efficacious reforms or as quack corporate governance. The learning of the literature, much of which was available when Congress was debating the bill, is that SOX’s corporate governance provisions were ill conceived.

Pendulum Swings back Some More

Link: WSJ.com - Cox's Nomination to Run SEC Signals a Regulatory Shift.

Now the regulatory terrain could be changing. "He's someone who, if he is confirmed, portends a major shift in the direction of the SEC," said Joel Seligman, dean of Washington University law school and an SEC historian.

Is Compliance Becoming Sexy

I am glad compliance officers and their lawyers are getting more respect, and this suggests how significant the impact the regulatory reforms of the last few years has been. Firms are willing to shell out a lot more for compliance now than they would just a few years ago. Link: After Scandals, New Legal Stars Rise on Wall St. - New York Times.

Just as corporate raiders represented the Wall Street of the 1980's (think of Gordon Gekko) and mutual fund managers were the icons of the 90's (Jeffrey N. Vinik, who ran the Fidelity Magellan fund, was a minor celebrity), the lawyers who keep companies in compliance with increasingly tough regulatory laws have become a new prototype of the financial district.

They may lack the flash and glamour of earlier models, but this is the compliance lawyer's moment in the sun.

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Nonetheless, new regulations and several years of aggressive tactics against Wall Street firms by the New York State attorney general, Eliot Spitzer, have created a hot commodity out of a legal specialty that five years ago was regarded as the bottom of the food chain.

"These are the people who can blow you up if you have a compliance failure or a rogue trader," said Frank Fernandez, chief economist at the Securities Industry Association.

And Maureen S. Brundage, head of the securities section in the New York office of the law firm of White & Case, noted: "The profile of the compliance lawyer has changed. It used to be generally a dead-end job with no future."

Reading this does leave one mildly sour aftertaste however.  Compliance in the financial  industry is certainly very necessary and important, but the primary goal of financial institutions should be to provide useful products and services, and compliance is a means to achieve that goal, not a goal in and of itself.  One hopes that this does not pressage the rise of a manadarin class that will constitute a permanent regulatory/compliance complex.