Rocky Mountain Securities Conference: Panel 1: Senator Sarbanes, Chairmen Cox and Levitt, and Professor Brown

The Colorado Bar Association and SEC went for the big guns to celebrate 40 years of this annual conference, held May 9th in Denver. Chairman Cox, Senator Sarbanes and former (and longest-serving) Chairman Levitt formed the opening panel, chaired by this blog’s own Professor Jay Brown.

The theme of the panel was a look back at six years of SOX. Panelists defended the law, while noting that changes need to be made in the way it is implemented. Senator Sarbanes described the state of the nation before SOX, saying that there is danger of collective amnesia about how severely Enron and Worldcom affected investor confidence at the time. He justified the process of passing SOX, saying it was not, as has been asserted, a rushed job but included extensive committee meetings with “lots of experts.” And after all, said the Senator, Section 404 is really only two simple paragraphs.

Senator Sarbanes is proud of the fact that the bill had true bi-partisan support, as evidenced by the final committee vote of 17-4. His sentiments were echoed by Chairman Cox, who compared the significance of SOX to the 1933 Act, saying both came out of extensive country-wide dialogue on what was wrong with the system at the time and how it needed to be fixed. Senator Sarbanes remarked that “A crisis is a terrible thing to waste.”

Not surprisingly, Chairman Cox believes the benefits of SOX outweigh its limitations and costs (while mentioning that the SEC is surveying costs). Not only has it been good for investor confidence in the U.S., but the “rest of the world” likes it, approves it, and has copied it. “The global consequences are not without difficulty, but net, net—it is all to the good.”

Chairman Levitt spoke briefly and directly to his point: “Enforcement is the soul of the Commission.” Asserting that the test of whether a system or structure is “good” is its ability to change, he said, “Every time I came up with the perfect solution, in about two months it became imperfect, and we had to change it again.” Chairman Levitt referenced Secretary Paulsen’s recently-issued Blueprint, saying that while the ideas will be debated for several years, Paulsen did the country a favor by raising the issues. However, the suggestion for a principles-based regulatory system—which Levitt described as “mushy”--is “dead wrong.”

Prof Brown asked why Sec 307 (requiring corporate counsel to report infractions up the ladder) was included. Senator Sarbanes bluntly replied that there was a sentiment to “beat up” on lawyers equally with accountants. But he noted that the bill stopped short of requiring counsel to go outside the company, leaving the issue of “noisy withdrawal” to continue to be debated.

In answer to what impact SOX has had on SEC operations, Chairman Cox quoted statistics to support the obvious answer that SOX changed the scale of the agency. The SEC went from reviewing 500 companies in 2002 to 45,000 now. It is responsible for distributing billions of “fair funds” fees. Went from a budget of $514 million in 2002 to $811 million by 2004. (When asked if he thinks the current budget is enough, Chairman Levitt’s one word answer: “No.”)

Throughout the panel, and indeed throughout the day, Chairman Cox and other Commission officials gave the sold-out conference attendees a head’s up on areas of increased SEC activity. The Commission is now the regulatory agency for credit rating agencies. A “close study” is being done on auction-rate securities. Continued development of on-line information. A summary of the comments from the enforcement panel of SEC notables will be provided in another post.

Information about the 40th Annual Rocky Mountain Securities Conference can be found here.