Rep. Frank says SOX goes overboard, but no legislation is necessary

WASHINGTON — Too many certifications of financial statements are required under the Sarbanes-Oxley Act, House Financial Services Committee Chairman Barney Frank, D-Mass., said at a conference last week.
But the Public Company Accounting Oversight Board in Washington and the Securities and Exchange Commission “will appropriately scale it back,” and no legislation is needed, he told about 600 attendees at the Council for Institutional Investors’ spring meeting here.
“The accountants probably, in helping draft 404 regulations, overdid it a little bit, and we violated a very important principle: Never ask your barber if you need a haircut,” Mr. Frank said, getting a laugh from the council’s membership. The council is a Washington-based organization that follows investment issues for large public, union and corporate pension funds.
‘Case by case’
Mr. Frank referred to Section 404 of the 2002 law, the most controversial section, which requires that company executives certify their financial statements and set up controls to ensure that the statements are accurate.
Amid talk in Washington in recent weeks of ways to reduce the U.S. financial regulatory burden, Mr. Frank said he agreed with proposals made by the U.S. Chamber of Commerce to limit criminal indictments of entire firms — which led to the collapse of accounting firm Arthur Andersen LLP of Chicago — and the practice adopted by government prosecutors in recent years of coercing company officials to give up their legal rights in order to avoid harsh prosecution.
The former Big Five accounting firm was effectively forced out of the auditing market in 2002 when the Department of Justice indicted it on criminal charges related to its audit of Enron Corp. of Houston.
Regulations need to be examined on a “case by case” basis, Mr. Frank said.
He offered hedge funds as an example of an industry that doesn’t need substantially more regulation. Last year, the U.S. Court of Appeals for the District of Columbia Circuit overturned an attempt by the SEC to require all hedge fund managers to register.
However, hedge funds that aren’t registered with the SEC should be required to retain documents for review by law enforcement agencies if necessary, Mr. Frank said. There is agreement on that point within the hedge fund industry, he added.
Economic growth by itself isn’t enough to achieve widespread prosperity, Mr. Frank said.
“You have to worry about distribution,” he said. The financial industry calls for measures to help Americans save more, Mr. Frank said, adding: “One reason people don’t save more is, they don’t have any money.”
Making better efforts to reduce inequality “is an essential part of the health of the capital system,” he said.
Mr. Frank advised privately held companies to recognize unions. Leveraged purchases of companies made with private equity are leading to a concern that “to make it pay you’ve got to squeeze people” who are employed by the companies, he said.
Making what Mr. Frank called a “recommendation” to people who manage private equity, he said, “I would give them very good advice that would make a lot of money for them. If you start recognizing unions among the people who you have acquired as employees, you would save yourself a lot of grief with the U.S. economy.”
Mr. Frank also warned that if Congress enacts his legislation requiring companies to give shareholders advisory votes on executive compensation packages, he expects boards to heed the votes. If boards were to ignore votes against compensation packages and if the SEC doesn’t allow shareholders greater access to proxy ballots, Mr. Frank warned, Congress may move to give shareholders such access for elections of directors, as the unions have called for.
“It’s a step-by-step process,” he said of shareholder rights. “You can’t do it all at once.”

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