For a man in office roughly four months, Treasury Secretary Henry Paulson has some definite opinions on regulatory oversight and its effect on American competitiveness.

To avoid confusion, when he mentions “regulatory oversight,” it’s a euphemism for the four-year-old Sarbanes-Oxley Act.

Last week, Paulson gave a 45-minute oration in New York about achieving “regulatory balance” and how the collapses of Enron and WorldCom have more or less created a “thicket of regulation” which he argued impedes competitiveness.

Paulson’s dilemma appears to be how to mollify Wall Street’s concerns over the costs and time associated with SOX compliance, and yet at the same time inspire investor confidence.

Paulson spent many years as one of the Masters of the Universe of Wall Street during a highly successful tenure running Goldman Sachs. It would hardly be a stretch to surmise that many of his peers at that time are the same ones trying to bend his ear about eradicating, or at least reforming, SOX.

Paulson waxed poetic about adopting more flexible accounting rules, pointing to the ones mandated overseas – particularly in Europe.

"Rules by themselves cannot eliminate fraud," he said. "Wrongdoers will seek out loopholes or ways to circumvent the rules."

He’s right in the fact that no matter how explicit, rules often don’t serve as a deterrent. I’m fairly certain they have rules prohibiting bank robberies, but last year alone, U.S. banks were robbed of more than $150 million.

But make no mistake — Paulson would love to beat down SOX like an inmate who cut the chow line at Sing-Sing. However, in full diplomacy, he stopped short of saying that, but did add that the regulatory structure as its stands is more or less a mixture of confusion and unnecessary expense.

Upon taking office in July, Paulson listed financial “competitiveness” domestically as a priority of his administration. Critics of SOX have jumped on the fact that a disturbing portion of IPOs this year were launched abroad rather than on domestic shores.

But SOX proponents and assorted investor watchdog groups have long argued that relaxing oversight legislation may, in fact, lead to larger problems and ultimately another mega-scandal.

They also make the rather cogent point that the financials of companies that bypassed the U.S. to list overseas may be somewhat suspect. It would also be hard to argue with the soaring stock indexes here.
The Treasury secretary’s speech comes weeks before the Securities and Exchange Commission will more than likely propose changes to Section 404 of SOX — the portion of the sweeping reform act that has generated the most vocal opposition, particularly from smaller filers.

But whatever emanates from the SEC’s committee on SOX in 2007 it’s safe to assume that changes are in the offing.

It may not take long after that to determine if it was worth it.


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