The Committee on Capital Markets Regulation, which has the support of Treasury Secretary Henry Paulson, released a report urging legislators to consider overhauling the country’s enforcement policies and litigation system.

The report stops short of recommending a reworking of the Sarbanes-Oxley Act, instead saying there are a number of improvements that could be made to the law’s much-maligned internal control requirements.

Committee director Hal Scott, a Harvard Law School professor, highlighted several ideas for Section 404 during a press conference to release the report. Scott said improved materiality standards, perhaps in the form of a different definition of “materiality,” could go a long ways towards ensuring that auditors look for controls that significantly matter to a company’s processes and bottom line.

Scott said that materiality standard should also be carried over into a discussion about financial statements and restatements. More actionable guidance is also needed, which Scott noted that the Public Company Accounting Oversight Board is already working on. Scott also said that the committee is suggesting regulators explore the possibility of only auditing critical business processes annually and conduct inspections of less critical issues on a regular cycle.

Finally, Scott said that the report calls for Congress to also consider liability caps for auditors, as well as the introduction of safe harbors, though it stops short of advocating for either option.

Business leaders have expressed concern that the United States is losing ground when comparing the corporate stock listings in the country to more lightly regulated foreign exchanges elsewhere. Investor advocates have attributed the shift in investment abroad to a series of unrelated reasons, including the increasing globalization of business and steep underwriting fees charged by U.S. investment banks.

“There’s no doubt there are many factors. But when you’re looking at significant and controllable factors, it’s easy to see there are changes that could be made to legal and regulatory issues,” Scott said. “We are way over on the side of micro-rules about everything.”

In addition to the 404 changes, the committee’s other major initiatives suggested that Congress step in to force federal and state regulators to better coordinate investigations and that a number of “best practice” changes are implemented to heighten shareholder rights.

The capital markets panel contains representatives from an array of business interests, including the chief executives of two major accounting firms, current and former officials at the New York Stock Exchange and the NASD, investment bankers, and such private investors as Wilbur L. Ross Jr. The group is led by R. Glenn Hubbard, former leader of President Bush's Council on Economic Advisers; and Brookings Institution Chairman John L. Thornton. Paulson, the Treasury chief, is not actually a member.

The 135-page report, which outlines 32 recommendations, is available at www.capmktsreg.org. The wheels on one of those recommendations, the consolidation of the NYSE and NASD regulators, were officially set in motion earlier this week.

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