Small Companies to Get Some Relief on Finance Rules

But forget about any wholesale rollback of the landmark Sarbanes-Oxley law passed in 2002.

By Matthew Mogul, Associate Editor, The Kiplinger Letter

May 2, 2007

Business groups are in for a big disappointment. For months, they've been lobbying, with help from Treasury Secretary Henry Paulson, for a major reversal of the movement to put a tighter rein on how companies are run, an effort that began five years ago with the sudden collapse of Enron.

There'll be no overhaul of Sarbanes-Oxley, the law passed in the wake of the Enron debacle to restore investor confidence by placing strict controls on accounting procedures, outside audits and a host of other factors involving company finances.

The business groups argued that the law went too far and had too many unintended consequences, including high compliance costs. Most of all, they said it made it too difficult for U.S. firms to compete in the global marketplace. But the groups failed to prove their case, in part because European and Asian nations are adopting similar laws and regulations.

There will be some relief, easing the burden on smaller public firms, those with market caps under $75 million. The Securities and Exchange Commission (SEC) is likely to issue new rules in June that give small companies discretion on outside audits, but not the full exemption from accounting provisions smalls hope for.

The SEC is simultaneously moving to help business in other ways:

• Enforcement: There'll be fewer, smaller fines and lower settlements as SEC lawyers are made to get advance commission approval for penalties. The SEC is also pushing to make it harder for investors to sue companies, and it wants to give legal protection to auditors who may miss fraud.

• Arbitration: SEC Chairman Christopher Cox is considering a plan to move investor disputes to an arbitration panel. It's an uphill fight, but a Cox victory would limit the number of shareholder lawsuits.

• Mutual funds: The SEC will insist board members be independent of management, but will make an exception for chairmen.

• And hedge funds: Expect regulators to abandon efforts to force these lightly regulated investment pools into periodic reviews.

This easing of government controls will be partially offset by shareholders flexing more muscle and holding company managers accountable. Investors are winning more say in how businesses are being run -- on everything from executive pay to golden parachutes after a merger. They now have a better chance to get their own board candidates on ballots and to make sure directors don't just rubber-stamp management decisions.

In the end, the result will be a middle ground on corporate governance. The regulatory burden will be lighter, especially for smalls, but investors can still feel that their interests will be protected.

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