There was an article in the New York Times not long ago asking whether the SEC was changing course, away from its mission of protecting investors. As evidence of this shift, the article noted that Chairman Cox had scheduled a speech before the Chamber of Commerce. We noted on this Blog that the evidence of a shift was thin and specifically noted that Chairman Cox had been opposing efforts to amend SOX, despite a growing din that this be done. Our post is here.

Chairman Cox gave the speech on Wednesday, March 14. A copy can be found on the DU Corporate Governance web site. In the speech, he acknowledged the costs of Section 404 (noting “that while a portion of the first-year compliance experience of Sarbanes-Oxley undoubtedly reflected start-up costs — and, in many cases, long-neglected maintenance by companies of their internal control systems and procedures — it is undeniable that much of the cost was attributable to excessive, duplicative, or misdirected efforts.”), but then rigorously defended the Act. “It may fairly be credited with correcting the most serious problems that beset our markets just a few years ago. It has played a significant and valuable role in restoring integrity to our markets. Remember where we were, and what happened. We needed decisive action. Sarbanes-Oxley delivered.” With respect to whether SOX should be amended, his answer was unequivocal: “I want to state clearly this morning that I disagree.”

This Blog has taken issue with attacks on SOX. Early criticism focused on the rushed method of adopting the Law (Congress added many provisions that were not vetted through hearings) and various provisions such as the separation of accounting and consulting activities. These attacks had limited traction. With time, most criticism gradually focused on Section 404, specifically the provision that required outside auditors to attest to management's assessment of internal controls. The critics relied on questionable cost data, a decline in IPOs (usually without mentioning that the decline started before the adoption of SOX), and a purported increase in the number of "going private" and "going dark" transactions that had other explanations and at best a tenuous relationship to Section 404. Many of these arguments have been discussed here.

Those objecting to SOX mostly disagree with federal intervention into the corporate governance process. Forget that the SEC already has a significant presence, one that is only increasing. More importantly, criticism of federal intervention must take into account the weaknesses of the alternative. The reality is that Delaware law does not impose meaningful standards on officers and directors, something the series of posts on the definition of independent director illustrate.

The Blog applauds Chairman Cox both for taking an unequivocal stance on SOX and for disputing the data and conclusions raised by those opposing the Law. SOX may need to be changed but it will most logically entail a strengthening rather than weakening of the Act. We have discussed the need to improve the whistle blowing protections of the Act. We will discuss other areas in the future.