Editors Note: Amalie L. Tuffin is a member of the Research Triangle Park law firm of Daniels Daniels & Verdonik, P.A.

RESEARCH TRIANGLE PARK, N.C. – The goal? To improve the competitiveness of our capital markets. The vehicle? The new Committee on Capital Markets Regulation.

The Committee, which consists of nationally prominent business leaders and investors, was formed in September to consider changes in the Sarbanes-Oxley Act, as well as other laws and regulations governing U.S. securities markets and corporate governance. The group is independent–it has no officially sanctioned government status–but it has already drawn praise from Treasury Secretary Henry Paulson, who said:

“I am pleased to learn the Committee on Capital Markets Regulation, an independent group of highly-respected leaders in each of their fields, will examine the competitiveness of the U.S. public capital markets. This issue is important to the future of the American economy and a priority for me. I look forward to reviewing their findings and ideas.”

Heavyweights From Business, Academia On Board

The Committee is being directed by Hal S. Scott, a professor at Harvard Law School who was instrumental in forming the group. The group’s co-chairs are R. Glenn Hubbard, dean of the Columbia Business School and a former chairman of President Bush’s Council of Economic Advisors, and John L. Thornton, chairman of the Brookings Institute and former president of Goldman Sachs (where Secretary Paulson was his boss). Other luminaries on the Committee include former Commerce Secretary Donald L. Evans, the heads of PricewaterhouseCoopers, Deloitte Touche Tomatsu, Office Depot, DuPont and the CIT Group. In addition to Professor Glauber, academia is represented by Peter Tufano of Harvard Business School and Luigi Zingales of the University of Chicago Graduate School of Business, among others.

Notably absent from the Committee’s composition are any government officials or regulators, although at least one member (Robert Glauber, a visiting professor at Harvard Law School and former chairman of the NASD) has significant regulatory experience.

Committee To Address Specific Set of Issues

The Committee plans to issue an interim report in November. Among the issues it plans to cover in the report are:

  • Whether laws need to be changed to limit criminal and civil liability for companies, auditors and directors. One focus of this inquiry will be what should be the role of state governments (think New York attorney general Eliot Spitzer) in financial market issues and regulation? Another focus will be issues related to securities class action litigation.

  • Should the Sarbanes-Oxley Act, especially Section 404 of the Act, be changed? Section 404 addresses internal controls over financial reporting and requires auditors and senior executives to certify the adequacy of internal controls.

  • Does the Securities and Exchange Commission need to adopt better procedures for conducting cost-benefit analyses of its regulations?

  • Are the shareholder rights provisions in place in the U.S. adequate? For example, should shareholder approval be required prior to the adoption of takeover defenses?
  • Will Committee Be Taken Seriously?

    Secretary Paulson recently noted in a speech at Columbia University that:

    “There have been plenty of challenges over the last five years, not the least of which were the corporate scandals involving such companies as Enron and WorldCom. Corrective measures to address investor confidence also played a role in the recovery. I take pride in the fact that when there is a problem in the United States–like no other nation in the world–we shine a light on it and move quickly to clean it up.”

    This sounds like firm support for the Sarbanes-Oxley Act and similar regulation. Secretary Paulson went on to state, however:

    “Often the pendulum swings too far and we need to go through a period of readjustment. But there is no doubt that certain legal and regulatory actions were critical to restoring confidence. The challenge before us now is how to achieve the right regulatory balance to allow us to be competitive in today’s world while guarding against the recurrence of past abuses.”

    This sounds more favorable to some sort of deregulation or backing away from SOX and is the part of his speech that has drawn the most public notice. Secretary Paulson’s views, his support for the Committee, the Committee’s composition and its contacts with government all suggest that the findings of the Committee will have significant weight.

    If the Committee’s report favors deregulation, it will be no surprise at all if legislation is introduced in January (when the new Congress convenes) to roll back portions of SOX or to make other changes in line with the Committee’s recommendations.

    Daniels Daniels & Verdonik, P.A. has been serving the legal needs of entrepreneurial and high technology clients for more than 20 years. Amalie L. Tuffin concentrates her practice in the representation of entrepreneurial and technology-based businesses, focusing on corporate, taxation and securities matters. Questions or comments can be sent to atuffin@d2vlaw.com.