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Campos Says SOX is Not to Blame for Declining IPOs

Commissioner Roel Campos, in recent remarks to the Consumer Federation of America, took issue with what he called ideological challenges to regulation based on anecdotal information and conclusions that are not supported by facts. In particular, Campos rebutted arguments that the Sarbanes-Oxley Act and section 404 have led to a decline in U.S. global competitiveness. Campos said the facts do not support that conclusion.

Campos said the decline in initial public offerings in the U.S. cannot be blamed on the U.S. regulatory system. Recent studies have suggested that SOX has provided a significant benefit to the capital markets, he said. Campos believes the U.S. regulatory system provides a competitive advantage. Investors receive better protection in the U.S. than anywhere else in the world, he said.

Campos noted that people tend to forget the scandals that triggered the adoption of SOX, and the resulting outrage. The scandals involved more than bad conduct, he said. They also revealed material weaknesses in the way that companies were operated and regulated. Firms had developed cultures that justified the conduct, he added. It is natural to forget the outrage of the scandals, Campos said, but not the issues that SOX addressed, such as independent audit committees, improved auditor independence and improved public disclosure.

Campos also addressed the report by the Committee on Capital Markets Regulation. The findings of the Committee should be analyzed, he said, but should not lead to an overreaction. He outlined various ways in which the global environment has changed and cited a Washington Post editorial which said the only reason to worry about a decline in IPOs is if it reflects a decline in efficiency in the U.S. markets, rather than an increasing appeal of other options. There are many reasons for foreign companies to list elsewhere, in Campos' view, some of which did not exist until recently.

Campos pointed out that the IPO market declined dramatically prior to the adoption of SOX, and then increased in 2005. Some of the IPOs listing abroad are secondary listings, he said. The implosion of the U.S. tech market also led to a decline in the number of IPOs.

Some people have cited the number of foreign delistings in the past year as evidence of a decline in U.S. competitiveness, according to Campos. He pointed out that 15 of the 26 delistings were due to mergers and acquisitions. Campos added that the number of foreign company IPOs in 2006 was the highest in years, as was the amount of capital raised.

Campos said the Committee on Capital Markets Regulation ignores the fundamental differences in U.S. markets and those in Europe and Asia. No other market has the large retail investor base of the U.S., he said, and no major market has the same degree of oversight of its nonfinancial public operating companies.

Campos believes that SOX section 404 is working. He urged Congress and the public not to use SOX as a scapegoat for the reduction of IPOs in the U.S. The SEC and the PCAOB are working to improve section 404 as quickly as they can. Campos said the real issues facing the U.S. capital markets are globalization and technology, not SOX. The convergence of accounting and auditing standards are at the top of the SEC's regulatory agenda, he said. Campos warned against tinkering with a regulatory system, including SOX, which has brought value and benefits to the U.S.

Jacquelyn Lumb