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Atkins Urges Global Cooperation in Devising Regulatory Solutions

In remarks prepared for delivery last month before the Deutches Aktieninstitut in Belgium, Commissioner Paul Atkins talked about the importance of regulating with a view to the differences among corporate and national cultures. Atkins said international securities regulators must devise solutions that reflect the global marketplace for capital and goods without imposing a single set of rules on all participants in the marketplace. The corporate scandals in the U.S. had global ramifications, he said, but so do the attempted solutions.

Atkins acknowledged the large number and significance of new regulations that have been adopted since the passage of the Sarbanes-Oxley Act, the largest regulatory initiative since the 1930s. He observed that regulators seldom question whether the regulatory framework was to blame when things go wrong, but look for ways to do more. Atkins suggested that corporations could prevent regulatory solutions by upholding basic business ethics and adopting effective compliance programs.

Now that the SEC's rulemaking activity has slowed down, Atkins said he looks forward to a period of reviewing the many changes brought on by the Sarbanes-Oxley Act to ensure that they are protecting investors and at what cost. The SEC stepped outside of its traditional regulatory sphere, he said, which created a number of conflicts with established regulatory frameworks in the U.S. and abroad. Atkins said the SEC is committed to working with its international counterparts. He recognizes that the reach of the Sarbanes-Oxley Act has caused concern abroad that the SEC was overlapping with foreign regulators' territory and called for cooperation and deference to other regulators.

With respect to corporate governance, Atkins said that a variety of approaches are acceptable and the SEC must be sensitive to the concerns of foreign issuers whose local customs and regulations differ significantly from the U.S. Any experimentation with different corporate governance models should be investor-driven, rather than government fiat, he added.

Atkins also hopes that regulators can minimize the conflicts imposed by PCAOB oversight of foreign public accounting firms that audit SEC-registered issuers. He noted that Germany plans to form its own version of the PCAOB. Other comparable bodies will ease the work of the PCAOB, he said, and in particular the difficulties of reviewing foreign auditors. The SEC must use its oversight to ensure that the PCAOB, a nongovernmental, nonprofit corporation, is ultimately accountable to taxpayers, he added.

Atkins is concerned about anecdotal evidence that foreign issuers see the costs of compliance in the U.S. as outweighing the benefits of trading in the U.S. markets. If there are accommodations that the SEC can make for non-U.S. issuers without undermining the objectives of the Sarbanes-Oxley Act, it should do so, he said.

Section 404 compliance has caused the greatest problems, according to Atkins, some of which are unrelated to the quality of internal controls. The SEC has deferred one compliance deadline because of backlogs at accounting firms, he reported. Smaller clients are given less priority than larger clients, he noted. Atkins said these events heighten his concern that section 404 will generate a lot of lucrative new business for auditing and law firms without a correspondingly large benefit for investors. He hopes that the burdens of section 404 will diminish over time.

Atkins also acknowledged non-U.S. companies' concerns with the cost of litigation in the U.S. As the SEC imposes additional disclosure obligations, it must keep in mind that the disclosures may also be used as the basis for litigation, he said. The SEC must give clear guidance on what companies must disclose so that they will not be subject to retroactive disclosure obligations through enforcement actions and private litigation.

Atkins is concerned with corporate complacency when it comes to additional governmental incursions that occur because of the misdeeds of other corporations. Such complacency confirms the view that regulatory solutions are the appropriate way to resolve financial crises, he explained. However, if changes in a company or an industry are necessary, Atkins said not to wait for a regulator to impose them. Companies should design their own solutions, he said.

Atkins admitted to being a frequent critic of government mandates that are imposed without empirical evidence, but acknowledged that information that would be helpful in understanding the impact of the SEC's actions often is not presented. However, once regulations are finalized, Atkins said companies should continue to share their experiences in complying with the new regulations.

Atkins urged companies and their national and EU regulators to help the SEC to avoid conflicting regulatory burdens and to work with the SEC in addressing concerns about recent regulatory reforms. International cooperation will benefit everyone in the long run, he said.