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SEC Commissioner Paul S. Atkins critiqued his own agency before a gathering of lawyers and company directors recently, warning that excessive government regulation could hobble U.S. financial markets and undermine economic freedom. Atkins, who is a lawyer, began his talk with the ultimate disclaimer: “Let me start by saying that the views that I express here are my own and do not necessarily represent those of the Securities and Exchange Commission or my fellow commissioners.” He told the Atlanta chapter of the National Association of Corporate Directors on Feb. 23 that in the regulatory rush following recent corporate scandals, he had a fundamental philosophical concern: “Namely, that we must not allow the American economy to be unduly encumbered by a web of regulations that stifles investment, innovation and entrepreneurship.” He mentioned a recent Wall Street Journal/Heritage Foundation survey called the Index of Economic Freedom. “For the first time in the decade-long history of the index,” he said, “the U.S. is no longer among the top 10 ‘most free’ countries.” He urged the SEC to pause and reflect before taking further regulatory action and to take the time to review regulations already in place. “We [must] take care not to jeopardize the position of the U.S. as the best and most dynamic market in the world,” he said. Specifically, Atkins cited fines levied against corporations. “Shareholders are the ones who, at the end of the day, bear most of the costs imposed on the corporation. You might think that in the wake of Enron and WorldCom, with their large shareholder losses that were broadcast on television, this simple truth would have been driven home. … [I]ndividuals commit fraud. Corporations don’t,” he said. As for individuals, Atkins cautioned against criminalizing business decisions — especially those made by people who didn’t have complete information or who received bad legal advice — by looking at them through the regulator’s lens of 20/20 hindsight. He said in those instances, remedial organizational or managerial actions might be more appropriate than fines. The SEC has new authority under the Sarbanes-Oxley Act to direct fines to special funds that would provide restitution to shareholders harmed by fraud, he said, adding that those funds go into the same pot as settlements from private securities suits. “This only heightens the conundrum we face. Basically, we fine the corporation in order to put the fine into a fund to reimburse the shareholders who were just fined themselves. … I fear that if we are not careful, that we might view ourselves as an extension of the plaintiffs’ bar, with similar philosophies and tactics,” he said. Atkins also noted that Sarbanes has strengthened the role federal regulators may take in overseeing corporate directors, attorneys, accountants and auditors, but he said he worries about what form that oversight might take. He said that the SEC, faced with only a few instances of wrongdoing, might try to fix them with “overly technical prescriptions” that would dissuade talented professionals from serving as corporate directors for fear of personal liability. As an example, he said that the SEC first issued in Sarbanes an “overly restrictive” definition of a financial expert on an audit committee. Under that definition, he said, the criteria were so high that only a retired engagement partner from a Big Four accounting firm would qualify. Now, he said, “whatever a layperson would view as a financial expert is OK.” SECTION 404: BOON OR BURDEN? Atkins also discussed � 404, the internal controls provision of Sarbanes, saying it has proven itself the most expensive and burdensome part of the act, but if it achieves its objectives, it could be one of the act’s most valuable sections. He noted that almost 600 companies reported material weaknesses or significant deficiencies in internal controls last year. “Should those disclosures trigger a significant market impact?” he asked. “What criteria are used to constitute a material weakness and are those criteria applied consistently across all companies? Should investors even care, particularly if the auditors have given a clean report on the financial statements? Only time will tell.” Atkins urged companies to take responsibility for their actions by fostering a corporate culture — from the CEO and the board on down — that promotes ethical behavior. Regulators, Atkins said, need to engage in the same sort of soul-searching. Regulators rarely analyze whether a prior regulatory framework was at least partly to blame for current problems, Atkins said, adding that the regulatory response to recent corporate scandals has been no different. “We regulators do not ask whether we have done anything wrong, but instead what more we need to do,” he said. FREE TO CRITICIZE This isn’t the first time Atkins, a Vanderbilt University law graduate who began his career as a corporate lawyer and has served on the staffs of former SEC chairmen Richard C. Breeden and Arthur Levitt, has critiqued his own agency. In mid-February, he said at the Bond Market Association 2005 Legal & Compliance Conference that the SEC’s regulatory pace had been “frenetic.” He urged the agency to take the time to implement clearer rules, saying “the failure to provide proactive regulatory guidance undermines our own oversight program and encourages informal, scattershot regulation,” according to the text of his speech on the SEC’s Web site. Asked after his talk in Atlanta about his contrarian stance, Atkins answered that he has the freedom to speak his mind, thanks to an SEC appointment that does not expire until 2008. (President Bush tapped him for the post in 2002.) He also acknowledged that the problems he sees in the SEC are not new. “If you get back to Adam Smith’s ‘Wealth of Nations,’ written in 1776, he hated public limited liability companies … the self-interest of managers that’s averse to the interest of shareholders. It’s an age-old problem of trying to get the balance right,” he said. As for the new corporate governance rules, he added, “too often it’s just too easy to say ‘more, more, more’ without stepping back.”

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