Sunday, October 29, 2006

Prospective chair of House Finance Committee raises questions about global financial regulation

On a recent trip abroad, I was asked several times about the likelihood that the Sarbanes-Oxley Act would be repealed in the coming year, given Treasury Secretary Hank Paulson's stated desire to streamline U.S. financial regulation. (See here and here.) This is an understandable question. After all, if most of your U.S. news comes from the Wall Street Journal and Financial Times and you don't have a thorough understanding of the U.S. political system, you could see how someone might come to think that it is a matter of time before SOX gets pulled. However, as I've noted before, the Treasury Department in the United States is not as powerful as the finance ministries of most countries. Further, if the Democrats take control of the House of Representatives on November 7 (which seems more likely than not at this point), chances of a repeal of Sarbanes-Oxley drop considerably. Chances drop even more if, as expected, the SEC and PCAOB radically restructure how SOX Section 404 is implemented (see here).

This view was repeated this week by Representative Barney Frank (D-Mass.), who is clearly trying out for size the chairman's seat of the House Finance Committee. (As the senior Democrat on the committee, Frank is in line to become chairman should the Democrats gain a majority in the House.) In an interview with the Financial Times ("Top Democrat casts doubt on regulatory co-operation"), Frank stated that European concerns about the possible "export" of Sarbanes-Oxley were overblown, because "it's not going to happen" and "[s]ix months from now it will be less of a burden for companies than it is today. ...They [the SEC and Public Company Accounting Oversight Board] have the authority to thin out what is required. We think the accountants probably overloaded on the audit requirements."

However, Frank also cast doubt on the value of international regulatory cooperation:
"Joint action is theoretically [good] but what does that mean? In American baseball, if the runner and the ball arrive at the base at the same time, the tie goes to the fielder. Who breaks a tie if there is a disagreement over policy between the SEC and FSA?"
Frank then stated that he wasn't sure if a supra-national regulator was a good idea, but it might be something useful to look at in the future.

I'm not sure what to make of that statement, frankly. Frank certainly knows that the idea of a surpra-national financial regulator is a non-starter in the United States, unless, of course, the U.S. regulator were to be the international regulator. Even if the U.S. political environment changed so radically that international-level financial regulation were to become politically acceptable (and it certainly won't), current American laws make it illegal for U.S. securities and banking regulators to delegate any oversight or powers to an international organization. So, either Frank was talking without thinking (which wouldn't be the first time a politician has done that), or he was thinking of something else entirely. If he was thinking something else entirely, it is not at all clear what that might be.

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