Repeal SOX

The WSJ discusses a lawsuit filed yesterday by the Free Enterprise Fund, advised by Ken Starr among others, lodging a constitutional challenge against SOX. The suit says the PCAOB violates the Appointments Clause of the Constitution. For an analysis of this issue, see Donna Nagy, Playing Peekaboo With Constitutional Law: The PCAOB and its Public/Private Status.

The kicker is that the hastily drafted SOX lacks a severability clause – so the whole thing might get thrown out. As the op-ed piece notes, Congress will have an opportunity to fix it. But Congress should do more than just fix the Constitutional problem. Congress should throw the whole thing out, or at least drastically shrink it. A court decision could provide the leverage to accomplish this.

I’ve profiled the many problems in my Sarbanes-Oxley archive and in a series of articles noted in those archives, including here and here. In the works is a longer work for the AEI with Henry Butler that makes the case that SOX has been an unmitigated disaster, contrary to the claims of its defenders who even in the face of mounting problems and evidence attempt to sugar-coat the negative effects of the law. We’ll be presenting the paper at the AEI March 13.

Obviously this would be a drastic, unprecedented move against a major piece of legislation that, for all its flaws, has been vigorously defended by prominent politicians and journalists.  Even the constitutional lever is unlikely to be enough.   

But even if the odds are long, the effort is still arguably worth it.  SOX wasn't just a bad law, but a uniquely bad law, passed under uniquely bad conditions without any of the safeguards that normally accompany major legislation. 

And even if repeal or drastic shrinkage is impossible, it's still necessary to make the case as a warning against future SOX's.  One way to do that is to establish SOX as a paradigm of bad law. In other words, to make Sarbanes and Oxley the Edsel Fords of corporate governance regulation.

Update:  More from the WSJ's Law Blog.

Comments

[Hans Bader]

You can find a copy of the complaint in this lawsuit at http://www.cei.org/pdf/PCAOBComplaint.pdf.

The suit challenges the constitutionality of the auditing board created by Sarbanes-Oxley, the PCAOB, under the Appointments Clause.

Another paper goes into greater detail about why the PCAOB is unconstitutional. It is available at http://www.cei.org/pdf/4873.pdf.

Hans Bader
Competitive Enterprise Institute
(CEI)

[Hans Bader]

The web links (URLs) I listed above for the lawsuit complaint and related paper don't work because they contained a period at the end.

So use the following links instead:

Complaint filed in lawsuit challenging board created by Sarbanes-Oxley:
http://www.cei.org/pdf/PCAOBComplaint.pdf

Study alleging board is unconstitutional:
http://www.cei.org/pdf/4873.pdf

Hans Bader

[John McGraw]

With major companies having spent millions on compliance at this point, the overturning of the legislation is especially problematic. If repeal became fact, what would corporate officers tell shareholders about the spent monies on a compliance that turned out to be essentially valueless ? And, what would lawmakers and regulators tell corporate officers who made the efforts to comply ? Oddest of all, the need to cover this black hole of poor judgment will require a broad population of the business and political community to behave essentially in the same coverup mode that started the demand for such oversight in the first place. The problem has been dramatically compounded by this attempt to definitively regulate corporate behavior. You cannot substitute rules for good judgment, and you cannot make the market system error proof for all participants. The remedies to specific corporate malfeasance should be pursued in court under pre-existing laws. The urge to add laws in the wake of every problem must be resisted, regardless of the editorial pages or even the reelection prospects of incumbents. Think of it: because of a headlines problem for the politicians, every corporation in the country has a vested interest in a costly, and very arguably unhelpful compliance regime. Central economic decision making and administration has been tried elsewhere, and the results were not all that encouraging, you may recall.

[Larry E. Ribstein]

Good point, and a powerful illustration of why it's important for Congress to get it right the first time.