Sarbanes-Oxley and the Constitution

Broc Romanek quotes Lynn Turner (former SEC chief accountant):

Often one reads that SOX was hastily created by Congress without much thought. However, that position is usually espoused by people who had - or have - no knowledge of the legislative history, or quite frankly oppose the regulation.

Romanek recites the long efforts to adopt an accounting oversight board that culminated in SOX’s PCAOB. He adds:

In 2002, after 42 further witnesses presented during 10 days of public hearings, the Senate passed a precursor to Sarbanes-Oxley. Then, the House conducted numerous hearings and heard from many witnesses. After the WorldCom scandal came to light, both the Senate and House overwhelmingly adopted Sarbanes-Oxley - which included many similarities to the '78 legislation (in some places, it is nearly word for word). Not exactly what one might call a 'rush to judgment.'

All of this is by way of rebuking the lawsuit to strike down the PCAOB and SOX, discussed here. One would, of course, expect a defense from the accountants – by far the biggest beneficiary of SOX, and from Turner, a main proponent of the Act and of the PCAOB. What has SOX’s defenders so exercised about the lawsuit is that they know very well that a successful result could result in the death or significant curtailment of the Act. That is exactly what Henry Butler and I will be arguing for at the AEI on March 13. 

The idea that SOX is anything other than a misguided rush to judgment is refuted absolutely by Roberta Romano in her dissection of the Act and its legislative history, The Sarbanes-Oxley Act and the Making of Quack Corporate Governance. Nothing more clearly shows the haste and lack of care in the act that the lawsuit against the PCAOB threatens the entire Act because Congress forgot to add a severability clause.

The fact that SOX finally adopted the oversight board idea that refused to die for 30 years is hardly an argument for the Act. If anything, it’s a demonstration that SOX sprouted from pro-regulatory soil so fertile it would let anything grow, even an idea that had been squashed for 30 years. The idea that Elvis lives has been around as long as the accounting oversight board idea, and wouldn’t become less idiotic if Congress finally enacted it into law.

Finally, as Steve Bainbridge points out in response to Romanek, none of this has anything to do with the lawsuit. If the Act is unconstitutional, it doesn’t matter whether it’s good or bad.

And while we’re talking about unconstitutionality, Steve also mentions the First Amendment. For more on this, see here and here. Once the courts recognize that the securities laws are not exempt from the constitution, they might look at a few other provisions and rules.

Comments

[Robert Schwartz]

Monroe Friedman raised the first amendment issue 30 years ago. He is right. Most of the 33 act is a prior restraint. yes SOX is a mess. Does Brock think we have all lost our memories?