Is the SOX small firm exemption doomed?

Steve Bainbridge is suggesting that SEC Chairman Cox has ruled out a small firm exemption. If that's true, is it bad? Although such an exemption has a lot to recommend it, it is ultimately flawed, for reasons I explain here. Among other things, SOX and 404 problems aren't limited to small firms, such an exemption invites firms to take economically perverse actions to avoid regulation (instead of going dark or private, they'll "go small"), and it's not clear the SEC has the necessary authority.

As Henry Butler and I recommend in our AEI paper, it would be better to repeal the Act, repeal 404, or at least rewrite 404 so that it lets firms use reasonable business judgment as to what problems to disclose.

But wouldn't a small firm exemption be better than nothing, despite potential costs? At least it ameliorates the situation for the most adversely affected firms. The question concerns the opportunity costs of such a change. I'm hypothesizing that refusing a small firm exemption would create the necessary political momentum for meaningful change.

Even if I'm ultimately wrong, the process likely would at least end up with a second-best solution of a Congressional small firm exemption, or increase the pressure on the SEC. Best not to give up on the prospect of meaningful change by starting with a second-best solution.

Update:  Robert Pozen in today's WSJ is thinking along the same lines that SOX -- specifically 404 -- should be revised for all firms.