[House Hearing, 109 Congress]
[From the U.S. Government Publishing Office]



 
 A BALANCING ACT: COST, COMPLIANCE, AND COMPETITIVENESS AFTER SARBANES-
                                 OXLEY
=======================================================================

                                HEARING

                               before the

                   SUBCOMMITTEE ON REGULATORY AFFAIRS

                                 of the

                              COMMITTEE ON
                           GOVERNMENT REFORM

                        HOUSE OF REPRESENTATIVES

                       ONE HUNDRED NINTH CONGRESS

                             SECOND SESSION

                               __________

                             JUNE 19, 2006

                               __________

                           Serial No. 109-217

                               __________

       Printed for the use of the Committee on Government Reform


  Available via the World Wide Web: http://www.gpoaccess.gov/congress/
                               index.html
                      http://www.house.gov/reform



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                     COMMITTEE ON GOVERNMENT REFORM

                     TOM DAVIS, Virginia, Chairman
CHRISTOPHER SHAYS, Connecticut       HENRY A. WAXMAN, California
DAN BURTON, Indiana                  TOM LANTOS, California
ILEANA ROS-LEHTINEN, Florida         MAJOR R. OWENS, New York
JOHN M. McHUGH, New York             EDOLPHUS TOWNS, New York
JOHN L. MICA, Florida                PAUL E. KANJORSKI, Pennsylvania
GIL GUTKNECHT, Minnesota             CAROLYN B. MALONEY, New York
MARK E. SOUDER, Indiana              ELIJAH E. CUMMINGS, Maryland
STEVEN C. LaTOURETTE, Ohio           DENNIS J. KUCINICH, Ohio
TODD RUSSELL PLATTS, Pennsylvania    DANNY K. DAVIS, Illinois
CHRIS CANNON, Utah                   WM. LACY CLAY, Missouri
JOHN J. DUNCAN, Jr., Tennessee       DIANE E. WATSON, California
CANDICE S. MILLER, Michigan          STEPHEN F. LYNCH, Massachusetts
MICHAEL R. TURNER, Ohio              CHRIS VAN HOLLEN, Maryland
DARRELL E. ISSA, California          LINDA T. SANCHEZ, California
JON C. PORTER, Nevada                C.A. DUTCH RUPPERSBERGER, Maryland
KENNY MARCHANT, Texas                BRIAN HIGGINS, New York
LYNN A. WESTMORELAND, Georgia        ELEANOR HOLMES NORTON, District of 
PATRICK T. McHENRY, North Carolina       Columbia
CHARLES W. DENT, Pennsylvania                    ------
VIRGINIA FOXX, North Carolina        BERNARD SANDERS, Vermont 
JEAN SCMIDT, Ohio                        (Independent)
------ ------

                      David Marin, Staff Director
                Lawrence Halloran, Deputy Staff Director
                       Teresa Austin, Chief Clerk
          Phil Barnett, Minority Chief of Staff/Chief Counsel

                   Subcommittee on Regulatory Affairs

                 CANDICE S. MILLER, Michigan, Chairman
CHRIS CANNON, Utah                   STEPHEN F. LYNCH, Massachusetts
MICHAEL R. TURNER, Ohio              WM. LACY CLAY, Missouri
LYNN A. WESTMORELAND, Georgia        CHRIS VAN HOLLEN, Maryland
JEAN SCHMIDT, Ohio

                               Ex Officio

TOM DAVIS, Virginia                  HENRY A. WAXMAN, California
                       Ed Schrock, Staff Director
               Kristina Husar, Professional Staff Member
                         Benjamin Chance, Clerk
            Krista Boyd, Minority Professional Staff Member


                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on June 19, 2006....................................     1
Statement of:
    Robotti, Robert, president, Robotti & Co.; William W. Beach, 
      director for data analysis, the Heritage Foundation; John 
      P. O'Shea, president and CEO, Westminster Securities Corp.; 
      and David Lawrence, chief financial officer, Acorda 
      Therapeutics, Inc..........................................    48
        Beach, William W.........................................    58
        Lawrence, David..........................................    73
        O'Shea, John P...........................................    65
        Robotti, Robert..........................................    48
    Wolkoff, Neal, CEO, the American Stock Exchange; R. Cromwell 
      Coulson, CEO, the Pink Sheets; and Mallory Factor, 
      chairman, Free Enterprise Fund.............................     8
        Coulson, R. Cromwell.....................................    19
        Factor, Mallory..........................................    30
        Wolkoff, Neal............................................     8
Letters, statements, etc., submitted for the record by:
    Beach, William W., director for data analysis, the Heritage 
      Foundation, prepared statement of..........................    60
    Coulson, R. Cromwell, CEO, the Pink Sheets, prepared 
      statement of...............................................    22
    Factor, Mallory, chairman, Free Enterprise Fund, prepared 
      statement of...............................................    32
    Lawrence, David, chief financial officer, Acorda 
      Therapeutics, Inc., prepared statement of..................    75
    McHenry, Hon. Patrick T., a Representative in Congress from 
      the State of North Carolina, prepared statement of.........     3
    O'Shea, John P., president and CEO, Westminster Securities 
      Corp., prepared statement of...............................    68
    Robotti, Robert, president, Robotti & Co., prepared statement 
      of.........................................................    51
    Wolkoff, Neal, CEO, the American Stock Exchange, prepared 
      statement of...............................................    11


 A BALANCING ACT: COST, COMPLIANCE, AND COMPETITIVENESS AFTER SARBANES-
                                 OXLEY

                              ----------                              


                         MONDAY, JUNE 19, 2006

                  House of Representatives,
                Subcommittee on Regulatory Affairs,
                            Committee on Government Reform,
                                                      New York, NY.
    The subcommittee met, pursuant to notice, at 10 a.m., in 
the Auditorium of the U.S. Customs House, 1 Bowling Green, New 
York, NY, Hon. Patrick T. McHenry (chairman of the 
subcommittee) presiding.
    Present: Representatives McHenry, Dent, and Maloney.
    Also present: Representatives Kelly, and Feeney.
    Mr. McHenry. Come to order. Good morning. I'm Congressman 
Patrick McHenry from North Carolina. I am chairing this 
subcommittee in Candice Miller's stead. She has been detained 
in Michigan due to a family health emergency. She's OK. She 
wanted me to communicate that, but unfortunately she cannot be 
here today.
    I'm joined this morning by my colleagues from everywhere 
from New York to Florida. To my immediate right would be Mrs. 
Maloney, who actually represents Manhattan. And to my left, my 
good friend and fellow class representative, Charlie Dent from 
the 15th Congressional District of Pennsylvania, representing 
the Lehigh Valley. Next to him is Sue Kelly, representing just 
to the north of the city, Westchester and the Hudson Valley, 
representing New York's 19th Congressional District. And to her 
left is Tom Feeney from Florida, representing the space coast 
and Florida's 24th Congressional District. And we are looking 
forward to this hearing today on ``A Balancing Act: Cost, 
Compliance and Competitiveness after Sarbanes-Oxley.''
    Both Tom Feeney, Mrs. Kelly and I are members of the House 
Financial Services Committee. I am also a member of the House 
Government Reform Committee. And under the auspices of the 
House Government Reform Committee, of which Charlie Dent and I 
both sit on, we're having this hearing today.
    I am very pleased to be here in this historic setting 
discussing an important issue for our financial markets. New 
York has long been considered the financial capital of the 
world, although we in North Carolina are very pleased about our 
banking center in Charlotte and I'm pleased to represent a 
number of folks that work there. The reason why we're holding 
this hearing today is because of a growing concern that due to 
certain regulations and regulatory matters and legislation that 
we've passed, America and New York is losing its lead as a 
financial capital to foreign exchanges.
    To illustrate the point, I would draw your attention to a 
Wall Street Journal article of January 26, 2006 that reported: 
``In 2000, nine out of every ten dollars raised by foreign 
companies through new stock offerings were done in New York. By 
2005, the reverse was true. Nine out of every ten dollars were 
raised through new company listings in London or Luxembourg.''
    Furthermore, on Tuesday, May 30, 2006, the Journal noted 
that the world's top 10 Initial Public Offerings since the 
passage of Sarbanes-Oxley, only 1 occurred on Wall Street.
    Finally, it's not hard to conclude that the announced 
merger of the New York Stock Exchange with Euronext is due in 
part to their desire to recapture these lost listings. Indeed, 
the Wall Street Journal on Friday, June 2nd said this: that one 
factor pushing the New York Stock Exchange toward Euronext is 
the shriveling of initial public offerings by international 
companies amid a tougher U.S. regulatory environment.
    Certainly, Sarbanes-Oxley was a reaction to World Com and 
Enron-style scandals. But this bill does offer some solid 
guidance to businesses. But unfortunately, the implementation, 
in particular of Section 404, a section just 168 words long, 
has resulted in some unintended consequences that have become a 
huge handicap for American businesses.
    I've met with a number of business and banking leaders 
about this subject around the country and in North Carolina and 
they agree. Sarbanes-Oxley has made a dramatic and sometimes 
negative impact on the capital markets. Transparency is very 
important in corporate governance. We understand that as public 
policymakers. However, as a rule, less government regulation 
translates to more productivity, economic expansion and job 
growth. So we have to balance those competing interests and 
needs.
    Congress did not intend to handicap U.S. businesses with 
these huge costs and the original SEC estimates said that 
annual compliance cost of the average firm would be somewhere 
around $91,000. Today, the average firm spends $3.7 million to 
comply with the requirements of Sarbanes-Oxley. The SEC 
underestimated the cost by a factor of 40 and that is after 
compliance costs have decreased. In fact, a moderate size 
community bank in my District spent $500,000 last year in 
direct costs associated with compliance of Sarbanes-Oxley, on 
top of all the other indirect costs they tally into many 
millions. And this is for a small community bank.
    So we have to look at competitiveness around the world, if 
we're to draw that capital here to the United States and that's 
what this hearing is about today. I look forward to the 
distinguished panels that we have here today and my colleagues' 
questions as well.
    And with that, I would now like to recognize my colleague, 
Mr. Dent, from Pennsylvania.
    [The prepared statement of Hon. Patrick T. McHenry 
follows:]
[GRAPHIC] [TIFF OMITTED] 33393.001

[GRAPHIC] [TIFF OMITTED] 33393.002

    Mr. Dent. Thank you, Mr. Chairman. I'd also like to thank 
Chairman Miller for holding this critical hearing today on 
Sarbanes-Oxley Act and also thanks to Mr. McHenry for pinch 
hitting for her this morning. As a result of the accounting 
scandals of Enron and World Com, Congress passed the Sarbanes-
Oxley Act of 2002 with the intent to restore public confidence 
in the financial market. SOX requires extensive disclosures 
about internal controls for public companies. Specifically, 
Section 302 requires corporate managers to attest to the 
accuracy and reliability of financial reports and disclose 
material witnesses in internal controls.
    Section 404 requires that public companies must disclose 
their own financial controls as part of their annual report and 
requires an outside accounting firm to audit internal controls 
and the company's attestment before being considered compliant. 
While the intent may have been positive, regulatory demands of 
SOX compliance has become extremely expensive for companies to 
meet and become a major obstacle, perhaps prohibiting smaller 
businesses from going public.
    I have had extensive discussions of this act with several 
constituents in my District. In fact, my good friend and 
constituent, Dave Lobach, is here today or will be here 
momentarily if he can park his car. Dave is the CEO of Embassy 
Bank in the Lehigh Valley. Dave and Elmer Gates, the chairman 
of Embassy, have given me a firsthand perspective as to the 
obstacles they face as a result of Sarbanes-Oxley.
    Banking is a highly regulated industry in the United States 
and as community bankers, they are consistently inundated with 
various rules and regulations that go well beyond simple 
regulation and I believe it's safe to say well into the realm 
of debilitating. Currently, and this bank in particular, 
Embassy Bank is reviewed on an annual basis by the state and 
the FDIC. Furthermore, in addition to conducting its own 
internal audit process, Embassy also has a number of external 
auditors who consistently assess a variety of different 
criteria ensuring regulatory compliance on many levels.
    I can say with certainty that many of the small businesses 
in my District see SOX as an anti-competitive initiative which 
adds additional process to an already over-regulated industry 
and adds tremendous cost in a business where the spreads are 
very thin.
    I have concerns that when the financial markets become too 
duplicative and over-regulated, the cost will be passed on to 
or absorbed by the consumer. I was shocked when Mr. Lobach 
informed me that the costs--he informed me that the costs 
Embassy Bank will accrue this year to be SOX compliant will 
equal the cost of opening and operating another branch office 
for a single year.
    I'm quite interested in this issue and the effects that the 
Sarbanes-Oxley Act has on the small businesses and banks in my 
District. I do not sit on this subcommittee or the Financial 
Services Committee, nor was I a Member of Congress when SOX was 
enacted in 2002. That said, I'm extremely interested in the 
testimony of these expert witnesses assembled here today and 
I'm eager to hear a bit about it, about their perspective as to 
the effects of Sarbanes-Oxley and the evaluation to cost and 
benefits of being SOX compliant.
    Thank you, Mr. Chairman.
    Mr. McHenry. At this point I recognize Congresswoman Kelly 
for the purposes of an opening statement.
    Ms. Kelly. Thank you, Chairman McHenry, for holding this 
hearing.
    I'd like to welcome Members of the subcommittee to New York 
and I really am very pleased to have the honor to have a 
constituent testify and to participate in a much needed 
discussion of the impacts of Sarbanes-Oxley Act on businesses 
in our country and in New York.
    In 2002, I voted for the original Sarbanes-Oxley Act. At 
that time it was a much needed response to the scandals at 
Enron and World Com that had already hurt millions of small 
investors and threatened to destroy confidence in America's 
securities markets. As chairman of oversight and 
investigations, I held the first Enron and World Com hearings. 
Voting for Sarbanes-Oxley then was the right thing to do.
    Four years later, America's economy is growing strong and 
consumer confidence is high. For all the success of this law, 
we do see some issues that demand attention. Employers in New 
York's Hudson Valley and around the Nation have experienced 
problems meeting the costs imposed by the regulators' 
interpretation of the law. We will hear the experiences of one 
of my constituents, David Lawrence of Warwick, NY, whose 
employer has brought numerous jobs to my District, but is 
struggling to meet the costs.
    When Congress passed Sarbanes-Oxley, it never intended to 
force any company to choose between following the law and 
creating jobs. Sadly, bureaucratic regulation has chosen to 
interpret the law in ways that no longer seem to make sense. 
Although accounting costs for audits are declining, businesses 
with less than $100 million market cap are having to divert 
precious personnel and resources to comply with a law that was 
never intended to cover America's smaller or startup companies.
    Smaller companies are increasingly raising capital outside 
the public markets and the IPOs have been delayed and many have 
moved off-shore. Given this situation, I think it's important 
that Congress examine how to ensure that our financial system 
remains strong, transparent and clean while allowing innovation 
and growth to flourish. Even the best laws need continued 
oversight in perfecting modifications.
    Today's witnesses from academia and industry will allow us 
to explore the best way to comply with the spirit and the 
substance of Sarbanes-Oxley in a way that makes sense for this 
Nation.
    I thank you for holding this hearing and I yield back.
    Mr. McHenry. Thank you, Ms. Kelly. Mr. Feeney.
    Mr. Feeney. Thank you, Mr. Chairman. I'm especially 
grateful to you, to Chairman Davis and Chairman Miller for 
letting Congresswoman Kelly and I kibbutz on your 
subcommittee's hearings because it's something very important 
to me. I'll tell you that there are a couple of traditional 
truisms in Congress that Sarbanes-Oxley has, I think, proven in 
my view. One is that Congress has typically two speeds, zero 
and over-react and the second is that often the law of 
unintended, unforeseen consequences means that the adverse 
consequences of a well-intentioned bill are much greater than 
the positive consequences.
    I have engaged for the last 9, 10 months in a listening 
tour, along with Congressman Meeks, Congressman Pete Sessions, 
Congressman Mark Kirk, and a few others at times and we have 
visited all three of the major exchanges in Chicago. We've been 
to the New York Stock Exchange, to the NASDAQ. I look forward 
to hearing Mr. Wolkoff's testimony which I've read. And I have 
come to a conclusion that it is time for a serious review of 
Sarbanes-Oxley. We now have enough empirical and anecdotal 
evidence across the board to know that the way it has been 
implemented, especially 404, has been counter productive.
    Ultimately, the test is not how many headaches we create 
for members of the board of directors, for the CFO or the CEO, 
ultimately, the test is are we giving net added value to 
investors? And I believe the answer is in many cases an 
overwhelming no and as we now put small cap companies under the 
gun, the deadline has been extended I think until December 16th 
of this year, but I am concerned that we are going to have a 
massive adverse reaction to imposing these enormously complex 
requirements on small companies.
    The bottom line is we have a conspiracy of two major 
problems that have come under the gun here. No. 1 is the way 
that Sarbanes-Oxley 404 has been implemented is very ambiguous 
in terms of what is a de minimis accounting error. There are 
lots of other standards that are not clearly set and you 
combine that with the fact that everybody involved, from the 
internal and the external auditors to the members of the board 
to the CFO, the CEO is under the gun for both civil and 
criminal liability. So over-zealous regulation is always the 
result when you have ambiguous rules and when you have 
essentially the death sentence for everybody involved.
    You talked about the $35 billion estimated direct cost of 
compliance. I am much more concerned about the indirect cost of 
compliance with Sarbanes-Oxley. The estimates are as much as 
$1.1 trillion by two separate sources, which means that 
effectively this is an 8 or 9 percent regulatory tax on every 
transaction that occurs in the United States of America, and I 
believe that we are quickly outsourcing our lead in America's 
capital markets which we've had for about 100 years.
    With that, Mr. Chairman, I'd like to just note that along 
with about 22 co-sponsors, I have filed a bill called the 
Compete Act. I would encourage people interested in Sarbanes-
Oxley issues to take a look at that bill. We've got eight 
sponsors and co-sponsors led by Senator Jim Demint in the U.S. 
Senate and I'm just again really thrilled to be here.
    Mr. McHenry. Thank you, Mr. Feeney. Because the Government 
Reform Committee has subpoena power, we always swear in our 
witnesses, so if you would all please rise with me, raise your 
right hands.
    [Witnesses sworn.]
    Mr. McHenry. Due to time restrictions, we'd ask you to 
please limit your opening remarks to 5 minutes. Your time will 
begin and be noted by the green light. They'll signify--when 
the yellow light flashes, it will signify you have 1 minute 
left. And I would ask you to please abide by that because we'd 
like to get to questions and we'd like to have a full hearing 
and the interaction that we have with the questions between 
Members of Congress and the panel is really where we'll gain 
the most knowledge.
    So with that, I'd like to recognize Mrs. Kelly for the 
purposes of introducing Mr. Factor.
    Ms. Kelly. It gives me great pleasure to introduce Mr. Neal 
Wolkoff, who is chairman and chief executive officer of the 
American Stock Exchange and was appointed to the post in April 
2005, after serving as an Acting CEO. Previously, he served as 
chief operating officer and several other senior level 
executive positions in the New York Mercantile Exchange, a 
member of the bar of the State of New York, and the U.S. 
District Court, Southern District of New York. Mr. Wolkoff 
received a B.A. from the College of Columbia University and a 
J.D. from Boston University School of Law.
    Next is Mr. R. Cromwell Coulson. Mr. Coulson is the 
chairman and chief executive officer for Pink Sheets LLC. In 
1997, he led a group of investors in acquiring Pink Sheets' 
predecessor, the National Quotation Bureau, reforming the 
company into the corporation which now exists. Prior to the 
acquisition of Pink Sheets, he was a trader specializing in 
distressed and value-oriented investments of over-the-counter 
market maker. He received a BBA from the Southern Methodist 
University in Dallas, TX.
    Next, we have Mr. Mallory Factor. Mallory Factor is 
chairman of the Free Enterprise Fund and president and founder 
of Mallory Factor, Inc. He is also the chairman of the New York 
Public Asset Fund and Blue Cross Blue Shield Investment 
Advisory Board. He serves as a member of the Board of Governors 
of the New York State Banking Department. He is a member of the 
Council on Foreign Relations and served as vice chair of the 
Council on Foreign Relations Task Force on Terrorism Financing. 
He was appointed by President Ronald Reagan to the Federal 
Savings and Loan Advisory Council of the Federal Home Loan 
Bank. He's a graduate of Wesleyan University in Connecticut, 
attended Columbia University graduate business and law program.
    We welcome you all and look forward to your testimony.
    Mr. McHenry. And we'll begin with Mr. Wolkoff.

 STATEMENTS OF NEAL WOLKOFF, CEO, THE AMERICAN STOCK EXCHANGE; 
R. CROMWELL COULSON, CEO, THE PINK SHEETS; AND MALLORY FACTOR, 
                 CHAIRMAN, FREE ENTERPRISE FUND

                   STATEMENT OF NEAL WOLKOFF

    Mr. Wolkoff. Thank you. Chairman McHenry and members of the 
subcommittee, on behalf of the American Stock Exchange, I would 
like to thank you for allowing me the opportunity to testify. 
As was stated before, I have submitted written testimony which 
I would like to become part of the official record.
    I would like to briefly summarize the written testimony. 
The American Stock Exchange is the only national stock exchange 
whose business focus is on listing small and mid-cap companies. 
And therefore, we feel that the impact of Sarbanes-Oxley on 
listed companies, particularly those companies that are in the 
small-cap arena are of particular concern to us, among the 
other national exchanges.
    While some of our 600-listed companies are large cap, the 
vast majority has capitalization between $50 million and $1 
billion and we find that any regulatory system that discourages 
these companies from participating in the public markets is of 
vital importance to our exchange and our listed companies.
    Our experience in the 4-years since the law was enacted has 
been that regulators have yet to determine how best to address 
these corporate governance issues without disadvantaging 
smaller companies that lack the same resources as larger 
companies. Key problems that confront smaller companies involve 
Section 404 Sarbanes-Oxley, which requires designing, 
documenting and ordering of financial controls. Neither the 
PCAOB nor the accounting industry have adequately defined what 
it means or what is necessary to comply. This lack of clarity 
has increased costs so that the auditing firms leave no stone 
unturned no matter how remote or immaterial the issue may be.
    The new regulations make no distinction between a $50 
billion large-cap company and a $75 million small-cap company. 
The law's failures to recognize the differences makes it 
extremely difficult for smaller companies to compete and to 
grow in this current regulatory environment.
    The lack of differentiation also places AMEX, as well as 
other U.S. exchanges, at a steep competitive disadvantage in 
listing foreign-based companies who instead choose to avoid 
U.S. capital markets. The lack of regulatory clarity allows 
foreign exchanges to arbitrarily fill in the blanks of Section 
404 compliance as they cross the United States and market their 
own major benefit which is, of course, avoidance of Sarbanes-
Oxley.
    In a recent trip to Tel Aviv, which is a hot bed of 
entrepreneurship, particularly in health science and 
technology, I witnessed the London-based exchange AIM, 
aggressively marketing its lesser requirements and lower costs 
of governance contrasted with the United States. We're seeing 
firsthand some of the impacts of Sarbanes-Oxley on smaller 
companies and our experience to date raises serious concerns.
    Last month, the exchange received a letter from one of our 
listed companies advising of its decision to delist its stock 
from trading on the AMEX. It went back to the Toronto Stock 
Exchange, citing the costs associated with Sarbanes-Oxley as 
the primary reason.
    Another example of the impact of Sarbanes-Oxley occurred in 
conjunction with a marketing effort in which I participated 
several weeks ago in London. After expressing initial interest 
in listing on the AMEX, the chief executive of one of the 
target companies sent a message to me, explaining that the 
Sarbanes-Oxley requirements, as explained to him by his 
counsel, prevented any further consideration of the idea and he 
declined the invitation to attend dinner.
    The SEC-appointed Advisory Committee on Smaller Public 
Companies has issued a report recommending that the SEC exempt 
some smaller and small-cap companies that comply with enhanced 
corporate governance provisions from Section 404 compliance. We 
support the conclusions of the advisory committee, believing 
that they represent a sound balancing of interest between 
regulation and economic growth. However, shortly after our May 
conference of SOX implementation issues, the SEC and the PCAOB 
said that they did support exemption for smaller companies, 
though they indicated willingness to work with companies on 
implementation of the regulators.
    This one size fits all approach is taken without regard to 
the impact of the cost and regulatory burden on the small, but 
important segment of the capital market place that smaller 
companies represent. In response to growing concerns of small 
business, Congressman Feeney introduced H.R. 5405, a bill that 
would modify Section 404, largely along the lines of the 
advisory committee recommendations.
    We believe that something must be done. Even if the full 
range of the advisory committee's recommendations is not 
followed either by the SEC and the PCAOB or if a legislative 
solution is not enacted.
    I'd be happy to answer questions, time permitting later on, 
as to a possible middle ground, because the American Stock 
Exchange is very interested in this issue.
    Thank you.
    [The prepared statement of Mr. Wolkoff follows:]
    [GRAPHIC] [TIFF OMITTED] 33393.003
    
    [GRAPHIC] [TIFF OMITTED] 33393.004
    
    [GRAPHIC] [TIFF OMITTED] 33393.005
    
    [GRAPHIC] [TIFF OMITTED] 33393.006
    
    [GRAPHIC] [TIFF OMITTED] 33393.007
    
    [GRAPHIC] [TIFF OMITTED] 33393.008
    
    [GRAPHIC] [TIFF OMITTED] 33393.009
    
    [GRAPHIC] [TIFF OMITTED] 33393.010
    
    Mr. Feeney. Mr. Coulson.

                STATEMENT OF R. CROMWELL COULSON

    Mr. Coulson. I very much appreciate the opportunity to 
provide testimony to this subcommittee in connection with its 
investigation of the health, liquidity and competitiveness of 
U.S. equity markets during the implementation of the Sarbanes-
Oxley Act.
    Pink Sheets is the leading provider of pricing and 
financial information for the over-the-counter securities 
markets and, among other things, operates an electronic 
quotation and trade negotiation service for broker-dealers. 
While Pink Sheets is well known as the primary trading venue 
for the stocks of smaller public companies, the bulk of Pink 
Sheets trading by dollar volume takes place in distressed or 
reorganizing issuers and the securities of large international 
issuers.
    My message today has four parts. First, we will share some 
of our thoughts about SOX, based on what we are hearing from 
smaller public companies; second, some statistics on 
deregistration; third, a few general observations about the 
competitiveness of U.S. markets; and fourth, we will describe 
our efforts to encourage cost-effective disclosure that 
protects investors.
    We agree with everything about SOX, except for its costs. 
SOX has rightfully forced management to be responsible for 
their company's disclosure and accountants to stand behind 
their audits. Unfortunately, by removing the vendor-client 
tension from the audit process, accounting costs are no longer 
within the audit client's control. Regulators have given no 
guidance so the client can push back. We sincerely hope that 
the SEC's recent initiative to repair Section 404 audit process 
will rebalance the client-vendor relationship and rein in the 
cost burden for all issuers, large and small.
    Approximately 500 issuers that have gone dark are currently 
trading in the Pink Sheets system. While the number of issuers 
going dark may seem high, from 2000 to 2005, over 5,000 issuers 
filed Form S-1s or SBTs to register securities in the public 
markets for the first time. Already this year over 500 issuers 
have filed with the SEC to be registered. So while there's been 
an increase in deregistration activity, it is simply not true 
that issuers have been exiting the registration system en 
masse.
    It is true that many small issuers are still watching and 
if the costs become too burdensome, those numbers may change.
    But this brings us to our third topic, the competitiveness 
of our equity capital markets for small companies. There's been 
much discussion lately suggesting that due to SOX 404, smaller 
U.S. companies are flocking to the LSE's alternative investment 
market. We don't really buy the argument that the success of 
the AIM is due to SOX 404. We see substantially more Canadian 
and Australian companies listing on the AIM than American 
companies and neither of those countries has adopted SOX or 
requires a Section 404 audit.
    If you look at the Toronto Stock Exchange, who has a very 
successful tier for smaller issuers, most of their marketing 
materials now are saying why we're better than the AIM. And so 
that said, we think that much can be learned from other 
markets. In studying the AIM and other successful markets for 
small companies, we are very impressed by the fact that capital 
raising is perceived as an integral part of the listing 
process. The London Stock Exchange publicized extensively the 
capital raised for its listed issuers to an extent that seems 
odd when compared to U.S. exchanges.
    The AIM was designed to provide a successful opportunity 
for smaller U.K. companies to raise capital. That has created a 
community of advisors and capital providers for smaller U.K. 
companies. It is not surprising that by offering attractive 
capital-raising opportunities for smaller companies, the AIM is 
now finding a worldwide audience.
    We have learned much from the AIM. I would respectfully 
suggest that the subcommittee's work would be enhanced by a 
thorough study of the AIM and what ideas can be brought to 
America.
    Fourth, disclosure requirements must be effectively 
tailored for smaller companies. The challenge is to encourage 
disclosure that will protect investors from questionable 
issuers without giving--without driving good companies away. 
The AIM has an excellent solution. Smaller companies are 
required to appoint a professional gatekeeper which they call 
the NOMAD who works with the issuer and performs due diligence 
so that material information is disclosed to investors.
    Our new OTCQX listing concept has been borrowed, in large 
measure, from the AIM process. Companies listing on the Pink 
Sheets OTCQX premium tiers, are required to appoint and pay for 
an attorney or broker dealer to review their disclosure. We 
believe that this review of an issuer's disclosure will benefit 
investors because much of the disclosure necessary to make good 
investment decisions is not contained in a company's GAAP 
financial statements or 404 controls.
    Investment decisions for smaller issuers are usually based 
on the company's prospects. In contrast, the focus of a U.S. 
GAAP audit is on the disclosure of historical numbers. This has 
been lost in a lot of what the value of SOX brings. We all know 
historical performance is no guarantee of future results, as 
even truer of the smaller issuer working on a cure for cancer 
or some new technology that has no revenues. These plans and 
prospects must therefore be clearly described in the 
nonfinancial portions of an issuer's disclosure.
    We think that the OTCQX disclosure review process will play 
such a valuable role for smaller issuers that we are agnostic 
of OTCQX issuers are SEC registered or just have audited GAAP 
finances. While we expect to attract companies that deregister 
with our more intelligent disclosure process, we believe that 
almost all of the OTCQX issuers who are interested in raising 
capital will still be registered with the SEC. That is because 
the most attractive U.S. capital pools for small issuers demand 
registration rights.
    Even with registered issuers, we think the OTCQX review 
will serve the useful function of helping the issuer to get it 
right which should inspire greater investor confidence in OTCQX 
issuer disclosure. At Pink Sheets, we see great opportunities 
to create a vibrant and successful secondary market for small 
companies. A study commissioned by the AIM, states that a 
vibrant market for small to medium enterprises can add as much 
as 1 percent to the GDP growth of a country's economy. We hope 
OTCQX becomes a part of that. Thank you.
    [The prepared statement of Mr. Coulson follows:]
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    Mr. McHenry. Thank you, Mr. Coulson.
    Mr. Factor.

                  STATEMENT OF MALLORY FACTOR

    Mr. Factor. Chairman McHenry, distinguished members of the 
subcommittee, I'm honored to testify here today about my views 
on Sarbanes-Oxley legislation. My remarks are based on the work 
that I've undertaken as chairman of the Free Enterprise Fund 
and Free Enterprise Institute.
    Recently, you may know the Free Enterprise Institute has 
joined with a small Nevada accounting firm to launch a legal 
challenge to the constitutionality of the Public Company 
Accounting Oversight Board [PCAOB].
    Today, I'll focus on the economic concerns about Sarbanes-
Oxley in four main areas: its cost to our public companies, its 
discouragement of American entrepreneurship, its 
disproportionate burdens on small businesses, and finally, its 
adverse effects on the global competitiveness of our capital 
markets.
    In my written testimony I also discuss the unintended 
beneficiaries of Sarbanes-Oxley and the unconstitutional Public 
Company Accounting Oversight Board. I welcome the opportunity 
to discuss any of these issues in response to your questions.
    First, Sarbanes-Oxley has imposed enormous costs both 
direct and indirect on our public companies. The passage of 
Sarbanes-Oxley coincided with the loss of $1.4 trillion of 
shareholders' wealth. No more than $400 billion of that loss 
could be explained by other factors. In other words, Sarbanes-
Oxley had a $1 trillion negative impact on the U.S. economy, a 
$1 trillion decrease in shareholder value is just the opposite 
of the growth to increased investor confidence that supporters 
of the legislation predicted would result in the passage of 
Sarbanes-Oxley.
    Estimates from the American Electronics Association showed 
that U.S. companies are spending an aggregate of $35 billion a 
year just on Section 404 compliance, almost 3,000 percent more 
than the SEC's projected cost of $1.2 billion in June 2003.
    The cost of being a public company in the United States has 
increased dramatically. The average cost of being a U.S. public 
company has increased by $1.8 million, a stunning 174 percent 
increase. This cannot be what Congress intended. These costs 
must be reduced for the sake of America's economic health.
    Second, Sarbanes-Oxley is discouraging entrepreneurship. 
Inaccessible public capital markets have ripple effects that 
touch even the earliest stage investments. With fewer liquidity 
events on the horizon for most startups, fewer early stage 
investments are economical. Many of the startups that do get 
funded will have difficulty raising enough capital to succeed 
as they begin to grow out of their development phase. The 
capital that is available, often takes the form of expensive 
equity, private equity of mezzanine financing.
    In addition, the criminal provisions put a further chill on 
entrepreneurship. CEOs and CFOs are required to certify 
corporate reports without traditional good-faith protections. 
They can also be held criminally liable for honest mistakes in 
those reports.
    The Nobel Prize winning economist, Milton Friedman said, 
``it's costing the country a great deal. Sarbanes-Oxley says to 
every entrepreneur for God's sakes don't innovate, don't take 
chances because down will come the hatchet. We're going to 
knock your head off.''
    Third, Sarbanes-Oxley has a disproportionate negative 
effect on small business. Compliance costs are not coming down. 
Last week a study showed audit fees for small cap companies 
jumped over 20 percent in 2005 alone. From 2003 to 2005, audit 
fees have increased a startling 141 percent for small-cap 
companies. This increase is significantly higher than the still 
costly increase of 104 percent for medium size companies and 62 
percent for large capitalization companies over the same 
period.
    For companies with less than $1 billion in yearly revenues, 
average Sarbanes-Oxley compliance costs have increased 174 
percent overall since inception. I believe that relief for 
small and medium-sized companies is the most urgent aspect of 
reform which Congress should address immediately.
    Fourth and finally, Sarbanes-Oxley hinders America's 
standing in the global economy. Last year, the London Stock 
Exchange had a record year for foreign listings. In a survey of 
these new listings, they discovered that 90 percent of the 
companies that considered listing in the United States said 
London's Exchange was more attractive because the companies 
listing there did not have to comply with Sarbanes-Oxley.
    In 2005, 23 of 24 companies that raised over $1 billion in 
capital chose not to register on U.S. exchanges, according to 
the New York Stock Exchange. In 2000, prior to Sarbanes-Oxley, 
9 out of 10 of the largest IPOs in the world involved the U.S. 
public markets. In sharp contrast, last year 9 out of 10 of the 
top IPOs avoided the U.S. markets all together.
    If Sarbanes-Oxley is good for investors, they should be 
willing to be paid for the benefits, but a study by Professor 
Kate Latvic of the University of Texas School of Law shows that 
investors, in fact, do not prefer such regulated companies. Her 
study found that investors preferred companies not subject to 
Sarbanes-Oxley.
    In conclusion, I believe that the common interest of 
businesses, investors and all Americans require a thoughtful 
revision of Sarbanes-Oxley. Such reform to reduce the counter-
productive and unintended ill-effects of Sarbanes-Oxley will 
enable our entrepreneurs, our investors and our workers to have 
confidence that America will continue to lead the world in 
competitiveness, productivity and economic abundance.
    I look forward to your questions and I also wish quick 
recovery for Chairman Miller's husband and I thank her for 
putting this together.
    [The prepared statement of Ms. Factor follows:]
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    Mr. McHenry. Thank you. Thank you, Mr. Factor. I'll start 
off the questions and we'll put the 5-minutes on the clock 
which we'll try to stick to.
    I enjoyed your testimony. I think you all have three unique 
perspectives and that's why it's wonderful to have you on the 
same panel.
    Mr. Coulson, have you seen an uptick in your business with 
Pink Sheets well, since the passage of Sarbanes-Oxley?
    Mr. Coulson. Since Sarbanes-Oxley, we've seen tradings and 
uptick in trading in our business, but it's not--the companies 
that are deregistered are not currently actively trading 
securities for the most part because they fall into--from that 
side, if you look at the 500 companies that are in the Pink 
Sheets, about half of their stock trade is below 50 percent, so 
I'd say they're economically distressed and they were having 
trouble any way and they may not have remained public 
companies. And other ones are the quiet, the guys who have 
deregistered, their companies are not accessing capital markets 
and they're not seeing the value portion of other companies 
controlled by a large shareholder who says it's not worth it to 
them.
    But there hasn't yet been a windfall from SOX and what 
we're building with OTCQX, we're really building it to fit to 
either side because we look at the regulatory environment today 
and don't hope that it will change either way.
    Mr. McHenry. Mr. Wolkoff, have you seen activity in terms 
of, or a slackening in activity, in terms of IPOs new listings 
on your exchange? Or, have you seen companies going dark or 
delisting from your exchange since Sarbanes-Oxley?
    Mr. Wolkoff. It's not a simple answer because I think that 
up until about 2 years ago the AMEX was not being an effective 
competitor as far as attracting new listings. And over the last 
2 or 3 years, we've seen an uptick because we've increased our 
efforts, our spending and so we have been actually taking quite 
a few companies both from IPOs or who have left the NASDAQ. 
Those seem to be the two.
    We have seen some companies that have chosen to go private. 
One can always ask whether it might have been a more 
appropriate decision for that company in the first place and we 
have seen certainly a difficulty in attracting companies from 
outside the U.S. jurisdiction. Particularly for us, we have 
about 20 percent of our market in natural resources, 
exploration and production. Canada is a natural marketing place 
for us. And we've found that it's difficult, although we've had 
success, it is difficult success. It's challenging success.
    Mr. McHenry. Someone put forth the idea that in essence 
small cap companies have a disproportionate share of their 
profit being spent on compliance costs. So the idea would be a 
larger entity could purchase them and roll in their compliance 
costs and thereby increase shareholder value.
    Have you seen mergers and acquisitions driven in that 
direction?
    Mr. Wolkoff. I've seen mergers and acquisitions. I could 
not say that's the cause or that should even be a desirable 
cause. The fact that entrepreneurial companies get absorbed 
into conglomerates or into companies that are simply larger, 
may not be the best growth engine for the economy. We've always 
seen small companies being bought. In the pharmaceutical 
industry, a company, just to name one like a Pfizer, rather 
than spending 10 years developing a new pharmaceutical in-
house, may simply choose to buy a company that has promise----
    Mr. McHenry. I have a quick question. I'll get back to you.
    Mr. Factor, in about 30 seconds, what do you advocate in 
terms of public policy? I mean short of repealing Sarbanes-
Oxley which from your testimony I think would be a desirable 
thing, what would you say?
    Mr. Factor. I think the most immediate need is to grossly 
exempt small and medium-size companies from Sarbanes-Oxley, No. 
1. No. 2, I think you have to create PCAOB in a constitutional 
way. We believe it's totally unconstitutional under Section 2, 
Article 2 of the Constitution.
    Mr. McHenry. OK, Mr. Wolkoff, in conclusion here, what can 
we do short of passing legislation to amend Sarbanes-Oxley 
right now, what would you advocate?
    Mr. Wolkoff. Yes, I think that some relatively straight-
forward actions could be taken. No. 1, define Section 404 and 
what it might mean for companies of different revenues and of 
different market capitalizations, perhaps even in different 
lines of business. Require the accounting companies to put 
specificity within audit programs as to what the goals of a 404 
audit would be. With respect to 404, depending upon the 
capitalization and revenues of the company, I would highly 
recommend that once a company complies with 404, that the 
certification be done not on an annual, but a biannual or a 
triennial basis, hence improving the cost factor.
    And last, as to those smaller companies and I think there 
are quibbles about the actual market capitalization, but there 
should be a level of company that provided they have 
independent audit committee and other ethical-promoting 
corporate governance factors within the company should be 
permitted to choose and disclose that they're exempt from 
Section 404 and that the investor on the basis of that 
disclosure can choose to buy or not buy the particular stock.
    Mr. McHenry. Thank you, Mr. Wolkoff.
    Mr. Dent.
    Mr. Dent. Thank you, Mr. Chairman. Thank you all for being 
here today.
    As someone who represents a district where we have a lot of 
Main Streets as opposed to a Wall Street, I mentioned in my 
remarks about a lot of the small banks, in particular, have 
been very, very concerned about this law and the cost of 
compliance and it's been outrageous.
    The question I have and it's probably directed to Mr. 
Factor, some of the supporters of Section 404 say that these 
compliance costs will dramatically decrease as businesses get 
streamline control processes. It would seem to me that 
regardless of the level of cost down the line, that the initial 
compliance costs associated with going public are a large 
enough deterrent to listing on U.S. exchanges. So how do you 
answer those----
    Mr. Factor. I would say there are a number of people who 
say that, in particular, the accountants whose profitability 
has soared since Section 404 compliance has been made necessary 
by this.
    I also believe that a number of the larger firms feel that 
Section 404 compliance should be kept because it's become a 
barrier to entry for small companies that really are the engine 
of America.
    Section 404 is a disaster. I consider it my theory of 
holes. Section 404 came about because of the problems that 
occurred with Enron and World Com and we knew at that point 
that we were in a hole because of that. And what frequently is 
done and I quote Mr. Oxley ``in a hothouse atmosphere excessive 
regulation comes about.'' And those are his words, 
``excessive'' and ``hothouse atmosphere.''
    What they did to get out of the hole, you just dug it 
deeper.
    Mr. Dent. Well, thank you for that answer. And on the issue 
of mezzanine financing, can you explain what you mean by that 
term, one, and two, how does this distort the public capital 
markets?
    Mr. Factor. The most efficient markets are the capital, are 
the public capital markets. They're extraordinarily efficient. 
They bring the cost of capital down. When you use private 
equity firms, the costs go up. There are not as many people 
involved.
    Liquid markets bring the cost of capital down. Mezzanine 
financing firms are firms that are supplying equity, debt, sort 
of middle of the road instruments that capital markets and 
public capital markets, had supplied. But because of Sarbanes-
Oxley, and the compliance costs, people have been avoiding it.
    Remember, in an AEA study, companies under $100 million in 
revenues, 2.5 percent of revenues were spent on Sarbanes-Oxley 
compliance. That takes companies from profitability to 
unprofitability.
    Mr. Dent. Thank you for that answer and I guess there's a 
question for all of you. I'll start with Mr. Wolkoff. You've 
all indicated there's a growing trend of smaller companies to 
list overseas. Basically, if the trend continues, what is this 
going to mean for Wall Street?
    Mr. Wolkoff. It's a loss of influence. It's a loss of jobs. 
Certainly, it's a lack of opportunity for us to grow. I think 
that the fact that Canadian companies and Australian companies 
choose to list on the AIM Market rather than their home markets 
is not really a positive about Sarbanes-Oxley. It simply means 
that their home markets are very small as far as access to 
capital and they need access to a larger market. The point 
being, they don't consider us.
    When I was in Tel Aviv and London, recently, I could tell 
that my compatriots at the other national exchanges hadn't been 
there. They basically, I think, have thrown in the towel 
because the message is that it's too difficult to list in the 
United States. We haven't thrown in the towel, but what we're 
looking for is some ability to market U.S. capital markets and 
that means some modification in the requirement.
    Mr. Dent. Are your foreign competitors aggressively 
marketing Sarbanes-Oxley against us?
    Mr. Wolkoff. Very aggressively. It's--in fact, for the AIM 
market, it is the major selling point. It is Sarbanes-Oxley on 
page 1, Sarbanes-Oxley on page 5 and Sarbanes-Oxley on the 
concluding page. And in fact, one of the reasons that we have a 
chance is that Sarbanes-Oxley alone is not enough to overcome 
some of the problems with liquidity that these foreign 
exchanges have.
    There's a quest to be in the United States. Companies want 
to be here if we show even a small amount of good faith in 
modifying some of the heavy-handedness of some of the rules. 
I'm not saying do away with it. I'm saying modify it and make 
it more sensible. Give us some tools to market to these foreign 
companies.
    Mr. Dent. Thank you and I see my time is up. I yield back.
    Mr. McHenry. Thank you, Mr. Dent. Ms. Kelly.
    Ms. Kelly. Mr. Coulson, you mentioned in your testimony 
that a liquid market for the micro cap stocks can boost the GDP 
of our country by as much as 1 percent.
    Do you think that the current SOX regulatory regime is 
really retarding growth in the Pink Sheet companies?
    Mr. Coulson. There's two sides. The Pink Sheet companies 
has--a lot of Pink Sheet companies that are raising capital, 
there are issues where there should be more criminal and civil 
charges against the fraudsters which is needed more. And 
that's--there's an issue where there's a subset of smaller 
companies that just should be run out of town by the sheriff. 
And then there's another side on legitimate smaller companies 
that they don't understand the costs of what it will be to be 
public. They are not sophisticated. They don't have access to 
reams of law firms who can research a question. They need to be 
treated much more like the IRS treats a taxpayer, an individual 
taxpayer by the SEC, rather than how the IRS treats a 
corporation. And they need to be educated and they need to be 
brought into the system.
    And that really doesn't happen from the SEC's viewpoint 
because they don't get phone calls when someone successfully 
invests in a smaller company that grows. They get a phone call 
when someone loses money in a smaller company. So their 
viewpoint is quite different and it's very enforcement based. 
And I wished there was more enforcement. There's more 
enforcement, but they also work to help companies engage in 
capital formation and that's really what they've done a great 
job with at the AIM. They have built a market for capital 
formation and the London capital--the capital of London has 
really directed itself at smaller companies. And that's what 
brings in entrepreneurship and GDP growth and all the good 
things.
    Ms. Kelly. I'd like to go to Mr. Factor. You talked about 
the smaller companies having very high opportunity costs 
because of SOX 404.
    I'd like you to elaborate a little bit on some of what the 
opportunity costs are and what--how much of an impact do you 
think that this is going to have on--not only the further 
growth in the industry sector, but also I'd be interested in 
your thoughts about what the impact of Sarbanes-Oxley is on New 
York State.
    Mr. Factor. Well, I think New York State financial services 
industry has had preeminence around the world. And has been 
known--I think it's putting a very, very big dent in it. If you 
look at the major firms that are here, and they're also around 
the world as well, and they can move their people personnel and 
their transactions almost anywhere. We have seen a book by Tom 
Friedman called the World is Flat, how the world is flattening 
out and how we have to be more competitive because things are 
becoming more equal. But what Sarbanes-Oxley does is tilt the 
world to other countries. We are really hurting our 
opportunities to create jobs, to create infrastructure and to 
grow and be productive.
    Ms. Kelly. Do you think that this Section 404 has a strong 
impact on the smaller companies to the extent that it's going 
to really harm the market here?
    Mr. Factor. It is harming it already. We've seen IPOs going 
overseas. We've seen the growth of private equity which is not 
as efficient from a cost point of view. We've seen companies 
choosing to go private. We've seen companies not choosing to go 
public. It means they don't have access to capital in order to 
grow. That's how we create jobs. That's how this country is 
built.
    Ms. Kelly. That takes me right to Mr. Wolkoff who having 
been on--going on the American Exchange, I was very impressed 
with the active role that investors have in the smaller 
companies. And I'd like very much to have you elaborate a bit, 
if you would, on the burden that 404 places on the family 
controlled public companies where you have these very active 
investors.
    Mr. Wolkoff. I think there's a couple of categories. For 
the U.S. company, I think by and large, companies are 
internalizing the costs and continuing to list somewhere, if 
they're able to list. I think that the costs are significant. 
If one did a cost benefit analysis, I have no doubt that the 
cost benefit analysis would be much more heavily weighted 
toward costs than toward benefits. That being said, I can't say 
that Sarbanes-Oxley doesn't have certain good aspects to it or 
isn't appropriate in some cases, but for many companies, 
particularly science companies, like a company forming a new 
drug, they have a patent. They have no revenue, they have 
Sarbanes-Oxley costs that they have to incur and that just 
requires them to divert resources from the other things that 
they're doing.
    Ms. Kelly. Thank you. My time is up.
    Mr. Wolkoff. May I just make one quick comment?
    Ms. Kelly. Yes.
    Mr. Wolkoff. It will be under 15 seconds. You're talking 
about $35 billion that's being spent on Sarbanes-Oxley 
compliance under 404 that could be used for infrastructure, 
that could be used for innovation, that could be used to help 
us grow our economy and create jobs instead of being used for a 
full employment program for accountants.
    Mr. McHenry. Thank you, Ms. Kelly. Mr. Feeney.
    Mr. Feeney. Yes, Mr. Wolkoff, I wanted to followup on some 
questions that Ms. Kelly had for Mr. Factor and I'm like 
Representative Dent. I don't have any exchanges in central 
Florida. Nothing is more liquid that I know of other than air 
and water than cash. And as investors can increasingly go on 
the Internet and invest their money in investments all over the 
world, I spoke to the chief financial officer in Hong Kong, Mr. 
Tong, I believe it is, and asked him whether or not a Hong Kong 
entrepreneur would think about listing on one of the New York 
exchanges and he laughed at me.
    But why should an investor care? I mean the bottom line is 
as I have more opportunities to invest in Luxembourg or London, 
you know, 100 years ago, America took the lead, companies, 
houses like J.P. Morgan moved their central locations from 
London to the United States, why should my constituents worry 
if more money is going to be raised through private equity 
firms. Mr. Coulson is developing a private regulatory network 
that doesn't have some of the absurd consequences. If Congress, 
the PCAOB and the SEC, deliberately or unintentionally, decide 
just to totally outsource liquid capital markets, other than 
the fact that folks on your exchange will lose jobs and Ms. 
Kelly may be hurt, why will this hurt investors in central 
Florida?
    Mr. Wolkoff. I'll admit, it wouldn't be a good thing for 
the American Stock Exchange, but we have to look at this in the 
context of two fairly discrete components, one being the 
companies themselves that seek to raise capital and the other 
being the investors. As far as companies that seek to raise 
capital, the more regulatory costs that are imposed on the 
company, the more expensive the cost of capital becomes the 
more likely it is that company will look to source capital 
either in some other jurisdiction or privately.
    Mr. Feeney. If I can interrupt, do you have an opinion on 
whether or not under Sarbanes-Oxley, as currently implemented, 
an Apple, a Dell or a Microsoft would have had an easy a time 
going for $50 or $75 million in capitalization to where they 
ended up?
    Mr. Wolkoff. I recently was on a panel with the CFO of Dell 
and I made the point and he didn't reject it entirely that the 
next Dell very well might be in the dorm room of a university 
located in Hong Kong or in Mumbai, but probably not in Texas, 
given the difficulty of companies to startup.
    To the other part of your question, as to why investors 
would care, people have over-emphasized or over-stated, I 
think, the ease with which American investors can access 
foreign markets. It is expensive. There is a lack of 
transparency. There is a lack of access to regulatory 
assistance, regulatory certainty and there are currency issues 
that keep it from being as easily accessible as one might want. 
I think that is not an issue that would be resolved with 
Sarbanes-Oxley unless some modification began to get companies 
to do a list and bring their listings into the United States 
and accept U.S. jurisdiction and I believe that there is a 
great hunger in the rest of the world to access American 
capital markets, but that they're being deterred from doing so.
    Mr. Feeney. Mr. Wolkoff, in your testimony, you talked 
about, one of the things we do in the Compete Act is we allow 
companies to voluntarily comply or disclose if they're not 
going to comply and let the investors determine what the 
premium would be to comply with certain regulations. If the 
regulations turn out to be absurd, then the liquid will follow 
the rational regulatory scheme.
    But in addition, two things that we think are important and 
tell me how this would play on AMEX, because you do have a few 
large cap companies listed.
    Mr. Wolkoff. Yes, we do.
    Mr. Feeney. We require a very strenuous definition of what 
a de minimis standard is, so that not every box of paper clips 
on the planet is--we have this sort of this race to the absurd 
in the regulatory scheme because everybody's threatened with 
civil and criminal liabilities.
    How important would that be?
    And then second, we suggest that the outside audits which 
are totally redundant, I mean they do keep people honest, but 
those people already are subject to civil and criminal death 
penalties. So they're redundant.
    Supposing we made the external audits random so that the 
AMEX could decide, for example, every 10 percent of its 
companies, randomly selected, do you think it would have the 
same chilling effect against fraud that SOX was designed to get 
at? Can you address those two issues, the de minimis standard 
and the potential for random external audits?
    Mr. Wolkoff. Yes, Congressman, I liked your bill. I thought 
it was well thought through and considered the important 
issues----
    Mr. Feeney. Mr. Levitt didn't think so. He was the author 
of SOX or claims. He wasn't so happy.
    Mr. Wolkoff. Mr. Levitt and I don't necessarily agree on a 
number of issues, so that's not really the standard of whether 
you've done a good job or not. I think you have done a good 
job. I think that one, the need to have definition, the need to 
provide rationality to what's required so that how you maintain 
a box of paper clips, as you say, really doesn't come into an 
overview of your internal controls. I also agree with you as 
far as the ability to opt out of regulations so long as that's 
disclosed and there are some other protections.
    I think that any effort to provide clarity, to provide 
lesser scope of regulation on smaller companies, to allow the 
investor to make up his or her own mind based upon appropriate 
disclosures, I think those are all good things and I agree with 
my colleague from the Pink Sheets, that an increase in 
enforcement dollars would also go a long way. I think seeing 
Mr. Lay and Mr. Skilling convicted has done more benefit for 
American capital markets and the trust in them than all the 
bills in the history of the U.S. Congress possibly could have.
    Mr. McHenry. Any further questions from the panel?
    Ms. Kelly. I'd like to throw one out if you don't mind.
    Mr. McHenry. Certainly.
    Ms. Kelly. We're trying to look at what will generate a 
liquid market that will grow the economy. To do that, it's very 
difficult because we don't have a statutory--a real statutory 
definition on what we should be regulating here. As you've all 
pointed out, the large companies don't have a great deal of--it 
doesn't have that big of an impact, but these smaller, these 
nascent companies that are coming into the market, things that 
Mr. Coulson, the entities Mr. Coulson, and you, Mr. Wolkoff, 
often deal with, should we look at a cap on the capitalization 
of a company? Where would you set the marker if you were 
rewriting this bill? And Mr. Feeney's bill does the kinds of 
things that I feel are good. That gets the government, let 
industry itself decide. But if we have to rewrite the bill in 
some way, would you put a cap on it--on capitalization, on the 
amount--certainly not the profitability, but where would you go 
with trying to rewrite this so it makes sense?
    Mr. Wolkoff. Are you asking me?
    Ms. Kelly. I'm asking all of you.
    Mr. Wolkoff. I think that there should be exemptive 
authority. I think that there are some companies that should be 
able to disclose that they're not complying and the reasons why 
and I think in the case of say companies that are looking to 
discover a new medical device or a new pharmaceutical, and have 
very little revenues, Sarbanes-Oxley is not the reason people 
are buying those stocks and I think that would be completely 
understandable.
    I believe that there's probably quite a bit that can be 
done, even in the absence of legislation, simply by giving 
definition, by continuing certain exemptions as they exist, by 
giving a break, really, to foreign companies, who want to try 
to access American capital markets and aren't going to have 
half of their shareholders be U.S. citizens, but some smaller 
amount. I think that all of these things are worth trying. I 
think that there are people with greater knowledge of the 
application of accounting rules and securities laws than 
perhaps I have, but like the panel, I do have concerns that 
what we have right now is heavy handed, is excessive, is 
hurting American capital markets and is hurting American 
business as well, and should be rethought in every fundamental 
way in order that we can become competitive with the rest of 
the world without lessening those standards that are most 
important to investors.
    Mr. Factor. What I think needs to be done is 404 needs to 
be done away with. Mr. Wolkoff talked about two people who got 
convicted. There were over 700 convictions since Sarbanes-Oxley 
was enacted, well over 700 and fines galore, none of them under 
Sarbanes-Oxley.
    What we don't need is additional legislation and 
regulation. What we need is to take the regulation that we have 
and legislation that we have and use it properly. The 
fundamental problem is that once the--once you have in power 
town D.C., once you have an Enron and World Com, it's like that 
the regulatory dinner bell ringing and the bureaucrats come 
rushing to the table with new organizations that just add 
enormous costs to our society. And it's hard to dislodge it. 
And what we need to do is dislodge them under 404. We need to 
dislodge them by getting rid of 302 which criminalizes, in many 
cases, taking risks. We need to really think this thing--this 
thing needs to be thought through thoroughly and say what 
legislation do we really need to give America the opportunity 
to grow and prosper and create jobs.
    The only thing I can tell you is we filed a lawsuit to 
challenge the constitutionality of the Public Company Oversight 
Accounting Board [PCAOB]. On the day we filed it, it was the 
day that PUHCA, which is the Public Utilities Holding Company 
Act of 1935, finally was gotten rid of. It was an overreaction 
in 1935 to Sam Ingersoll and in many ways it was a Stalinist 
act in the way it was written. It allowed the SEC to bust any 
multi-state utility holding company. Sometimes the gross 
overreaction really hurts our country and Sarbanes-Oxley does 
that.
    Mr. Feeney. Mr. Chairman, I wonder if I could ask one more 
and with respect to 302, my bill doesn't touch that, but if you 
do define de minimis standards, the criminal penalties become a 
lot less arbitrary.
    Does any of the three panelists have a very quick opinion, 
the PCAOB and the SEC appointed a small business advisory 
committee. I thought their recommendations--I've been working 
on this for 8 or 9 months and I thought their recommendations 
were prescient since my bill was written, but not quite filed 
yet.
    Does anybody have an opinion why they, for the most part, 
nodded and then went about their merry way without adopting the 
most important of the advice given by their own advisory 
committee?
    Mr. Coulson. I watched that panel very closely and I think 
their report is actually a great report on the state of small 
company market past 404 and Sarbanes-Oxley. And there's a lot 
of other points they raised that should be followed through on.
    They went for the long pass, get rid of it. And it's much 
harder to go through and decide which controls are material to 
investors and I think a great process will be if the SEC can do 
it and the PCAOB is go through, figure out what the controls 
are at small companies and figure out which ones are material 
to investors and what's the cost benefit and say OK, here's 10 
controls you need when you're this market cap. Here's 50. And 
let's really, because SOX 404 is like a rule in Small Town, USA 
that says every house has to be painted every year, but the 
painter decides when he's done and you're paying him by the 
hour. That can't work.
    You need to be able to cutoff your accountant and say we're 
done on the audit and this is what the regulators say you have 
to do. And that hasn't been done. And that's the real nightmare 
and people are running around, the sky is falling. There are 
SOX consultants who will say pay me hourly and I'll tell you 
how the sky is falling.
    There needs to be reined in and while--I agree with many 
points of Mr. Factor, and maybe we should get rid of it, but 
dealing with going forward, we really need to rein in the cost 
for the small company and give them some comfort.
    Mr. McHenry. And with that, thank you so much for 
testifying today. Mr. Coulson, I think you had a great line 
there at the end about the housepainter. I think it's very well 
stated.
    Mr. Coulson. Thank you.
    Mr. McHenry. And thank you so much for taking the time to 
testify before us. This information is very important to us, to 
ensure the strong nature of our financial markets going 
forward.
    With that, we're going to have a set for 5 minutes for the 
next panel, and this panel will stand in recess for 5 minutes.
    [Recess.]
    Mr. McHenry. The committee will come back to order. I 
welcome the second panel. Thank you for taking the time to be 
with us today. Thank you for waiting your turn.
    Because the Government Reform Committee has subpoena power, 
we always swear in the witnesses as you heard with the previous 
panel, so if you would all please rise and join me. Raise your 
right hands.
    [Witnesses sworn.]
    Mr. McHenry. We note in the record that all the witnesses 
responded in the affirmative. With that, I'd like to recognize 
my colleague from Pennsylvania, Mr. Dent, for the purposes of 
three introductions and Ms. Kelly for the fourth.
    Mr. Dent. Well, first I'd like to introduce our next 
witness today which is Mr. Robert Robotti. Mr. Robotti is the 
president and managing director of Robotti & Co. He recently 
served with distinction on the Securities and Exchange 
Commission's Advisory Board on Smaller Public Companies. He 
holds a B.S. degree from Bucknell University, about 100 miles 
up the road from me and an M.B.A. in taxation from Pace 
University. We're glad to have you with us here today, Mr. 
Robotti.
    I'd also like to welcome Mr. William Beach, director of the 
Center for Data Analysis [CDA], at the Heritage Foundation. Mr. 
Beach previously served as president of the Institute of Humane 
Studies at George Mason University in Fairfax, VA; previously, 
unranked basketball team, by the way, which made it in this 
year's Final Four. He is a graduate of Washburn University and 
he also holds an M.A. in history and economics from the 
University of Missouri, Columbia. Thank you for being here.
    And then we'll also hear today from Mr. John O'Shea. Mr. 
O'Shea is the president and chief executive officer of 
Westminister Securities Corp. He is an allied member of the New 
York Stock Exchange and a member of the New York Board of Trade 
and Securities Traders Association. He holds both a B.A. and 
M.A. in economics from the University of Cincinnati. Welcome.
    Ms. Kelly.
    Ms. Kelly. Thank you. Our final witness today is Mr. David 
Lawrence who is the chief financial officer of Acorda 
Therapeutics, Incorporated. Mr. Lawrence is a founding member 
and currently serves on the Board of Directors as treasurer of 
the Brian Hearn Children's Fund. He is a graduate of Roger 
Williams College and received his MBA in Finance from Iona 
College. And we thank you all for being here.
    Mr. McHenry. And with that, we'll start, just a reminder 
for this panel, as you heard before, there's a 5-minute time 
limit for opening statements. You'll see the yellow light come 
on. We have 1 minute left at that point. I'd wrap up if I were 
you.
    And with that, Mr. Robotti.

STATEMENTS OF ROBERT ROBOTTI, PRESIDENT, ROBOTTI & CO.; WILLIAM 
W. BEACH, DIRECTOR FOR DATA ANALYSIS, THE HERITAGE FOUNDATION; 
   JOHN P. O'SHEA, PRESIDENT AND CEO, WESTMINSTER SECURITIES 
  CORP.; AND DAVID LAWRENCE, CHIEF FINANCIAL OFFICER, ACORDA 
                       THERAPEUTICS, INC.

                  STATEMENT OF ROBERT ROBOTTI

    Mr. Robotti. Hi. Thank you for the opportunity to testify 
today. I was recently a member of the Securities and Exchange 
Commission's Advisory Committee on Smaller Public Companies 
and, as such, served as a member of the Corporate Governance 
and Disclosure Subcommittee. The SEC, of course, established 
the Advisory Committee to examine the impact of Sarbanes-Oxley 
and other aspects of Federal securities laws on smaller 
companies.
    Professionally, I am both the Founder and Managing member 
of an investment partnership, which SEC rules require me not to 
name, and the Founder and Portfolio Manager of Robotti & 
Company Advisors, LLC, an SEC-registered investment advisor. 
Both of those entities, I direct the investment of slightly 
over $300 million, the vast majority of which is invested in 
small cap and micro cap companies.
    I am also a director of Panhandle Royalty Co., a publicly 
traded $160 million market cap company. I am a member of 
Panhandle's Audit and Compensation Committees and as such I am 
familiar with one company's travails with Sarbanes-Oxley's 
Section 404. I would point out that, as a board member, it is a 
logical predisposition to reduce one's potential personal 
liability by encouraging a company to overspend on Section 404 
compliance.
    I will address you today primarily as an investor in small 
cap and micro cap companies, i.e., someone to whom the benefits 
of Sarbanes-Oxley are directed. Let me start by describing our 
investment process. We are what is commonly characterized as 
bottom-up equity investors. Our stock selection is predicated 
on the research and evaluation of fundamental company data. 
Therefore, we are primarily interested in an issuer's annual 
audited reports as well as its interim financial statements 
which companies registered with SEC are required to publicly 
disclose. It goes without saying that the reliability of that 
data is paramount to our investment decisions. Once we invest, 
we think and act like owners. This includes continuous 
evaluation of management and the board's oversight through 
assessing their capital allocation decisions.
    Again, both audited annual reports and interim financial 
statements are fundamental tools utilized in this investment 
process. Therefore, I am a proponent of expenditures of time 
and money in producing such reports which benefit us, the 
investors and owners, by providing us with timely financial and 
other information abut an issuer.
    Let me point out that we know, from many years of 
investment in public markets, managements and boards 
occasionally fail to act in shareholders' best interest or even 
fail to attempt to act in shareholders' best interest. The 
document, the critical evaluation on our part of managements 
and boards, I can point to the fact that I and the entities I 
direct have been named plaintiffs in numerous lawsuits against 
companies in which we had invested as a result of our efforts 
to protect and we took these efforts to protect shareholder 
interests.
    So when management of our invested companies states ``the 
cost and effort of compliance with Section 404 is 
disproportionate to its benefits,'' I listen with healthy 
skepticism.
    I think it's important to point out that I strongly support 
the vast majority of the investor predictions provided by 
Sarbanes-Oxley: the independence requirements for the audit 
committee, the restrictions on loans to insiders, the 
whistleblower provisions as well as other restrictions on 
services by independent auditors, etc. The vast majority of the 
law is a tremendous step forward for shareholders. There are 
costs, both hard and subtle, exist, but my personal investing 
experience convinces me that the net benefit to shareholders is 
significant. Therefore, we support--and the support of these 
protections enumerated in SARBOX is documented by our 
committee's work at the SEC also.
    But then there is Section 404, where I believe some 
moderation with respect to its implementation would be 
practical. Conceptually, Section 404 compliance requires 
detailing, documenting and testing data pertinent to the 
reporting process. Realistically, Section 404 needs to be 
significantly right-sized. I further believe that the time and 
attention now required by top management of small companies to 
fully comply misapprpriates shareholder value. This is subtly 
more relevant to smaller companies than it is to larger ones, 
for large companies the time and effort required by 404 can be 
delegated to staff who are not charged with running company. 
For smaller companies, senior management spends a substantial 
amount of their time on 404 when they could be running the 
business. Instead, they're dealing with the compliance of 
Section 404. My perspective is based on my years of experience, 
observations and evaluations of companies and their 
managements.
    The misallocation of management's time and attention, as 
well as the hard costs paid to outside auditors and consultants 
are not the only negatives. The costs associated with complying 
with Section 404 continue to motivate small companies which do 
not plan on raising capital to deregister or go dark. When a 
company deregisters or goes dark the company can do this in a 
relatively short period of time. It ceases to be required to 
make annual financial statements and interim reports publicly 
available. It becomes, in essence, a private company with 
public shareholders. Since the vast majority of the universe of 
small companies has no plans on raising capital, the majority 
of these companies are candidates to go dark. It is probably in 
their fiduciary duty actually as directors and managements to 
consider this option.
    Small companies that have deregistered or that are part of 
the--planning to deregister, have to consider the huge costs 
associated with Section 404 compliance. And this is one of the 
unintended consequences. The GAO report itself identifies this 
as a problem and identifies that there was a significant 
increase in the companies that are deregistering. Out of 5,971 
SEC registered companies today who are non-accelerated filers. 
I'm going to skip through since I've got plenty more.
    We're concerned also about that impact that it was because 
a lot of the discussion really talks about companies raising 
capital, becoming public. What we're forgetting about is that 
there's a huge disenfranchised investor base out there who are 
shareholders in these companies and potentially are going to be 
subject to--there are almost no regulations in terms of what 
information will be available to and how they can evaluate 
these companies. That's a significant factor.
    Thank you.
    [The prepared statement of Mr. Robotti follows:]
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    Mr. McHenry. Thank you, Mr. Robotti.
    Mr. Beach.

                   STATEMENT OF WILLIAM BEACH

    Mr. Beach. Thank you for the opportunity to testify before 
you today, to come all the way from Washington to New York 
where it's even warmer, apparently, than down there.
    Policymakers at all levels of government, but particularly 
at the Federal level have a number of prime directives that 
govern their work: design and run efficient programs, change 
policy in line with the changing world in which the policy 
lives, listen to citizens and their elected representatives and 
due no harm.
    Within that list, clearly the last ranks highest in my 
view. At the risk of using an inappropriate analogy, the cure 
must not be worse than the disease. Doubtless, the most 
profound change in financial market regulation in the past 
decade occurred with the passage of the properly titled 
Sarbanes-Oxley legislation in 2002. There's an adage that I 
learned in the law and that is hard cases make bad law.
    Today, analysts are acquiring evidence that the reaction of 
Congress to transitory financial market problems and to the 
enveloping recession created law and subsequent regulation that 
has harmed markets, the creation of new businesses and consumer 
well-being, as well as the general level and quality of U.S. 
economic activity.
    Our own research in the Center for Data Analysis indicates 
that Sarbanes-Oxley may have had a negative effect on the 
volume of private equity deals independent of the influence of 
a poorly performing economy that surrounded investment 
decisions in the first 2 years following the passage of the 
act.
    The key ingredients of a well-functioning dynamic system of 
financial markets or financial information and 
entrepreneurship, there's no question about that. There are 
hardly any two factors more important unless it is the sheer 
volume of new business ideas and supporting entrepreneurial 
activity that produce markets in the first place. Economic 
activity can be harmed by government and these things can be 
harmed by your acts. While no one denies that good reporting of 
financial results is important to market performance, honest 
10Ks are preferred over dishonest ones. Markets can punish 
crooked companies much faster than you can and more severely 
than you can or the courts. In fact, the price system can move 
so swiftly against businesses that some stock exchanges 
actually have rules for stopping trading in a company's 
equities when prices fall by a certain percentage.
    Let me describe the research that we have done. There is 
increasing anecdotal and statistical evidence that Sarbanes-
Oxley has created damaging distortions in the price system. 
Ladies and gentlemen, the price system is a natural resource, 
all right? It isn't something that you've created or we've 
created. It's what we human beings have created and it's your 
duty to defend it.
    Our own research on this possibility has focused on changes 
to venture capital funding after passage of SARBOX. Venture 
capital funding reflects all aspects of the problem described 
here; entrepreneurial activity, it has capital costs, investor 
decisions, financial reporting requirements and in some cases, 
it will even have a public-traded moment.
    If Sarbanes-Oxley appears now to exercise a deleterious 
effect on financial markets, then the venture capital industry 
should provide an early indication of that effect, kind of like 
the canary in the cave. The staff of the Center for Data 
Analysis collected monthly data on venture capital deals from 
1995 onwards. Our data came from Thompson Financial Services 
Venture Economics Web site. These data included the volume of 
deals in their total value, commitments in IPOs. Data were also 
assembled from other CDA economic models on the U.S. economy. 
After all, the venture capital industry was severely affected 
by the collapse of the dot com bubble in the fall of 2000 and 
2001. The time period also saw the debate over more financial 
regulation heating up. So the key problem that we had to solve 
was how do you separate the collapse of the venture capital 
market from the effects of Sarbanes-Oxley? It's a very 
delicate, statistical problem.
    The analytical results from running a model of private 
equity deals contains ways of tickling out these effects, 
indicates that the anecdotal evidence is, in fact, very correct 
and that Sarbanes-Oxley actually reduced deals and we are 
currently updating the model with new and more recent data and 
we'll supply this committee with that when it becomes 
available.
    We also tested the same model with an appropriate number of 
time period lags for two additional measurements: fund 
commitments and initial public offerings with the same result. 
Now why was this result there and I'll conclude on this and we 
can do it in the queries that follow. What happens in Sarbanes-
Oxley is that the regulatory cost and the uncertainty adds to 
the cost of capital. It's the uncertainty factor which is 
actually the worse part as far as we can tell from the data. 
And the uncertainty factor raising the cost of capital and also 
raising the possibility of failure in the future has caused the 
deals to collapse in the way that we saw them. And we don't see 
that as something that's recovering any time soon.
    Remember, for every one tenth of a point, in capital costs 
brought about through government's own actions, there's 100,000 
or so jobs lost, potential jobs in the economy. So there's a 
direct result outside of the deals to the general macro 
economy.
    I'd be happy to answer questions.
    [The prepared statement of Mr. Beach follows:]
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    Mr. McHenry. Thank you, sir.
    Mr. O'Shea.

                  STATEMENT OF JOHN P. O'SHEA

    Mr. O'Shea. I would like to first express my appreciation 
for the opportunity to speak before the Subcommittee on 
Regulatory Affairs and share my views with regard to the costs 
and benefits of Sarbanes-Oxley. This is an issue of great 
importance to small businesses in America, as well as the 
financial community, regulators, and others who provide 
services to this vital segment of the American economy.
    I'm speaking before the subcommittee from a dual 
perspective: first, as president, CEO and owner of a New York 
Stock Exchange and NASD member firm and as a small business 
issuers as clients; and second, as an individual who has 
invested personally in many SBIs and also has acted as an 
officer and director of SBIs.
    I've worked with SBIs for over 20 years, and have witnessed 
numerous changes in regulations that have significantly 
improved the transparency of small capital markets, 
particularly the Over-the-Counter Bulletin Board. While some of 
these regulations placed increased burdens on issuers, they 
were regulations aimed specifically at smaller issuers for the 
purpose of enhancing disclosure and market liquidity for 
smaller public companies. By contrast, the Sarbanes-Oxley Act 
has placed a broad-based burden on publicly held companies of 
all shapes, sizes and characteristics. While there are many 
positive aspects of the act, such as those regarding conduct 
and related-party transactions, the audit and review standards 
are particularly onerous.
    In the case of larger companies, I believe the burden can 
be absorbed with reasonable impact and the benefits are 
realized by a large number of investors. In the case of smaller 
public companies, however, I believe the cost, in terms of both 
financial impact and management resources, has a 
disproportionately large effect. These impacts and expense are 
not commensurate with the benefit received, resulting in two 
trends that are having a negative effect on capital formation 
for small companies in the United States.
    Many issuers are choosing to terminate their registration 
or go dark. Additionally, an increasing number of issuers are 
choosing to go public in markets outside of the United States. 
Both of these fall under the ``law of unintended 
consequences,'' having the effect that this is the exact 
opposite of what SOX attempts to accomplish. Rather than 
increasing disclosure and providing stronger controls for 
companies, many issuers are terminating previously available 
disclosures, or, by going public elsewhere, not providing them 
at all.
    According to a study at the University of Maryland, 
approximately 200 companies petitioned to delist their stock in 
2003, with an estimated similar number in 2004. This compares 
with just 67 companies in 2002, prior to the implementation of 
SOX. Their securities are either moved to the pink sheets where 
they frequently decline in price, or they stop trading 
altogether. As the investors are left in the dark, having 
significantly less knowledge about the actions of management 
and operational results of the company, they are left with 
little leverage with which to form the basis of a more accurate 
valuation.
    The second trend is the growth of competing, non-U.S. 
marketplaces that cater to small cap companies, particularly 
the AIM in London. The number of foreign companies listed on 
the AIM has nearly doubled every year since the year 2003 when 
SOX was first implemented. With only 60 foreign countries 
listed on the AIM in 2003, the number jumped to 116 in 2004; 
220 in 2005; and 262 through May of this year.
    Among it's listed companies, the AIM includes 37 U.S. 
companies up from 17 1 year ago. Some of these abandon their 
U.S. trading status in order to join the AIM. Some never pursue 
U.S. trading at all. Further, emphasizing this attraction is 
the fact that newer markets are being formulated that are 
emulating the AIM system, not the NASDAQ. As these alternatives 
become increasingly available and credible issuers, both United 
States and international, will have less incentive to face the 
complexities and costs of trading in comparable U.S. markets.
    The two trends presented above reflected the general 
pushback smaller public companies are having against SOX. While 
many smaller public companies are choosing to stay the course 
and comply with the newer regulations as they become applicable 
to them, there is a significant discontent and concern 
regarding the disproportionately high cost to them. A study by 
Foley & Lardner found that in fiscal year 2005, the percentage 
increase in average audit fees was significantly higher for 
small cap companies at 22 percent than mid cap at 6 percent and 
S&P companies at 4 percent. The year-to-year percentage 
increases were greatest during the phase-in of Section 404 
requirements, with the largest increases being felt by small 
cap companies.
    In preparation for this testimony, we surveyed smaller 
companies to get feedback regarding their experience with SOX. 
In this informal survey, approximately 70 percent felt that SOX 
had no effect on communications with shareholders, 
communications with analysts or other information useful to 
management. Sixty-seven percent of those surveyed also felt the 
quality of their financial reporting was the same, although 31 
percent did feel that it had improved since the implementation 
of SOX. Seventy-four percent believed that the results obtained 
were not worth the expense and effort in implementing them.
    As an additional gauge of the perception of the effects of 
SOX, we surveyed investors, including 27 individuals and 
institutions. We asked these investors about the effects of SOX 
on the small and micro cap companies they invest in or would 
like to invest in. While 33 percent of the group believed SOX 
had the potential to reduce the risk of management fraud, 56 
percent believed it had no effect. Almost the entire group, 93 
percent, felt that SOX had a negative effective on issuer 
profitability, and 100 percent believed SOX has caused small 
and micro cap companies to be less likely to go public in the 
United States. When rating the effect of various factors on 
positive share performance, 85 percent felt that earnings and 
revenue growth was the most important, while 85 percent felt 
that compliance with SOX was least important. This indicates 
that, while investors find there are some positive aspects to 
SOX, those aspects are not as highly valued in the marketplace 
in light of the negative impact it has on profitability.
    Thank you very much.
    [The prepared statement of Mr. O'Shea follows:]
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    Mr. McHenry. Thank you, sir.
    Mr. Lawrence.

                  STATEMENT OF DAVID LAWRENCE

    Mr. Lawrence. Thank you for providing the opportunity to 
testify before you today on Sarbanes-Oxley Act, Section 404, 
and finding the proper balance among cost burdens, investor 
protection and U.S. competitiveness.
    I currently serve as the chief financial officer of Acorda 
Therapeutics. We are a public biotechnology company located in 
Hawthorne, NY. I have been involved with the management of 
corporate governance and finances in biotech and high tech 
companies for over 15 years. Founded in 1995, Acorda is a 
biotechnology company focusing on the development of next 
generation therapies that restore neurological function to 
people with spinal cord injury, multiple sclerosis and related 
conditions of the nervous system.
    Our company has clinical and pre-clinical drug candidates 
for MS, the focus on novel approaches to repairing damaged 
components of the central nervous system. We are currently a 
net loss company with one drug on the market. Our market cap of 
approximately $76 million as of June of this year is at the 
bottom 0.5 percent of total U.S. market cap.
    We completed our initial public offering in February 2006 
and are currently beginning the process of complying with the 
Sarbanes-Oxley Act.
    Today, I'm here to testify on behalf of the biotechnology 
industry organization, an organization representing more than 
1,100 biotech companies, academic institutions, State bio 
technology centers and related organizations in 50 U.S. States 
and 31 nations. The majority of bio member companies are small, 
research and development-oriented companies pursuing 
innovations that have the potential to improve human health, 
expand our food supply and provide new sources of energy.
    Acorda Therapeutics has a profile that's typical of the 
high-risk, capital-intensive, long-lead time regulated business 
environment of the biotech industry. As a representative of one 
of the most innovative high growth sectors of our Nation's 
economy, one in which the United States maintains a global 
leadership position, my testimony is tailored to the issues 
faced currently or that will be faced by emerging companies in 
the biotech sector.
    Let me start by saying that we fully appreciate and agree 
with the congressional intent behind Section 404, ensuring that 
companies have in place effective procedures and controls to 
enhance investor protection and protect against fraud. Where 
Section 404 has gone awry is in the implementation. The current 
implementation of Section 404 is not tailored and does not work 
well for small public companies.
    The one size fits all approach of Section 404 is highly 
burdensome and smaller companies are bearing disproportionate 
costs on a relative basis. This has been recognized and 
documented, not only by the SEC advisory committee for smaller 
public companies, where members voted 18 to 3 in favor of 
Section 404 reform, but also by the GAO, where it found that 
smaller companies at the bottom 6 percent of total U.S. market 
cap pay up to $1.4 million on external auditors for Section 404 
compliance. The GAO also found that 47 percent of the companies 
reported significant opportunity costs related to Section 404, 
draining resources away from innovation and research.
    Even the SEC recognized in its recent statement that 
Section 404 might need reform based on a top down risk-based 
and scaled approach, which would make Section 404 more 
responsive to the individual size and complexity of the 
companies. For most biotech companies, the cost burdens 
associated with Section 404 compliance include both internal 
costs, as well as external auditor costs and are substantial. 
Our experience as a newly public, non-accelerated company is 
very similar to those experienced by BIO members. Due to 
limited internal resources, we will have to immediately 
contract with an outside consulting firm in order to comply 
with SOX requirements by the 2007 deadline.
    For many of the newly public companies, Section 404 costs 
could mean having to spend a large portion of their research 
funding for a leading drug or therapy on Section 404 
compliance, forcing many of the companies to make reductions in 
research spending in order to meet the requirements imposed by 
Section 404.
    For the investors, their confidence and trust in public 
companies may have increased as a result of SOX as a whole, but 
not necessarily due to Section 404. As we saw in the first and 
second years of Section 404 implementation, investors were less 
concerned when a company reported a material weakness in 
internal controls under Section 404, than on how much a small 
company was paying to meet Section 404 requirements.
    Here, the cost of implementing Section 404, particularly 
for smaller public companies, appear to outweigh many of the 
benefits that are directly related to Section 404.
    As embraced by the Advisory Committee in its final 
recommendations, it is critical that Section 404 reform 
framework establishing a risk-based approach that provides 
scaled reforms based on a revenue filter condition. This 
approach recognizes that level of risk, the level of 
complexity, and the level of product revenues are clearly 
interrelated and that product revenue should drive the level of 
internal control procedures.
    Without Section 404 reform, evidence points to the fact 
that innovation may be stifled and U.S. competitiveness 
compromised. With recent submission of the Advisory Committee's 
final recommendations and the SEC's statement of intent for 
reform, it appears that now is the opportune time for the SEC 
to fully engage and follow through with reforms consistent with 
the original principles upon which SOX was enacted.
    Thank you for your time and consideration of BIO's views. 
BIO urges the subcommittee to request expeditious action by the 
Commission on the reform framework endorsed by the Advisory 
Committee.
    [The prepared statement of Mr. Lawrence follows:]
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    Mr. McHenry. Thank you, sir, and I'll begin the 
questioning. We'll start the clock with 5 minutes.
    Mr. Robotti, a question for you. How much do you rely on 
Section 404, in terms of making decisions about companies? What 
is your reliance on Section 404?
    Mr. Robotti. Well, one of the points I raised is that I 
don't think the public market really ascribes much value to it 
because if you look at the micro cap companies that are not 
accelerated filers, less than $75 million of unaffiliated 
market cap today, there's no repricing of the securities in 
those markets. They don't have a higher multiple, but you've 
got to pay for those stocks. They don't sell a higher multiple, 
a lower multiple for books. So it doesn't seem to me, because 
part of the portfolio companies that we invest in are still not 
404 compliant and others are. So you know, I, as an investor, 
look at these companies, have met with managements, look at the 
financial reports they have, look at what they've done in the 
past in terms of restating their financials, and make my own 
subtle assessments about the reliability of management and 
internal controls. And so it's really not an assessment, 
because from the outset, it's, of course, always difficult to 
understand exactly the process that they went through in 404.
    The companies that I am familiar with the 404 processes 
that they have gone through, you know there are some benefits 
that do come from kind of reviewing top down, everything they 
do, but the time and effort involved--there's a lot more detail 
work that really is relatively irrelevant. So that's my 
opinion. And I clearly have talked to companies who have said, 
listen, who have said to me, the cost of being a public company 
is not that significant, so I don't know why company XYZ who is 
a competitor of ours did deregister--this is 2 or 3 years ago--
for other reasons. And then I come back to them a couple of 
months later and they say gee, we've looked at this 404 and 
we're looking at what the time and effort is going to be 
involved and the cost of it. I'm considering that we would 
really deregister.
    So that's a specific company where I've had conversation 
where clearly the guy said it's not significant being a public 
company and the costs aren't that significant to evaluating 404 
and saying: ``I don't know if I really want to go through that 
process and incur all these incremental expenses and I don't 
really see the benefit added.'' And I could understand, yeah, I 
own 19 percent of the company and yet I'm not really an 
insider. I'm not really privy to any information that any 
outside investor isn't, but I understand his process. And if I 
were a director, I would think yeah, maybe that is really 
relevant for you to not be a reporting company.
    Mr. McHenry. All right, I think it's pretty clear we 
understand the problems in the marketplace and I appreciate you 
touching on that. Now if we could transition, if we all, all 
four of you could take just 30 seconds and explain what we 
should do, what Congress should do, what action we should take 
and we'll begin with you, Mr. Robotti, but please keep it at 30 
seconds. We've got to keep to the time.
    Mr. Robotti. 404 is extremely poorly designed and 
implemented. The idea that you need additional work done on 
internal controls is logical and in the testimony given by an 
ex-SEC Commissioner who said what you've got to do, he said 
take 1 day for the CFO, 5 days for the order and that's what he 
said he designed the law when he implemented the law and wrote 
the law and that's not what's happening. So the implementation 
is vastly off.
    Internal controls are good. You need it. 404, way overkill.
    Mr. McHenry. Mr. Beach.
    Mr. Beach. I'm not on the market, so I won't give you that 
kind of a detailed response, but let me just say that I think 
you should commission research on the economic effects of 168 
words. I honestly think that Congress needs to have more 
information and reliable peer-reviewed information about what 
this has done, so you can get past the anecdotes which are all 
very important and into something that's more solid than that, 
something that you can rely on.
    Mr. McHenry. Mr. O'Shea.
    Mr. O'Shea. At the very least, I think you should delay 
implementing some of the more onerous provisions of the act, 
particularly 404, to do cost benefit studies, to understand the 
effect and perhaps consider having some companies, small cap 
companies or different industries being exempt from those 
provisions.
    Mr. McHenry. Mr. Lawrence.
    Mr. Lawrence. Similar. It's the 404 provisions that are 
especially difficult for small companies such as Acorda and 
others in the biotech industry. It really is either--put on 
hold so it can be further studied and analyzed or some sort of 
a leveled approach or scaled approach based on revenue and 
market cap.
    Mr. McHenry. All right, I appreciate your input.
    Mr. Dent.
    Mr. Dent. Thank you, Mr. Chairman. Mr. Beach, I do 
appreciate your comment just a moment ago about the impact of 
168 words on the economy. And I'm always reminded in this 
business of legislating that we pass laws to stop people, bad 
people from doing bad things and the corollary to that is 
oftentimes it prevents good people from doing good things and I 
think you drove that point home.
    Mr. Lawrence, I represent an area of the country where 
there's a lot of biotech interest and activity. And I'd be 
curious to know have you, are you aware of any research that 
has been foregone or discoveries that are not being made 
because of the compliance costs associated with Section 404?
    Mr. Lawrence. It's tough to say what discoveries have not 
been made, if the funds haven't been directed toward them. In 
our case, we will probably be similar to other biotech 
companies where you could spend upwards of $1 million or more 
in the implementation of SOX, so for a small company like us, 
that's $1 million that will not be used to bring in more 
researchers and license additional technology or things that 
could accelerate the development of breakthrough drug in the 
future.
    Mr. Dent. With respect to these opportunity costs for these 
small companies, I mean just elaborate on that. What do these 
opportunity costs--what opportunities are being missed?
    Mr. Lawrence. Just the opportunity to--you may have drugs 
reaching a certain development stage where additional funding 
could take it to the next level. Get it into a clinical trial, 
bring it into a Phase 2 clinical trial. Get it out of the 
laboratory and into human testing. Those are questions that you 
will ask yourself, if you're spending money on things that are 
not going to the research and development, primarily what 
investors have invested in our company for.
    Mr. Dent. Mr. Beach, can you just elaborate too on the 
impact on jobs. We're always talking about jobs around here and 
what do you see the impact on jobs because of this statute, 
Sarbanes-Oxley, and its implementation, I should say?
    Mr. Beach. Well, our own research is beginning to indicate 
pretty strongly, Congressman, that Sarbanes-Oxley has, in fact, 
added to the cost of capital and we know that in looking at 
large models of the U.S. economy, as well as industry specific 
models, that capital costs are really the big driver in 
business expansion, in reinvestment and new technology, all of 
which has immediately two areas, one, and that is the 
improvement in salaries and wages. It makes workers more 
productive and they're able to command higher pay and so if 
capital costs are going up, that will reduce the potential 
wages and salaries and also in achieving new employment. And 
when Congress acts to increase the cost of capital, that is 
worse than when any other institution in the United States 
acts, for example, just capital market increases because people 
who are borrowing now have to also calculate that you will 
followup this action with other deleterious actions and so we 
say in our modeling that at one-tenth of an increase in capital 
costs that's due to your actions results in 100,000 lost 
potential jobs, not actual jobs, but potential employment falls 
by that amount.
    Mr. Dent. And what industries do you think, looking 
forward, will be most impacted by this law, knowing that $9 out 
of $10 raised for these new companies are being listed 
elsewhere, outside of this country?
    Mr. Beach. That's why I think our research in the venture 
capital data was so important and revealing, Congressman. And 
just very, very quickly, we saw a real movement away from 
companies that would have difficult decisionmaking by the 
private boards. An unwillingness to take a company public, in 
other words. High technology companies. Of course, the area of 
the economy which has been benefited by Sarbanes-Oxley was made 
in the previous panel. We saw an increase, not only in 
compensation, but in numbers in the financial services sector, 
but particularly accountants and those subsectors. That's what 
the research indicates at this particular point.
    Mr. Dent. Thank you, Mr. Chairman. I will yield back.
    Mr. McHenry. Ms. Kelly.
    Ms. Kelly. Thank you. I'd like to ask Mr. Lawrence, biotech 
companies have really very low product revenues comparable to 
their market capitalization. And it's not uncommon for a newly 
public biotech company to have a market capitalization of $700 
million, but have product revenues of less than $1 million.
    The SEC Advisory Committee for Smaller Public Companies 
defines a smaller public company in terms of revenue and market 
capitalization. Now I asked the prior panel, is that an 
appropriate way to define or should we do it only on market 
capitalization alone? Should we--how do we redefine that so 
that it makes some sense?
    Mr. Lawrence. The market cap is an important piece. The 
revenue portion and it is true that when a company begins to 
have revenue, it does create more complex financial statements. 
Case in point, we recently went public and we acquired a 
product last year in 2004 and there was a large amount of work 
that went into revenue recognition on this product and how to 
report it on the books. Very detailed, very--intricate 
accounting policies had to be followed.
    So I think that the revenue piece is an important piece 
because it does add a sense of complexity to the financial 
statements and creates another layer of potential accounting 
discrepancies.
    Ms. Kelly. Let me ask another question. I've been sitting 
here thinking, listening. Are we holding the companies liable 
for something that we ought to perhaps because we're talking in 
Section 404 about figures that the accountants have? Perhaps we 
should talk about where the accountants are being held because 
when an accountant goes into a firm, the only way they're going 
to get any information about the firm really is if they've been 
doing it repeatedly and they know the firm very well or 
whatever the firm tells them, that's what they get.
    Should we perhaps be looking at accountancy, along with 
what we're talking about with trying to get some--the whole 
basis for 404 was transparency and the whole idea for 
transparency was to get some honesty out there in the 
marketplace to help an investor be able to invest with all of 
the available information. But perhaps there should be 
something we should be looking at in terms of accountancy with 
relationship to what this Section 404 is demanding of 
companies. I'm asking this of all of the panel.
    I'd like to start with you, Mr. Robotti. Have you thought 
about that? And I'd like to hear your thoughts.
    Mr. Robotti. Accounts play a key role in the total equation 
here and of course, they're driving--I think that's one of the 
problems with 404 is of course, you know their interpretation 
of PCAOB rules are how do you do an internal 404 review is 
what's adding to costs because that's one of the 
recommendations, of course, the committee did make that for 
small companies, not micro companies, so therefore between $700 
million and market cap and over $128 million, that 
qualification would move over time because it's as small as 1 
percent. Those companies would be exempt from the external 
auditor opinion on Section 404.
    My personal experience with one company where I am director 
today and on the audit committee, we just the other day met and 
our internal, our external audit was $100,000 incremental the 
first year and we paid $100,000 to hire a consultant to work 
with us to implement 404 and to put in internal controls and of 
course, there's the time and effort internally.
    The second year, the auditors charging us the same $100,000 
to do the audit, no cost savings the second year. There was a 
100-hour reduction from 580 to 480, but they raised the rates. 
So it's the same price. The external consultant went from 
$100,000 to $30,000 the second year. The external consultant 
clearly was important helping the company organize, demonstrate 
and categorize all of the internal controls that happen and put 
in controls that needed to be done the second year, but became 
more efficient. The external auditor, I don't know what they 
did the first year other than act as the oversight person to 
make sure that the internal work was done. The second year, I 
don't know what they're doing because I just don't understand 
that process. So that's what I'm saying, the implementation of 
404, I think is a problem. I think auditors are a key part of 
the problem.
    An extra reason why you don't need 404 today, the auditors 
kind of run the show because if they say listen, we don't like 
the data you gave us, then you know, we're going to say you've 
got to give us more data and more information. They control 
that relationship today.
    Ms. Kelly. Well, should there be some liability there? I 
don't know----
    Mr. Robotti. There is liability. They're concerned about 
liability. It's what's causing them to over-implement, over-
design 404. That's what's driving that.
    Mr. Beach. Congresswoman, I just wanted to say that I think 
you're on to something important there and we've noticed it 
too. This is not only an intervention into the financial side 
of private businesses and publicly traded companies and so 
forth, but the accounting industry should be in--it should be 
something that you should be concerned about because it was an 
intervention in their industry.
    Good accountancy leads to good information, leads to good 
pricing of companies, leads to a good allocation of resources 
in the economy. So I think accountants are absolutely critical 
to all of this and if we have damaged that industry 
inadvertently, we need to now pay a lot of attention to the 
rectification of that industry.
    Ms. Kelly. Mr. O'Shea.
    Mr. O'Shea. 404, in my view, has cause for two things to 
reinforce what Bob said. It could cause for very tough 
relationships between the auditors and the issuers because the 
auditors are constantly looking over their shoulder and the 
costs, both in monetary and running of the business by the 
issuers has gone up dramatically.
    Additionally, 404 causes the auditors to have to learn a 
lot more about the businesses than they've ever had to in the 
past. They should really be focused on their job which is 
analyzing the financial statements.
    Mr. Lawrence. I think that some additional clarity around 
exactly what the auditing firms need to be doing, separate and 
apart from a financial audit is part of the problem. I'm not 
sure they understand, speaking of liability, where it ends and 
where they're off the hook and where they're not and what they 
need to do and what they don't need to do. So that's part of 
the problem. So basically what they're doing is looking at 
everything.
    Ms. Kelly. Thank you.
    Mr. McHenry. Thank you, Ms. Kelly.
    Mr. Feeney.
    Mr. Feeney. Well, thank you, Mr. Chairman, and in fairness, 
somebody has to speak up for the accountants here. They're not 
here to defend themselves. To the extent the Big Four were 
endowed by Congress, intentionally or unintentionally, with 
control of the marketplace, Pepsi needs an internal auditor and 
an external auditor. Assuming they don't want to hire the same 
two that Coke has already signed up, we have created this 
monopoly rent-seeking opportunity and I don't particularly 
blame the accountants for taking advantage of something that we 
in the SEC and PCAOB have endowed them with. I do think that 
it's one of the problems we haven't talked about here today, 
but that's probably best talked about when we have some folks 
from the accounting industry, both big firms and small firms.
    Mr. Robotti, you control about $300 million of investment, 
your firm does. Do you, as part of your due diligence, when you 
make an investment decision, do you go down and pull a 404 
report and pour over the pages 1 through 480 or whatever?
    Mr. Robotti. There is no external--404 is just a sentence. 
There's no detail, no information.
    Mr. Feeney. OK, but the compilation of that report by the 
external, I mean there is a report that the external auditors 
do, is there not?
    Mr. Robotti. No.
    Mr. Feeney. Well----
    Mr. Robotti. There is no outward available public 
dissemination of information that is the culmination of the 404 
report, other than the opinion of the auditor.
    Mr. Feeney. OK, Mr. Robotti, you indicated in your 
testimony that you think that small companies, given the--they 
were bumping up against this December 16th date and even some 
companies that have complied, I think the way you put it was 
that they have a duty to consider going--a duty to their 
investors, a duty to consider going dark. Does that also 
include maybe a duty to consider going offshore with respect to 
where they list and whether or not they delist? I mean Mr. 
Coulson has a proposal he refers to as DOD that's sort of a 
private regulatory proposal.
    Mr. Robotti. I think all of those things potentially make 
sense. I can see where it is logical for a board of directors 
to decide to register as a public company to trade in the pink 
sheets. The problem with that is that decision is unilaterally 
in the decisions of the board of directors, what to do, and 
then once that's happened how does that company act and how 
does it treat those shareholders who potentially are 
disenfranchised because instead of having all of the 
disclosures and the protections and of course, that's what it 
is. It's the disclosure of information that potentially 
provides investors with the ability to understand that 
something is going wrong and if we were to seek some kind of 
redress whether that's to change the board, whether it's court 
action, if you don't have the information, you can't do that 
and that is unilaterally decided by the management in the board 
today. That's the problem with the process.
    Mr. Feeney. I don't know whether you've read Mr. Coulson's 
testimony, but he's got a private regulatory proposal he thinks 
takes care of some of those.
    Mr. Robotti. But that's a voluntary, on the part of the 
company process. I, as a shareholder, really have no say in 
whether that company--I have a company that just last week 
announced that it's going to deregister with the SEC. IT's an 
ex-New York Stock Exchange company. It will do $700 to $800 in 
revenue and I don't know what they're going to do tomorrow.
    Mr. Feeney. That's true, that's a problem. But as an 
investor going forward, you have a choice when you're choosing 
where to put your money, company A or B, to determine whether 
or not the private regulatory scheme or 404 compliance is a 
better place.
    Mr. Robotti. But I disagree with the fundamental, that 
concept. You are forgetting about every shareholder of those 
companies that currently had invested, when they were a 
reporting company, when they took on that obligation. Now 
suddenly, they're not any more. It's not my new investment of 
capital. It's not the new creation of company giving capital, 
that's a problem, but you've forgotten about the guy who was a 
shareholder who bought in under a presumption that----
    Mr. Feeney. I couldn't agree with you more. We don't have 
any argument at all. It's one of the unintended perverse 
consequences of the way we've implemented Section 404.
    Mr. Beach, you're not an economist, you're a data analyst, 
is that right?
    Mr. Beach. I am an economist, sir.
    Mr. Feeney. You are an economist.
    Mr. Beach. With due apologies.
    Mr. Feeney. I'll ask you your opinion on a big question and 
ask you whether or not we can ever quantify it because you have 
some obvious expertise in the quantification and the scientific 
approach.
    I want to know your opinion whether the cost of SOX 
compliance has resulted in the loss of more jobs and the more 
net value to the American economy than Enron and World Com 
combined, and then I want to know because your methodology, as 
I understood it, is you're going to look at the companies that 
have basically gone dark or delisted or are availing themselves 
of private equity markets where they would have probably stayed 
in the public equity markets. Then you're going to look at the 
inefficiencies and the cost of raising capital and you're going 
to give us a number.
    That method seems to me woefully inadequate to talk about 
the total impact on the economy, because Mr. Lawrence just 
explained that he's got his best and brightest scientists, in 
some cases, spending a good portion of their time instead of 
finding the next cure for multiple sclerosis, they're talking 
to their internal accountants, their external accountants, 
their lawyers and others. So it's almost impossible to quantify 
the loss of opportunity, isn't it and I'll let you answer those 
questions.
    Mr. Beach. With any precision, it certainly is. What we try 
to do in this particular case is go through the following 
exercise. We're taking a lot at what we think is a leading 
industry in this whole debate and that is the venture capital 
industry. That's just one of many and we are saying can we 
isolate the effects of changes in that industry due to Sarb-Ox 
on the cost of capital and several other, Congressman, economic 
concepts. If we can, then I can take those results and move 
them into another model of the U.S. economy which has been used 
for a long, long time by economists, a very good detailed 
model, in fact, I imagine you even used it.
    And from there, we can then say this is the effect of Sarb-
Ox on the economy. Same exercise. Look at Enron, World Com, 
Global Crossing. Did they have that kind of tangible effect on 
these key economic drivers? Move those results into the same 
model and then compare the effects of these companies having 
that increase in cost of capital as opposed to Sarb-Ox. That is 
exactly what we're doing right now in my unit.
    It's a real good economics question. It's a real good data 
analyst question and we will reach a conclusion contrary to the 
old saying that if you lay all economists end to end, they 
never, in fact, reach a conclusion. I think we're very close to 
being able to advise the committee that Sarb-Ox has a long-
reaching and very deep effect on the economy.
    Mr. McHenry. Any further questions from the committee? 
Well, hearing none, I want to thank the panel for taking the 
time to be here and for sharing information. We're going to 
take this back to Washington and as Mr. Feeney said, he already 
has legislation that he has filed. And there's a lot of 
interest growing to make needed reform. So thank you for being 
here today and this includes our Government Reform Committee 
hearing.
    Ms. Kelly. Mr. Chairman, I would like to say I do thank the 
staff from Washington from this committee that came here and 
did all the work to set this up. They did an excellent job.
    Mr. McHenry. Yes.
    [Whereupon, the subcommittee was adjourned.]
    [Additional information submitted for the hearing record 
follows:]
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