How Independent Was the Committee on Capital Markets Regulation?

Yesterday, a report was released detailing the ways in which recent regulation may have harmed the ability of U.S. firms to compete with foreign firms. Here's a typical account:

Panel Urges Relaxing Rules For Oversight, Greg Ip, Kara Scannell, and Deborah Solomon, WSJ: A blue-ribbon committee on financial regulation has called for better protection of auditors, company employees and outside directors from authorities and lawsuits, as well as less-detailed rule-making and lower-key investigations.

The Committee on Capital Markets Regulation's report, to be released publicly today, is one of the most high-profile efforts to date to address concerns that excessive regulation -- much of it a response to recent corporate scandals -- is adding to corporate costs, stifling the public securities markets and causing the U.S. markets to lose business to foreign competitors.

"The United States is losing its leading competitive position," the 148-page report says. One reason is "the growth of U.S. regulatory compliance costs and liability risk." ...

The report makes 32 recommendations, of which six relate to easing the application of Section 404 of the 2002 Sarbanes-Oxley Act governing internal company-financial controls. The SEC already plans to present new guidance on section 404 on Dec. 13. Companies have complained that the section is expensive and onerous to implement.

Other recommendations call for setting a higher bar for regulators or private litigants to go after outside auditors, independent directors and company employees, especially when they act in good faith. It also recommends Congress cap auditors' liabilities, as some European countries do. ...

I haven't had the time to study these proposals yet, so I can't say a lot about them (please comment if you can help here). However, typical of this administration, it pays to find out who is behind the report to expose potential biases:

Report on Corporate Rules Is Assailed, by Carrie Johnson, Washington Post: Investor groups sounded alarms yesterday after it emerged that a foundation with ties to a pair of well-heeled business donors and an executive battling civil charges had funded a controversial new report seeking to slash corporate regulation.

The Committee on Capital Markets Regulation, which argues that U.S. markets are suffering under overzealous enforcement and unwieldy rules, said it received $500,000 in financial support from the C.V. Starr Foundation. The charity has longstanding ties to Maurice R. "Hank" Greenberg, the former American International Group chief who was ousted from his post last year and is contesting civil charges filed by the New York attorney general.

Two committee members, Wilbur L. Ross Jr., a private investor, and Citadel Investment Group manager Kenneth C. Griffin, contributed "a few hundred thousand dollars" more, Ross said in an interview. The panel was formed this year with support from Treasury Secretary Henry M. Paulson Jr., a former chairman of the Wall Street firm Goldman Sachs.

The lengthy report released yesterday recommended that businesses and boards of directors get increased protection from private lawsuits. Panel members also urged Congress to curtail the power of state officials to charge financial and audit firms with crimes. Businesses should face criminal charges only as a "last resort," the study says.

Consumer advocates seized on the issue to question the study's conclusions and the motives of the panel's members, who include top executives from some of the nation's largest accounting and investment firms as well as people with close ties to the Bush administration. ...

The group's 32 recommendations include rethinking the mission of the Securities and Exchange Commission to make it less antagonistic to business... SEC commissioner Roel Campos, a Democrat, warned yesterday that rolling back a system of regulation that has protected U.S. investors for decades could have profound and costly consequences if it went too far. ...

Barbara Roper, director of investor protection at the Consumer Federation of America, went even further, asserting that the capital markets group had preordained its conclusions and carefully selected statistics to make its case that more companies were listing their stocks on foreign markets because of burdensome U.S. rules.

"You could take every single step on their list, and when you were done, you would have done nothing to reverse recent trends, and in the meantime you would have made it significantly more difficult to hold corporate criminals accountable for their crimes," Roper said.

R. Glenn Hubbard, the former leader of President Bush's Council of Economic Advisers who co-chaired the capital markets panel, told reporters that "this commission was entirely independent of any donor." ...

The members of the capital markets committee were tilted more toward industry rather than investor advocates. "Where are the people who represent institutional and individual investors?" said Duke University securities law professor James D. Cox. "I see this as a very pro-executive position, well intentioned but misguided."...

Update: Brad DeLong's sidebar says this is worth reading:

Summers Challenges Paulson Campaign, WSJ Washington Wire: Larry Summers, the former Clinton Treasury secretary, challenges the campaign led by today’s Treasury secretary, Henry Paulson, to ease up on regulation to help U.S. financial markets and Wall Street firms do better in global competition, particularly with London. Responding to this week’s report by the private-sector Committee on Capital Markets Regulation, Summers tells The Wall Street Journal: “Some of the specific suggestions are valuable, but the approach goes wrong in focusing so heavily on competitiveness when there is also much that needs to be done to better protect investors and assure the integrity of those who oversee and manage America’s largest corporations.”

“I hope the Bush administration,” he adds, “will focus as intensely on helping the American manufacturing, American agriculture and American health-care industries as it is on this particular aspect of financial services.”

New York Governor-elect (and current Attorney General) Spitzer blasted the report. “The logic of their argument and the facts they rely upon are wrong,” Spitzer says. Moreover, the proposals seek to reign in state prosecutors who pursue fraud and who stepped in “when the SEC was doing nothing.”