A group of prominent executives and academics called for changes to the Sarbanes-Oxley Act that they say is driving companies away from the U.S. markets.

The Committee on Capital Markets Regulation, led by former White House Economic Adviser Glenn Hubbard and former Goldman Sachs Group Inc. President John Thornton, says Congress should exempt companies with market values of less than $75 million from Sarbanes-Oxley audit requirements unless costs are brought in line with benefits. The group also says the Justice Department should pursue corporate criminal indictments only as a last resort.

"Firms must choose to come to the United States: they do not have to come," the group said in an advance copy of the 135- page report. "It is the committee's view that in the shift of regulatory intensity, balance has been lost to the competitive disadvantage of U.S. financial markets."

Treasury Secretary Henry Paulson told the Economic Club of New York on Thursday that the domestic capital markets "face significant challenges." He has been waiting for the report as he prepares meetings next year to examine the U.S. accounting and legal systems. Paulson has questioned whether laws like Sarbanes- Oxley, passed in the wake of corporate scandals, went too far.

Former SEC Commissioner Harvey Goldschmid said the group's recommendations would diminish the authority of federal and state regulators to ensure corporate managers act in the best interests of shareholders. "The recent drive for accountability and deterrence would be replaced by a world where almost anything goes," he said.

Sarbanes-Oxley

Members of Congress have said they are concerned the U.S. may lose its status as the world's top financial center because of costs stemming from the Sarbanes-Oxley Act.

House Financial Services Committee Chairman Michael Oxley and Senator Paul Sarbanes, a Maryland Democrat, drafted the law in 2002 after accounting scams at Enron Corp. and WorldCom Inc. cost investors about $65 billion, according to government estimates and shareholder lawsuits.

Sarbanes-Oxley requires outside auditors to evaluate the procedures companies have in place to ensure accurate financial statements. Critics say accountants have interpreted the provision too stringently, driving up compliance fees and prompting companies to take initial public offerings overseas.

Cost of Regulation

Representative Barney Frank, a Massachusetts Democrat poised to replace Oxley in January, says he supports easing the law's costs. Representative Nancy Pelosi, a California Democrat who will become House Speaker, has said she wants to reduce burdens on small companies.

U.S. companies paid $4.36 million on average to comply with Sarbanes-Oxley in 2004, the group said.

To ensure that regulation doesn't become too expensive in the future, the group suggested the SEC periodically review its rules to make sure benefits exceed costs.

The capital markets committee says it doesn't want to emasculate Sarbanes-Oxley, which it says has "significantly strengthened the financial reporting and governance processes for public companies." In addition to tightening accounting rules, the law stiffened penalties for corporate fraud and requires top executives to certify that company books are accurate.

To prompt overseas companies to sell shares in the U.S. and prevent domestic firms from going elsewhere, the Justice Department should stipulate that it will only pursue criminal prosecutions in instances of "pervasive culpability throughout all offices and ranks."

Class-Action Lawsuits

Charles Niemeier, a member of the Public Accounting Oversight Board, said in an interview that regulators are already working to resolve most of the committee's concerns about Sarbanes-Oxley by revising audit standards to save companies time and money.

SEC Commissioner Roel Campos, a Democrat, said in an interview that securities regulations give U.S. markets advantages over foreign rivals by boosting investor confidence.

"Foreign investors tell me every day that they invest billions of dollars in the U.S. because they feel that our system protects capital and minority shareholders better than anywhere else in the world," Campos said.

Civil litigation presents another problem. U.S. settlements from class-action lawsuits soared to $3.5 billion in 2005 from $150 million 10 years earlier, the group said. The risk of litigation has prompted insurers to charge U.S. firms six times as much as they do European companies for coverage protecting executives and directors from lawsuits.

Congress

The committee said Congress should limit liability for accountants by "preventing damage awards against audit firms and their employees at a level that could destroy a firm." U.S. financial markets couldn't sustain the demise of another accounting firm after Arthur Andersen LLP went out of business following its indictment for aiding Enron's fraud, the group said.

The SEC should shield independent directors from shareholder lawsuits when board members can show decisions were based on "good-faith reliance on an audited financial statement," the report said. Such a change would encourage more people to serve on public boards.

The group's effort is a "landmark in the drive to keep America's capital markets competitive in the global economy" that will help the public understand "the challenges American capital markets face," said former U.S. Commerce secretary Donald Evans, now chief executive officer of the Financial Services Forum, a Washington trade group.

Investor Concern

The Council of Institutional Investors, a Washington group representing 140 pension funds with more than $3 trillion in assets, "disagrees strongly" with the committee's recommendations.

"We believe many of the panel's recommendations, if adopted, would undermine the effectiveness of market watchdogs and weaken critical investor protections," the group said in a statement.

There is no guarantee regulators will take up the committee's recommendations. Democrats, considered less friendly to business, will take control of Congress in January and similar suggestions have been rejected before, said Damon Silvers, associate general counsel of the AFL-CIO labor federation.

Former SEC Chairman Arthur Levitt said the report's recommendations may hamper the SEC's ability to police the securities markets. Any attempt to further delay Sarbanes-Oxley requirements for smaller companies would be particularly harmful to investors, Levitt said in an interview. Levitt is a board member of Bloomberg LP, the parent of Bloomberg News.

"We can't afford to slow down the SEC," Levitt said.