Most CFOs won’t forget Alan Beller. He is credited with overseeing the implementation of more than 15 rule-making efforts related to the Sarbanes-Oxley Act, including those requiring certification of the accuracy of financial reports by chief executive officers and chief financial officers. As head of the Securities and Exchange Commission’s Division of Corporate Finance, Beller also oversaw the rule-making that produced the most significant reforms in decades to the securities offering process, and the first comprehensive SEC rules for registration and disclosure for the asset-backed securities market.

In February, Beller decided to return to private industry after serving a little more than four years at the SEC. On August 1, he will rejoin law firm Cleary Gottlieb Steen and Hamilton, where he had been for 25 years prior to his government service. He will be based in the firm’s New York City office and will focus on securities, corporate governance ,and other corporate law matters.

Beller recently spoke with CFO.com about a wide range of critical topics, including the Sarbanes-Oxley Act—including Section 404; the SEC’s proxy access proposal; and the majority vote movement as it relates to the election and ratification of corporate directors. Here’s what Beller had to say.

CFO.com: Why did you decide to leave the SEC earlier this year?

Alan Beller:I actually stayed one to two years longer than I expected to. [Former SEC chairman Harvey] Pitt and I talked about me coming down for two or three years to work on significant reforms of the disclosure system and the securities offering process. [But] the job I had was not the job I accepted. The first two years were dominated by a process that was more reactive than proactive, calming the turmoil at the commission and [in the] markets and implementing Sarbanes-Oxley.

That was a big accomplishment.

One of the things I am most proud of is playing a successful role in [implementing Sarbanes-Oxley].

Do you think Sarbanes-Oxley has been a success?

Except for 404, [the Sarbanes-Oxley Act] has been, on the governance and disclosure side, an absolute unqualified success. It has changed the way CEOs, CFOs, and top management think about disclosure. The biggest thing is—by making CEOs and CFOs certify [to the accuracy of financial statements]—is that with the stroke of a pen you have changed the dynamic of company disclosure. One thing I saw in the 1990s was a suspension of skepticism. SOX brought back healthy, robust skepticism.

Critics of Sarbox cite Section 404—the internal control provision—as being too onerous. Is the criticism legitimate?

I think 404 is a work in progress. The first go around, for a variety of reasons, was too burdensome and way too expensive by any stretch of the imagination. I think the objective of the internal control provision is a good one. A lot of people say internal controls won’t prevent fraud. So get rid of it. I don’t think [Sarbox] was just about fraud. It was triggered by fraud and addresses fraud. But parts are intended to improve the corporate system that goes beyond fraud.

Where will those improvements manifest?

Over time, [Sarbox] will increase the reliability of financial reporting. You can’t argue that’s a bad thing. But, the first-time cost was too high.

Do you agree with the critics who claim that Section 404 was too financially burdensome?

The first-time burden, in terms of management time, in which managers had to worry about 404 instead of strategic decisions, was skewed. [The initial experience] was not as good as it could have been because there was too much focus on counting all of the grains of sand in the ocean, rather than on what was important. [Compliance] was difficult for the biggest companies—those with 60,000 to 70,000 controls [over financial reporting systems].

What will ease the burden going forward?

It is time to amend AS2 (Auditing Standard No. 2).

How will changing the Public Company Accounting Oversight Board’s AS2, which governs the way auditors conduct Section 404 audits, help companies?

The combination of a prescriptive approach and the pressures accountants are operating under—they fear zero tolerance for their faults—has turned AS 2 into a rule that discourages application of judgment, and turned it into a rule that operates below an appropriate level of materiality. Too often it leaves management judgments the sideline, trumped by auditor judgment at times when the auditors should defer to the manager.

In light of the difficulties large companies have complying with Sarbox Section 404, do you think smaller companies should be exempt from 404 requirements?

Let’s start with a statistic. Companies under $75 million in float represent nearly half of public companies or more, but represent 1 percent of the total U.S. public market cap[italization]. Some people have taken that as an invitation to exclude them, but it doesn’t make sense. A real eye opener for me as a director at the SEC was the disproportionate incidence of trouble, of one sort or another, at smaller companies, sometimes rising to the level of fraud. So, to say don’t look at [small companies] is not the right thing to do. On the other hand, a system for small companies [should not be put in place] until you are confident that you have a system that works.

Beyond Sarbox, what other SEC accomplishments are you most proud of?

A couple of things. One was playing a leading role in helping to restore investor confidence, which is part of the agency’s role. It’s not something I expected to be in the middle of. The second thing was the securities offering reform. That’s was a 40-year project and we brought it to an extremely successful conclusion. Also, we wrote the first comprehensive set of rules for registration and disclosure for the asset-backed market. This is something many people don’t focus on because it affects a narrow segment. But, in 2003 or 2004, there was more asset-backed debt than straight corporate debt.

What was your biggest disappointment while a director at the SEC?


The inability to find a solution for the Commission to adopt [its] shareholder access [proposal].

The proposal would have allowed major, long-term shareholders to nominate directors under certain circumstances. Why do you think it received so little support?

[The proposal took] a balanced approach. It was designed to apply only to companies whose shareholders demonstrated very significant dissatisfaction. Triggers were set up, and companies were not subject to the rule unless either a shareholder proposal was adopted, or there was a substantial withheld vote against one or more directors. But it was criticized by the corporate side for a variety of reasons. They feared the possibility ÂÂ… [that] the rule would be divisive in the boardroom. [Some opponents claimed the proposal would] promote special interests; unions and politicians who run public pension funds were mentioned. Also, [opponents] said it would be hard to find directors to serve. On the other side, many said it didn’t go far enough [complaining that the process] took too long. It was a two-step process. Companies really in trouble would be dead by the time the second step took place.

Did you think any of the claims about the shareholder access proposal were valid?

They were all correct, in part. But, the rule was designed to be balanced and cautious. It was a big step. Some people say that the proxy access debate spawned the majority vote movement for electing directors. I agree with that. Both proposals were looked at roughly the same time. I do believe there was a cause and effect. The shareholder access rule did embolden activist shareholders.

Most companies use a plurality system of voting, which discounts “withheld” votes and, at least in theory, allows a director to be elected with only one “yes” vote. But majority vote movement has given shareholders more power in electing directors because it requires, well, a majority of shareholder votes to win an election. What is your opinion of majority vote process?

It’s mostly a state law issue.

Do you have a preference between the so-called Pfizer model of majority voting—which requires a directors who get a majority of “withhold” votes to submit a resignation—and the Intel model—which amends corporate bylaws to require majority voting?


It’s too early to say a single solution will work. I don’t think this movement is mature enough. All of the scenarios are pretty close to brand new. I’m unwilling to put my eggs in one basket. I support what Pfizer did. I know some say it has not gone far enough. Time will tell if it was enough. I also support mandatory shareholder proposals for by-law changes. If enough [stockholders] feel strongly it is the right approach, that’s what they should get.

Job offers for former SEC directors are usually plentiful. What did you think your next job would be after leaving the commission?

It’s interesting, because it ended up being an easy decision, but I spent an awful amount of time [mulling it over]. I had a lot of people expressing an interest in talking to me about what to do next. I spent more than two months working my way through that question. I actually spent the majority of time working through a couple of in-house opportunities at public companies to become general counsel.

Why did you decide to return to Cleary?

I ultimately concluded that [the corporate offers] weren’t quite right for me, today. Five years from now, I might reach a different conclusion. My main mandate [at Cleary] is to work on the hardest transactional and advisory assignments that the firm has related to securities and corporate governance. Such as: How does the audit committee deal with a crisis? How does the compensation committee deal with the new rules? How does a financial institution think about whether to engage in a particular structured transaction? I hope to be counseling corporate leaders and boards in corporate crisis situations, which I learned a lot about at the SEC.

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