Capital Markets

Paulson: Regs Need Cost-Benefit Analysis

Warning of threats to the dynamism of U.S. capital markets, the Treasury Secretary calls for a "rigorous cost-benefit analysis of new regulation."
Helen ShawMarch 13, 2007

In opening remarks at the U.S. Treasury’s conference on capital markets competitiveness, Treasury Secretary Henry Paulson, Jr. called for a reassessment of the current financial regulatory and accounting systems “with a particular eye toward more rigorous cost-benefit analysis of new regulation.”

The event was the latest in a series of reports and roundtables that have questioned whether the regulatory environment in the United States has become too burdensome in recent years.

Regulators, said Paulson, tend to adapt to the changing market by expanding instead of focusing on efficiency — a trend that he obliquely suggested might be harming the global competitiveness of the U.S. capital markets. The U.S., he added, should consider moving to a more principles-based regulatory system “as we see working in other parts of the world.”

Paulson made his remarks before a group that included Securities and Exchange Commission chairman Christopher Cox and former Treasury Secretary Robert Rubin. The goal of the conference was to explore the impact of competition from global capital markets and private pools of capital (including hedge funds) on public U.S. companies.

In addition to his general comments on regulation, Paulson took shots — some veiled, some more direct — at the country’s legal and corporate governance environment, as well as the U.S. accounting profession.

Paulson said that corporate governance should take a principles-based approach. “In my judgment,” he said, “we must rise above a rules-based mindset that asks, ‘Is this legal?’ and adopt a more principles-based approach that asks, ‘Is this right?’” At the same time, however, Paulson suggested that corporate boards were too weighed down by compliance burdens, noting that corporate governance “is a means to an end, not an end in itself.”

He also leveled a more direct shot at the legal profession, challenging the audience to consider whether “our legal system appropriately protects investors or gives too much latitude to unscrupulous lawyers.”

Accounting firms also came in for some implied criticism from Paulson, who questioned the concentration of accounting firms and the sustainability of the accounting industry’s business model. The markets should examine whether the status quo is producing “the high-quality audits and attracting the talented auditors we need,” and whether there is “currently enough competition in the accounting profession.”

While the Treasury Secretary lauded the principles behind the changes implemented since the Sarbanes-Oxley Act, he emphasized the need for a balance that assures investors and allows companies the flexibility to respond to changes in a global economy. “Our markets are, indeed, the best in the world,” said Paulson, “Yet we must be vigilant, and we must do everything we can to ensure they stay that way.”