Playing by the Rules
The cost of compliance is extremely high. The SIA estimates that the financial services industry alone spends in excess of $25 billion on compliance. That's quite a lot of money being spent just to play by the rules. And once Reg NMS gets into full swing, you can expect costs to continue to rise.
Reg NMS aside, most of the recent commentary points to Sarbanes-Oxley as the No. 1 culprit for high costs, as it forces companies to invest in new technology and processes. Despite the costs, though, most people feel that the benefits of the law -- no hidden expenses, legitimate earnings reports -- are worth the price. Plus, many organizations concede that SOX has forced them to update older business processes, which has resulted in greater efficiency, accuracy and accountability.
Anytime a company improves efficiency, it can't be a bad thing. Still, the price tag seems steep. But now a growing number of voices is calling for a slimming down, if you will, of SOX's reach, arguing that smaller companies cannot afford the compliance price tag. Estimates are that companies with a $1 billion or more market capitalization spend 3 percent to 5 percent of their revenues on SOX -- a drop in the revenue bucket. Smaller companies, however, are forced to spend a greater percentage of revenues to meet the compliance demands, according to a report from the Government Accountability Office. Delistings of smaller public companies are up since 2003 (the year SOX went into effect), although it is hard to quantify how many companies went private just because of SOX.
Some of the smaller financial services firms may be able to take some solace from the recent comments from SEC Chairman Christopher Cox, who has said that while SOX is a good idea, it sometimes hasn't been put into practice effectively and that he was open to the idea of changing portions of the regulation.
That could bring regulatory relief to many smaller companies, which then could invest their capital in new technologies to pursue business opportunities. But just as time heals all wounds, it also causes many to forget. When all is said and done, the daily front-page headlines from the Enron trial should serve as a reminder to all investors -- despite your feelings on SOX -- that the markets are better served by strong oversight so investors can feel confident about a public company. There probably are ways to reduce the compliance price tag without weakening SOX, but the choice between high compliance costs or a skittish investment market should be an easy choice for most Wall Street executives.
Greg MacSweeney is editorial director of InformationWeek Financial Services, whose brands include Wall Street & Technology, Bank Systems & Technology, Advanced Trading, and Insurance & Technology. View Full Bio
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