The 20-Year Experiment Holding Us Back

by Ken Lassman, President & CEO, Competitive Enterprise Institute

In late July the country observed the 20 years since the enactment of the Sarbanes-Oxley Act of 2002. At the time, this “corporate reform” law was the most prescriptive regulatory piece of legislation in history. Sadly, even this ignoble designation was surpassed by the Dodd-Frank Act in 2010.

It was an anniversary, of sorts, though it was not anything to celebrate.

Recently, CEI’s John Berlau and Josh Rutzick explained in The Wall Street Journal that Sarbanes-Oxley, sometimes abbreviated as SOX, has diminished opportunity for the American middle class, concentrated certain industries with just a few owners, and tilted startup funding investments toward a few large cities. Among their conclusions, “Sarbanes-Oxley has permanently altered the landscape of business growth and development.”

Legitimate entrepreneurs and ordinary investors like you are punished by the law’s costly mandates. Before SOX, midsize and even small companies could go to major stock venues for early growth capital. Many retail investors then grew in wealth as the companies succeeded. Home Depot, for example, had just four stores when it went public in 1981. Now, regulations aimed at protecting the public from the misrepresentations of a small number of large companies have had the opposite effect, putting a significant burden on a large number of smaller companies.

CEI challenged the burdens of the law since its introduction and won an important precedent at the Supreme Court against the SOX-created Public Company Accounting Oversight Board. Our team highlights how when companies forgo going public, ordinary investors lose the opportunity to build wealth.

A healthy economy makes social mobility possible and gives everyday Americans the freedom to invest as we choose. A robust financial system is a necessary ingredient and regulations that lock middle-and lower-income people out of the risks that come with financial markets necessarily locks them out of any rewards.

The 20-year experiment has failed. It’s unclear Sarbanes-Oxley did much to prevent fraud. Significantly, it failed to catch the mortgage shenanigans that led to the 2008 financial crisis.

Now, as the economy struggles with inflation and a recession, the benefit of scaling back these never-needed regulations should be apparent to all. ▫