BUSINESS
03/18/2010 05:12 am ET | Updated May 25, 2011

Democrat Beaten Back In Effort To Add Loophole to Investor Protection Bill

A Congressional committee temporarily killed an amendment Wednesday that would have exempted four out of five publicly-traded companies from a post-Enron requirement that they obtain annual external audits.

Rep. John Adler, a Democrat from New Jersey, had attempted to amend the Investor Protection Act of 2009 -- a bill designed to beef up investor protection -- by adding a provision that would have undermined the Sarbanes-Oxley Act, the 2002 law designed to increase investor confidence that was enacted after accounting scandals at Enron and WorldCom rocked investors. The law was supposed to improve the accuracy, reliability, and transparency of corporate financial reporting by requiring firms to audit their financial statements and internal controls.

Adler, a member of the pro-business New Democrat Coalition, had proposed to exempt publicly-traded firms with market capitalization less than $700 million from a provision of Sarbanes-Oxley mandating an external audit of the firm, as first reported Monday by the Huffington Post. In essence, 83 percent of public companies would not be required to get a second opinion on how they're protecting themselves internally against fraud and abuse.

Consumer advocates and investor groups said that the proposed exemption would have severely undercut protection for investors and increase the chances of financial fraud.

During a debate on the amendment, Adler argued that the requirement that companies get an external audit is too burdensome. "We've chased companies out of this country," he argued. Adler says companies are choosing other countries in which to list their stock, as opposed to doing it in the U.S.

Consumer advocates and investor groups say Adler's argument is specious, and point out that one such destination -- London -- "attracts listings by exempting foreign companies from its combined code of corporate governance," says Barbara Roper, director of investor protection at the Consumer Federation of America.

Adler also said that the cost of getting an external audit is too high for some companies. In reference to the cost of regulation, House Financial Services Committee Chairman Barney Frank (D-Mass.) said during the debate: "There's a greater cost to none."

"Tougher investor protection is pro-market," Frank said, undercutting Adler's points.

The amendment was defeated by a voice vote during the committee's markup of the overall bill. A final roll call vote is expected later Wednesday.