Do you believe in miracles? This season, a DC district court judge may just deliver one by calling Sarbanes Oxley unconstitutional.

This year as you toast the holidays, snifter of single malt in hand, let me propose a bit of tactful free-market remonstration to accompany your holiday cheer.

While admiring your “…stockings hung by the fire with care,” make a little wish and visualize reams of compliance paperwork ablaze from coast to coast. Picture New Year IPOs incubating, snug in their beds… This year when you hang your stocking, visualize hanging SOX.

The most dramatic example of knee-jerk regulation in modern market history, Sarbanes Oxley was Congress’s rapid response to the accounting scandals at Enron and WorldCom. But, in reality, SOX is a poorly drafted, onerous quagmire of compliance that has cost the US economy over a trillion dollars and pushed deals away from Wall Street to the friendlier shores of London and Hong Kong. SOX has caused more economic damage than it’s prevented.

The Committee on Capital Markets Regulation (the latest to supply the SEC with a SOX impact report) estimated the average cost per company for SOX compliance at $4.36 million. Since it’s inception in 2002, SOX has put visions of jail in the minds of CEOs, created a whole new compliance industry and is, itself, as UBS SVP of Investments, G. Stuart Spence, Jr. put it, “one of the best government-sponsored outsourcings of [investment banking] jobs I have ever seen.”

Though the SEC has taken heat for the documentation costs required by auditors, hopes for a wolf-guarding-the-henhouse enforcement policy were recently dashed with SEC Chairman Cox’s recent endorsement of an “efficient,” “top down, risk based,” “scale and tailor” testing compromise. In these days of carrots and sticks, his comments were a baby carrot at best. “Efficient” – this SOX can never be. As is, many smaller companies will continue to register overseas, remain private or de-list.

Given the new Congress, I’m not holding my breath for legislative reform, but there is a small chance that the oft dreaded third pillar of regulation, the judicial system, will bestow upon us the best Christmas present of all because, to add insult to injury, SOX may have been unlawful the whole time.

This month a DC district court judge will hear arguments that PCAOB, the Public Company Accounting Oversight Board and SOX’s enforcer, is unconstitutional.

As officers of the United States, PCAOB members must be appointed by the President with the advice and consent (approval) of the Senate. Instead they are appointed by the SEC, as a committee. The plaintiffs argue that this selection process violates the Constitution’s appointments clause.

The government argues PCAOB members are lesser officials not subject to that procedure -- an interesting argument given that members pay themselves more than the President makes himself -- around $450,000 a year. The fact that they set their own spending and the fact that Congress has no budgetary power over them suggests not only their seniority but that they possess the spending powers of Congress itself.

SOX may also violate another constitutional no-no: the separation of powers into three branches of government with checks and balances over the others. PCAOB has far-reaching legislative powers reserved for Congress yet is not subject to congressional oversight.

Despite the fact that SOX’s ultimate fate is months, if not years away, this hearing could be the beginning of the end. If PCAOB is found unconstitutional, SOX itself is at risk because it was so poorly drafted its authors left it without a severability clause to protect its remaining provisions. In layman’s terms: it’s all or nothing. Imagine the lost deals. In a world market warmed by global opportunity, SOX’s chilling effect has iced the US playing field for three and a half years. Therefore let me propose a new “out with the old, in with the new” year-end tradition: Instead of the usual stockings by the fire, this year let’s hang SOX, and raise a glass to new market opportunities in ‘07.

If you believe in Christmas magic, as you hang your “sox,” make a little wish to Judge James Robertson. You’re never too old to hope for a real Christmas miracle.

Heather Flick

12/20/06