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Pay-Discrimination Bill Coming to Vote

Human Resource Executive Online from July 24, 2007

The U.S. House is expected to pass legislation this week that will reverse a Supreme Court decision in the Lilly Ledbetter case that related to when a lawsuit seeking back pay must be filed. The law, opposed by business groups, will face a tougher battle in the Senate.

By Stephen Barlas

Expected House passage of a bill this week making it easier for employees to sue companies for pay discrimination will send the issue to the Senate where the bill may falter as other labor-backed bills have run aground.

Business groups are hoping that will be the case with the Lilly Ledbetter Fair Pay Act, which reverses a May 30 U.S. Supreme Court decision that ruled a former Goodyear Tire and Rubber Co. manager waited too long to sue for back pay, which she said was due to gender-based pay discrimination.

In its 5-4 ruling, the court's majority said that employees who claim unfair treatment in pay and bonuses based on gender or race must do so within 180 days of the original discriminatory action -- not within 180 days of their last paychecks.

The proposed law would reverse that, by allowing workers to file suit within 180 days of their last paychecks. It would also not require a worker who has already filed charges to keep filing new charges with each new paycheck.

Mike Eastman, executive director of labor policy for the U.S. Chamber of Commerce in Washington, says it is his understanding the Ledbetter bill will go to the House floor the week of July 23. The bill, strongly backed by the AFL-CIO and other Democratic interest groups, is likely to pass.

Eastman says he has been told that Sen. Edward Kennedy, D-Mass., chairman of the Senate Health, Education, Labor and Pensions Committee, will introduce the Ledbetter bill in the Senate, but not before August recess. Laura Capps, Kennedy's press spokesman, did not respond to an e-mail.

Craig Orfield, spokesman for Sen. Mike Enzi, R-Ohio, the top Republican on the HELP Committee, emphasizes Enzi would oppose the Ledbetter bill. "We view this as another vague and overreaching bill which will have a very hard time getting through the Senate," Orfield says.

The most recent pro-labor bill sent by the House to the Senate was the Employee Free Choice Act. It would have allowed the National Labor Relations Board to certify a union in a workplace if a majority of workers signed a card asking for union representation. There would not have to be an election.

The House passed that bill by 241-185 on March 1. But when it came up for a vote on the Senate floor on June 26, Democrats were able to get only 51 votes, short of the 60 needed to shut off debate and go to a vote.

The Supreme Court's decision in the Ledbetter case made it much easier for employers to defend against Title VII workplace-discrimination litigation -- specifically when the decisions about salary, raises and other pay-related issues were made a long time ago.

Ledbetter, a manager at a Goodyear plant in Gadsden, Ala., who worked at the plant from 1979 to 1998, brought the case in 1999. She claimed she was paid 15 percent to 40 percent less than male peers.

The House Education and Labor Committee passed the bill by a party-line vote of 25-20 on June 27.

In a letter to Committee Chairman Rep. George Miller, D-Calif., on June 27, a coalition of business groups wrote that the bill "virtually eliminates any time limitations for claims of employment discrimination. In doing so, the legislation invites stale claims and frivolous litigation when unwarranted litigation is already an issue under current discrimination laws."

"In fact, the Equal Employment Opportunity Commission reported that it found reasonable cause in only 5.3 percent of the over 75,000 charges of discrimination that it received in FY 2006 and found absolutely no cause for discrimination in over 60 percent of the charges (amounting to 45,500 "no cause" charges)," the group wrote.

A case of highway robbery?

From July 16, 2007 Financial Week

With complaints from environmentalists, truckers and small business groups, two congressmen want to put the brakes on private financing of state roads

By Stephen Barlas

Congress’ Remedy for Post-marketing Woes

June 2007 Pharmacy & Therapeutics Journal

When the Food and Drug Administration (FDA) approved
Merck’s quadrivalent human papillomavirus vaccine (Gardasil)
on June 8, 2006, the agency extracted some post-approval commitments
from the company, as it frequently does when it
“green-lights” an important new drug around which questions
still revolve. Those commitments involved additional testing of
Gardasil after it went on the market, particularly in
girls 11 to 12 years of age. Only a small number of
girls in this age group had participated in Merck’s
clinical trials, and these trials were submitted as
evidence of the drug’s efficacy and safety. That
patient population would loom large in the months
after the FDA’s approval as Merck mounted a political
campaign to convince states to require the vaccination
for sixth-grade girls.

However, the post-approval studies that Merck
agreed to perform would not start before June 2009,
if then. That short-term safety surveillance study is
set up to follow 44,000 vaccinated subjects for just 60 days to
monitor visits to hospital emergency departments and for six
months to monitor chronic problems such as autoimmune
disorders, rheumatologic conditions, and thyroiditis. Merck
must include a “sufficient” number of children (ages 11 to 12),
although no number is specified in the FDA’s charge to the
company.

Other companies that have committed to similar postapproval
studies have dragged their feet and, in some instances,
have simply ignored the FDA. The FDA has no authority to force
a company to complete a study. Even when a study is finished
and the FDA receives the data, there is no guarantee that the
results—if they are in any way disquieting—will prompt a suitable
reaction on the part of the agency, such as immediately
requiring new labeling or, in more serious instances, pulling the
drug from the market.

In the past few years, a number of unfortunate instances, particularly
the rofecoxib (Vioxx, Merck) fiasco, have shown that
it is easy for the FDA, because of shortcomings in the data, as
well as because of bureaucratic malaise and communication
gaps, to miss credible warning signs of drugs “gone wild,” producing
numerous adverse reactions.

During the past couple of years, these and other potential
problems have been highlighted, first by the U.S. Government
Accountability Office (GAO) and later by the Institute of Medicine
(IOM), whose report was requested by the FDA.1 Both the
IOM and the GAO cite the failure of drug companies to complete
post-marketing studies on time; they also cite the FDA’s lack of
authority to compel timely completion.

Serious limitations also afflict the FDA’s MedWatch system,
which catalogues reports of adverse drug events (ADEs). Moreover,
even when troublesome signs appear after a drug is on the
market, that evidence might not be available to the FDA’s Office
of Surveillance and Epidemiology (OSE), formerly
known as the Office of Drug Safety (ODS). The
OSE is set up to ensure that post-marketing problems
receive quick attention. It is subservient to
the FDA’s Office of New Drugs (OND), which has
considerably more stature within the Center for
Drug Evaluation and Research (CDER) and which
has sometimes been criticized for turning a blind
eye to emerging evidence of late-blooming safety
questions about new drugs.

Sheila Burke, MPA, RN, Chair of the IOM committee
whose members wrote its report, says:2
We found an imbalance in the regulatory attention and resources
available before and after approval. Staff and resources devoted to preapproval
functions are substantially greater. Regulatory authority
that is well defined and robust before approval diminishes after a drug
is introduced to the market. Few high-quality studies are conducted
after approval, and the data are generally quite limited.

These weaknesses explain why post-marketing surveillance
of drugs is the marquee issue as a major FDA reform bill sashays
(or, more appropriately, staggers) down the red carpet of the
Congress to the White House—because senators tussled over
multiple amendments when that bill, the Prescription Drug
User Fee Act (PDUFA) Reauthorization (S. 1082), came to the
Senate floor this past May. Controversial amendments involving
drug importation and the approval of follow-on copies of biotechnology
drugs were removed from the PDUFA bill. However,
although there were pitched battles over the provisions in
another amendment, the FDA Revitalization Act, sponsored by
Senator Edward Kennedy (D-Mass.), there was no question
that the post-marketing reforms in the Kennedy bill would be
included in the final PDUFA bill, and they were. However, those
post-marketing changes were not nearly as far-reaching as
Senator Charles Grassley (R-Iowa) had wanted; he had also
sponsored a competing FDA post-marketing reform bill.

The House of Representatives is likely to adopt the provisions

of the Senate’s bill on post-marketing surveillance, and the
bill will probably be sent on to President Bush to sign; he says
that his signature will be forthcoming. But before we look at
these changes in the Senate bill, it is necessary to outline the
problems they aim to resolve.

The FDA’s MedWatch system is the agency’s first line of
defense against a newly approved drug whose side effects,
whether or not they have been acknowledged in clinical trials,
cast a much darker shadow than previously thought. Physicians,
pharmacists, patients, and drug companies send in
reports of adverse reactions as the drug begins to be used and
potential problems become evident. But even the FDA has
admitted the system’s shortcomings. In a November 2006
speech, Scott Gottlieb, MD, Deputy Commissioner for Medical
and Scientific affairs at the FDA, acknowledged that MedWatch
is a valuable tool but “we know that it is not being used as effectively
as it ought to be.”3

The FDA and other agencies go by this general rule: for
every 10 adverse reactions reported, only one report is submitted
to the FDA. Of course, even that minimal number of reports
can be useful.

An example is Sanofi-Pasteur’s Menactra, a vaccine designed
to prevent bacterial meningitis. The FDA approved that vaccine
on the basis of clinical trials involving 7,000 children, none
of whom had contracted Guillain-Barré syndrome (GBS), a
neurological disorder. But lo and behold, when the drug reached
the market, reports of GBS developing in the children after
inoculation with Menactra began to filter in to the Vaccine
Adverse Events Reporting System (VAERS). VAERS is the
Center for Biologics Evaluation and Research’s version of
MedWatch.

Initially, there were only five reports. The FDA decided not
to change Menactra’s labeling, because those five reactions
were expected to be the norm with the introduction of a new vaccine.
At the time, however, the FDA noted that ADEs associated
with the vaccine were not always being reported and that there
might be additional cases that the agency might not be aware
of.

When Caroline Loew, PhD, Senior Vice President of Scientific
and Regulatory Affairs at the Pharmaceutical Research and
Manufacturers of America (PhRMA), appeared before a House
committee in May 2007, she gave a more expansive analysis of
MedWatch’s flaws:4
One of the shortcomings of this system is the variable nature of
reporting and the quality of reports. Ultimately, any database is only
as good as the underlying data, and one of the chief difficulties with
adverse event report databases is quality. Precious resources are
often expended in contacting health care professionals regarding
aspects of a report they have filed. In many instances, the reporter
is unable or unwilling to provide sufficient detail for analysis.

The FDA has been moving on its own to address this problem.
At the start of 2007, the agency announced steps it would
take with the extra $90 million it expects to receive in fiscal 2008
from the higher PDUFA fees that Congress is in the process of
authorizing.

One step would be to publish a request for proposals from
outside research organizations that would assist in determining
the best way to maximize the public health benefits associated
with collecting and reporting serious and non-serious ADEs
throughout a product’s life cycle.
Central to addressing this question are:
• determining the number and type of safety concerns
discovered by collecting the reports of ADEs.
• the age of products at the time safety concerns are detected
by the collection of ADEs.
• the types of actions that are taken next to protect patient
safety.

In early March, the agency took the next step by sponsoring
a public meeting to explore opportunities for linking postmarketing
monitoring systems in the private and public sectors
to create a virtual integrated, interoperable nationwide medical
product safety network. Such a “sentinel network” could integrate
existing and planned private and public sector databases
to enable the collection, analysis, and dissemination of safety
information about medical products to health care professionals
and patients at the point of care; that would be in the
clinic, where this information is needed to make informed
decisions about safe and effective treatments.

One of the Kennedy provisions in the FDA Revitalization Act
essentially seconds the FDA’s motion toward a sentinel network.
It authorizes a public and private partnership to establish
a routine active monitoring system that would create a “pool” of
relevant data assembled from federal and private electronic
databases of the health care population. This apparently would
be a complement to—or even a rival to—MedWatch. According
to the Kennedy bill, the data pool would have to have 25 million
patients swimming it by January 1, 2009, and 100 million patients
by January 1, 2012.

Although Senator Judd Gregg (R-N.H.) backed a competing
bill called the Safer Data bill, he agrees with Senator Kennedy’s
challenge to the FDA that it set up an active surveillance system.
However, he claims that the Kennedy timetable is too leisurely:5
I strongly support this in concept but feel the language needs to be
strengthened to ensure that the FDA has the direction it needs to
implement a robust system in an expedited timeframe. Information
collected must be standardized, and the overall system should be
validated.

Despite Senator Gregg’s criticism, it is difficult to see how the
FDA could assemble a pool of 25 million electronic health
records (EHRs) on Kennedy’s timetable, much less on a faster
one. There are 85 million Medicare and Medicaid recipients, but
neither of those two federal systems has mandated that physicians
produce EHRs. In the private sector, Kaiser Permanente
has been the leader in developing EHRs, and it now has them
for half of its 8.5 million patients, according to Paul Wallace, MD,
Medical Director of Health and Productivity Management Programs
at the organization.

The Kennedy proposal, which the House will probably accept,
does nothing to correct MedWatch’s debilities. It simply layers
a new early warning system based on EHRs on top of Med-
Watch. However, a second Kennedy proposal promises a better
benefit in the near term.

Another element in the Kennedy-sponsored FDA Revitalization
Act allows the FDA to order drug companies to prepare Risk
Evaluation and Mitigation Strategies (REMSs) for new drugs;
this might go a long way toward completing post-marketing
studies more quickly.

There is no question that drug companies have fiddled with
completing these studies, which explains why nearly everyone
in Congress is livid. The FDA itself has acknowledged that drug
companies decline to perform a significant percentage of the
post-marketing studies requested.

The agency’s own statistics for 2006 show that drug companies
failed to initiate more than 70% of post-marketing studies
that they committed to performing during that year; 899 of
the 1,259 post-marketing studies (71%) promised had not begun
as of September 30, 2006. This was an increase of 5% over fiscal
year 2005. When that report first came out, Representative Rosa
DeLauro (D-Conn.), Chairman of the House Appropriations
subcommittee, which approves the FDA’s annual budget, said:6
This report clearly demonstrates that drug companies do not intend
to keep these promises and that drug companies are taking advantage
of FDA’s lack of authority to require these studies.
However, PhRMA’s Dr. Loew has a different take on the
numbers:4

While it is true that 71% of open commitments are considered ‘pending,’
these ‘pending’ studies are in the preparatory phase of clinical
trial development during which the protocol is drafted and submitted
to FDA, IRB approval is obtained and the sponsor begins
recruiting clinical investigators. If sponsors simply failed to initiate
such studies, the studies would be coded as ‘delayed’ rather than
‘pending.’ However, only 3% of open studies are considered to be
‘delayed.’

No one disputes the value of post-marketing studies. Nothing
bears out their worth better than the pediatric studies performed
by drug companies in order to get an extra six months
of marketing exclusivity, which the Best Pharmaceuticals for
Children Act (BPCA) grants them.

For example, a 2007 GAO report about this act showed that
about 87% of the drugs that were granted pediatric exclusivity
under BPCA required labeling changes—often because the pediatric
drug studies found that children might have been exposed
to ineffective drugs, ineffective dosing, overdosing, or previously
unknown side effects.

And no one disputes the fact that the FDA does not have the
authority to compel drug companies to complete studies. The
Kennedy bill changes that by allowing the FDA to force companies
to accept REMSs when it approves a new drug. A REMS
could require that a company conduct post-approval studies, such
as a prospective or retrospective observational study, or even a
clinical trial, if a study was thought to be an insufficient means of
assessing a signal of a serious risk or of identifying an unexpected
serious risk. In addition, for the first time, the FDA would
be able to issue civil fines of up to $250,000 for not meeting a study
deadline, with the amount of the penalty doubling every 30 days,
up to a total of $2 million—figures that Senator Grassley insisted
be increased from the $10,000 and the $1 million levels in
the Kennedy bill. The Senate agreed by a strong majority.
However, by a narrow vote of 46–47, Senator Grassley failed
to establish a separate safety office within the CDER that would
have equal standing to the OND. Both the IOM and the GAO
highlighted the institutional weakness of the OSE, which at the
time of the GAO report was called the Office of Drug Safety
(ODS).

The GAO report from March 2006 described the OSE as subservient
to the OND. When the GAO finished its report, the
office had had eight different directors in the previous 10 years.
The GAO said that the ODS’s Division of Drug Risk Evaluation
was responsible for culling data on adverse drug reactions from
MedWatch and for making recommendations to the OND. However,
the “new drug folks” did not always listen closely to that
advice, and they even barred ODS staff members from appearing
before FDA advisory committees when those committees
were meeting to recommend the approval of new drugs and handle
other matters.

Equally disconcerting was another GAO finding: even when
the ODS made recommendations to the OND, no one at the
ODS stayed abreast of that particular problem to see how events
played out.

Steven Galson, MD, MPH, Director of the CDER, has
attempted to at least partially correct those bureaucratic disconnects
by elevating the OSE to report directly to him, instead
of through the OND. In addition, he established a new position
of Associate Center Director for Safety Policy and Communication
to focus on developing and implementing broad drug safety
and communication policies. Senator Grassley wanted to go
further by setting up a separate drug safety office on a par with
the OND, but the Senate rejected that approach. The Kennedy
bill does not address the OND/OSE imbalance at all.
However, a second Kennedy bill, called the Enhancing Drug
Safety and Innovation Act, which was also included in the
PDUFA reauthorization, attempts to broaden the flow of clinical
trial data into the FDA’s hands. It sets up a new national FDAadministered
clinical trials registry and requires that all clinical
trials supporting applications for drug approval, as well as all clinical
trials conducted with federal funding, be included in that registry.
When Senator Kennedy introduced this act on the Senate
floor, he explained the need for this new FDA registry by referring
to results from clinical trials on selective serotonin reuptake
inhibitor (SSRI) antidepressants, which have been linked to
suicide in teenagers.

He noted, “Tragically, such information was not adequately
available.”

However, all sorts of caveats are in the bill, allowing the Secretary
of Health and Human Services (DHHS) to waive reporting
requirements. (The FDA is part of the U.S. DHHS.)
Moreover, although it is difficult to argue with the [rationale]
for requiring quicker publication of clinical trial data, it is important
to keep in mind the limitations of that data. When she
appeared before the House Energy and Commerce Committee
on May 9, Marcia Crosse, Director of Health Care Issues for the
GAO, explained:7

Clinical trials typically have too few enrolled patients to detect serious
adverse events associated with a drug that occur relatively infrequently
in the population being studied. They are usually carried
out on homogen[e]ous populations of patients that will actually take
the drugs. For example, they do not often include those who have
other medical problems or take other medications. In addition, clinical
trials are often too short in duration to identify adverse events that
may occur only after long use of the drug. This is particularly impor-
tant for drugs used to treat chronic conditions where patients are
taking the medications for the long term.

Given the major problems that the FDA has had in recognizing
the initial warning signs of questionable safety and efficacy
associated with some new drugs, maybe it is too much to ask
that Congress fix those problems in one fell swoop. Certainly,
giving the FDA the authority to fine companies who miss deadlines
for post-marketing studies gives the agency important
new leverage. And the clinical trials registry can’t hurt. But to
the extent that the OSE remains a weak cousin within the agency
and to the extent that the MedWatch system remains as leaky
as a New Orleans levee in the wake of Hurricane Katrina, it is
likely that a new Vioxx-type situation will occur, perhaps sooner
rather than later.

Cox´ s Balancing Act

July 2007 Financial Executive

SEC Chairman Christopher Cox came in with a reputation as a business advocate. But his job is a complicated one, and he seems to be taking a cautious approach that aims at finding a middle ground between the interests of business and investors.

Christopher Cox entered the small hearing room on the fourth floor of the Russell Senate Office Building and walked the 50 blue-carpeted feet to the mahogany witness table without stopping to schmooze. It was Wednesday, April 18, at 10 a.m. on the dot, the starting time for the hearing on how the U.S. Securities and Exchange Commission, which Cox chairs, and the Public Company Accounting Oversight Board (PCAOB) are whittling down their compliance yardsticks on the Sarbanes-Oxley Act to make them more small business-friendly.

Cox sat down, opened a thick white binder and proceeded to scratch notes with a felt-tipped pen. Senator John Kerry (D-Mass.), chairman of the Small Business and Entrepreneurship Committee, and the other members had been delayed by a Senate floor vote. Cox rarely picked up his head, except when someone came over and interrupted his furious scribbling. He occasionally looked over and exchanged pleasantries with Mark Olson, the PCAOB chairman, who was sitting to his left, both of them facing the empty, horseshoe-shaped senators’ dais, draped in blood-red cloth.

Cox’s brown hair was slicked down like a newly paved road, and he was neatly barbered; in contrast, Olson’s hair was a little wild, with stray grey hairs curling up from his scalp. When the hearing started, Cox delivered a very thorough, almost intricate opening statement; but his voice could barely be heard three rows back, even with him speaking into a microphone. After Olson delivered his shorter statement, the questioning by Kerry and his colleagues began. Olson fielded the majority of the queries. When Cox weighed in, it was with staccato answers.

The performance was vintage Cox. The former California congressman, who served in the House for 17 years before taking the SEC job in August 2005, has always had a reputation as a guy who keeps his answers short and sweet, and his head down. “He is a student and intellectual of sorts,” says Bob Livingston, who served briefly as Republican Speaker of the House during the latter parts of Cox’s tenure. “But he is reserved. He is not your stereotypical back-slapping politician.”

Reputation for Accomplishment

Nonetheless, Cox, 54, had a reputation in Congress for getting things done. He led efforts to pass the Private Securities Litigation Reform Act of 1995, and was a key mover behind the Internet Tax Freedom Act of 1998. He left Congress as chairman of the House Committee on Homeland Security, in addition to his position as chairman of the House Republican Policy Committee, the number five spot in the GOP House leadership.

Cox’s pre-congressional professional life, as well as his tenure on Capitol Hill, prepared him particularly well for the SEC chairmanship. From 1978 to 1986, he specialized in venture capital and corporate finance with the international law firm of Latham & Watkins, where he was the partner in charge of the corporate department in Orange County, Calif., and a member of the firm’s national management. In the House, he served on the House Financial Services Committee when it approved Sarbanes-Oxley.

Certainly, Cox’s corporate finance background more than qualified him for the SEC chairmanship. But in selecting him, the Bush White House was looking for something more than a subject expert. President Bush wanted someone who could assuage the jangled nerves of the GOP’s business and Wall Street constituencies, whom Cox’s predecessor, William Donaldson, had annoyed, mostly with his interest in shareholder access issues.

Tom Lehner, director of public policy for the Business Roundtable, the lobby for Fortune 100 CEOs, calls Donaldson’s shareholder access proposal “very convoluted.” He adds, “It collapsed of its own weight.” But Lehner says his group didn’t push for Donaldson’s removal and continued to meet with him, including two days prior to his announcement that he was departing the commission.

Aside from calming the corporate waters, Cox was seen as a politically adept consensus-seeker who could also dial down the heat from newly empowered investor and consumer groups, the once-98-pound weaklings, who were beginning to throw their weight around.

Joseph Borg, president of the North American Security Administrators Association (NASAA) and director of the Alabama Securities Commission, says the initial reaction to Cox’s nomination in the investor protection community — given his leading role in passage of the 1995 securities reform legislation — was “uh-oh.”

He explains, “We thought he was going to be someone who does what Wall Street wants. But we were wrong in the past on other people, and we were wrong this time on him.”

Borg says he has had more meetings with Cox than he had in the 12 years prior to Cox’s ascension with all of Cox’s predecessors. “I would describe him as ‘business charming,’” explains Borg. “He is a good listener.” Borg says Cox has supported the NASAA on a number of initiatives having to do with protecting the assets of senior citizens. “But we don’t agree with him on everything,” Borg adds.

Neither does the U.S. Chamber of Commerce, to say the least. While Cox hasn’t been the big bad wolf that investor and consumer groups expected, neither has he been the wing man business was hoping for. “He is a guy who is interested in balance,” explains David Chavern, chief operating officer and senior vice president, U.S. Chamber of Commerce. “There are some things we are happy about, some things we are not happy about.”

The Accent on Balance

Balanced. That is the adjective that comes up frequently when people describe Cox. He was appointed by a Republican president but faces a Democratic Congress. He rides herd over two commissioners who are Republicans and two who are Democrats. He faces pressure from businesses to reduce the costs of complying with SEC rules, such as Sarbanes-Oxley Section 404’s internal control provisions, even as investor protection groups are pressing him to keep those rules sacrosanct.

In part because he was appointed to be a conciliating caretaker, and in part because of the very narrow political space he has to maneuver in, Cox has proposed no major regulatory initiatives — and probably no minor ones, either, if truth be told. What he has seized upon is eXtensible Business Reporting Language (XBRL), a mechanism for “tagging” and reporting financial data, which Cox has described as “interactive data” that can easily be shared with investors.

More than anyone, Cox has driven the effort to popularize the use of XBRL, but the jury is still very much out; many CFOs and other financial executives have questioned its value to them, and the SEC’s voluntary program had attracted only about 40 U.S. companies by mid-spring.

Cox has more or less played out hands Donaldson dealt him, whether on executive compensation, Sarbanes-Oxley or other issues. His record as a finisher, though, has been seen as wanting in some quarters. That’s perhaps not unexpected, given the fact that he has hugged the median on many issues, tiptoeing unsteadily between political traffic coming fast and furious from different directions.

Cox’s attempt to satisfy everyone runs the risk, of course, of satisfying no one. That has certainly been the sense some observers have with regard to his efforts to write management guidance for companies complying with Section 404 of Sarbanes-Oxley, which explains how they are to assess their internal controls and how they are to report on that assessment. Not only do companies have to worry about how well they assess their controls, they also have to worry about paying outside auditors to peer over their shoulders and write an auditor’s report based on the PCAOB’s Auditing Standard 5 (AS5, outlined in May, updates AS2).

Companies, particularly smaller ones, have complained loudly since the Section 404 requirement went into effect about the costs charged by outside auditors, complaints that rang loudly long before Cox arrived at the SEC. In response, Cox established an Advisory Committee on Smaller Public Companies that issued recommendations in 2006. He and Olson followed up in December 2006 by announcing proposed changes to AS2 — the new AS5 — and the first draft of the SEC’s new management guidance.

When Cox appeared before Kerry’s Senate committee on April 18, he said the Advisory Committee report “has informed many of the solutions that we are now preparing to put into effect.” Yet, the management guidance the SEC issued on May 23 doesn’t remotely look like what the Advisory Committee proposed.

The key recommendation made by the Advisory Committee was that the SEC should adopt a “scaled” version of Section 404 for micro-cap and small-cap companies — the committee sets financial requirements for both categories — and exempt them from 404 in the meantime, while that system is being developed. The SEC recommended none of that. Nor did it accept the advice of the Committee on Capital Markets Regulation, which was appointed by Treasury Secretary Henry Paulson.

Hal S. Scott, a Harvard professor and director of the committee, says, “We did recommend that before applying ‘revised’ SOX 404 (both the SEC’s and PCAOB’s revisions) to small companies that a thorough cost-benefit analysis be done with respect to small companies. From what Cox has said, he plans to go ahead without this. We would disagree with that approach.”

Kerry has also piled on, saying, “I am concerned that the SEC has provided no assurances that the new internal controls rules will actually reduce costs for small public companies because they have not yet completed the required Regulatory Flexibility Act review of the rule.”

Concern over Materiality

And while Cox emphasized at a May 23 press conference that the final guidance and AS5 would help companies of all sizes, not just small companies, business groups sound skeptical. For example, the SEC’s and PCAOB’s definition of materiality in their December proposals caused some heartburn, which the final guidance did not ease.

Scott complains, “It does not appear that the SEC has defined ‘materiality’ with any precision — certainly the PCAOB has not, in its proposed revision of AS5. We believe that without a quantitative definition — we suggested 5 percent of pre-tax income — the costs of 404 will not go down enough.”

Michael J. Ryan Jr., executive director and senior vice president at the Center for Capital Markets Competitiveness, U.S. Chamber of Commerce, applauds the SEC and PCAOB for issuing more principles-based guidance. “However, the question remains: will it be enough?” he asks.

“The answer depends first on the clarity of the SEC’s guidance and how it is interpreted by the SEC, PCAOB, public companies and audit firms. In the end, the policy-makers in Washington can say all the right things, but what will matter to companies and their shareholders is how this will play out in the field. Only time will truly tell.”

While Olson did most of the talking at the April 18 hearing, he is clearly a junior partner, given the fact that the SEC must approve all PCAOB standards. Cox has made that clear, most recently at an SEC board meeting in early April where the commission voted 5-0 to authorize its staff to harmonize its management guidance with AS5 in four distinct areas.

Their harmonization efforts leading up to publication of their separate proposals last December hadn’t been a rousing success, and that may not change, given Olson’s handling at the April SEC board meeting where Olson talked about the PCAOB’s intentions.

Cox was polite that day. But one Washington insider described the reaction of PCAOB staffers as “outraged” because they felt Olson “was stepped all over, but in a nice way so that no one in the press picked it up.” This person adds, “Chairman Olson’s comments were ignored. They weren’t part of the debate that morning.”

Asked whether PCAOB staffers felt that he was mishandled at that SEC meeting, Olson answers, “I wouldn’t characterize it that way. I didn’t feel that way.”

While dousing the fires from 404 has been perhaps Cox’s biggest challenge, XBRL, as noted earlier, has been his biggest initiative. One month before he appeared before Kerry’s committee, Cox had journeyed to the other side of Capitol Hill to explain his fiscal 2008 budget request to a House Appropriations subcommittee.

The biggest chunk of his statement was devoted to XBRL, an initiative launched by Bill Donaldson, but one Cox has embraced with a bear hug. XBRL is seen as a way for corporations to reduce reporting costs and for shareholders to more easily obtain information on a company’s performance, and to benchmark it against others’.

To kick-start the process, the SEC in January 2006 established a voluntary program in which companies could submit tagged data in exchange for the SEC giving them an expedited review of the registration statements and annual reports. “The best way for filers to understand how interactive data works is to participate in the voluntary program,” Cox said in announcing the program.

Cox admitted to the House Appropriations subcommittee on financial services and general government in late March, however, that only 40 or so companies were participating in the voluntary program. Microsoft Corp. is one of them. Taylor Hawes, controller, finance operations at Microsoft, has been an outspoken advocate of XBRL. “Chairman Cox is doing a good job and will be remembered for his leadership on this,” says Hawes, “but he has to keep a close eye on some policy challenges.”

Cox has delegated to an organization called XBRL U.S. the responsibility for making key policy decisions, such as how individual industries characterize their revenue. Microsoft, for example, could simply report its total revenue, or it could break it down into software versus other product sales, or break down software sales into component areas, or even into Xbox versus Play Station. Deciding how to tag that revenue is vital if investors are going to be able to compare Microsoft’s performance to Oracle Corp.’s, for example.

However, Microsoft and General Electric Co. are the only two preparers participating in XBRL U.S.’s efforts to establish these kinds of “policies.” Cox told the Senate Appropriations Committee that he expects the “taxonomies” that underlie tagging to be completed this year, but without greater participation by the corporate community, say Hawes and Mike Willis, a partner at PricewaterhouseCoopers and founding chairman of XBRL International, that simply will not happen.

A far larger and thornier issue for the corporate community is frustration over highly complex and arcane accounting standards. Cox has referred in the past to the “all-out war on accounting complexity” he is waging, and blamed the opacity of Financial Accounting Standard Board (FASB) standards for most of the accounting errors companies make.

For example, when he appeared before the House Financial Services Committee in May 2006, he said his first step would be to “re-address specific accounting standards that do not provide the most relevant and comparable financial information. Examples of standards in need of reworking for this reason include consolidations policy, certain off-balance sheet transactions, performance reporting and revenue recognition.”

A year later, FASB had done very little in any of those areas. One SEC staffer, who was not authorized to speak on the record, explains that what Cox meant, but did not say, was that he hoped FASB would get something done on those four standards “within five to 10 years.” Given the very deliberate pace of FASB standard-setting, and its current round of joint projects with the International Accounting Standards Board, that’s probably not an unrealistic time frame.

In contrast, the SEC published a proposed rule in four months on the Credit Rating Agency Reform Act (CRARA), which President Bush signed in September 2006. The purpose of that new law — which Cox in his testimony to the House Appropriations subcommittee said gave his agency a “significant new responsibility” — is to give corporate CFOs some choices beyond Moody’s and Standard & Poor’s when it comes time to get their corporate debt rated.

Set aside for the moment the fact that the SEC’s proposed rule managed to tick off both Moody’s and Fitch, one of the little guys the law was designed to help. But at least Cox used the whip on his own horse.

Better on Reporting Reforms

Turning back to accounting, it isn’t clear whether Cox himself thinks principles-based accounting is a good idea or whether he is marching to a tune fiddled by Treasury Secretary Paulson. Nor is it clear whether a Democratic Congress and possibly a Democratic administration would allow this notion to move forward.

Cox has had a better record on financial reporting reform than standards reform. About the new rules on executive compensation reporting the SEC published in the summer of 2006, FASB member Donald Young says, “He did a good job on that.”

Investor groups such as the Council of Institutional Investors agree. The new rules seemed, at least at first, to satisfy both users and preparers of financial statements. The rules require companies to report a “total” figure — one number — for all annual compensation, including perquisites. For the first time, all compensation for the past year to board members would be fully disclosed in a supposedly easy-to-read table.

In addition, companies must include a new Compensation Discussion and Analysis section, replacing the Compensation Committee Report, which was viewed by the SEC and others, according to the SEC press release announcing the changes, as so much “boilerplate.”

But as companies started to file proxies under the new executive compensation reporting rules, Cox has been lamenting the shortcomings of the rule he lauded last August. Cox told the 2007 Corporate Counsel Institute on March 8, “We’re seeing examples of over-lawyering that are leading to 30- and 40-page-long executive compensation sections in proxy statements. This kind of slavish adherence to boilerplate disclosure is what we’re trying to stamp out.”

“As Chairman Cox and other SEC staffers have already noted, more tweaks in the SEC’s rules may be required to elicit the types of disclosures [being] sought,” says Broc Romanek, editor of CompensationStandards.com. “One area of contention is that there is not sufficient analysis in the disclosures for shareholders to fully comprehend how boards devise CEO’s pay packages.”

Cox presumably has another year and a half to not only tweak the executive compensation rules, but to finalize other simmering issues that were already on the SEC’s front burner when he was appointed. No one questions his efforts, or underestimates the political challenges he faces. If he continues his balanced approach, his tenure is apt not to leave a bad taste in one’s mouth — or a particularly memorable one, either.

And, it will likely be his last meaningful role in Washington. Cox said in an interview with Bloomberg this spring that his tenure at the SEC will mark the end of his career in public service. “I’ve run for office plenty often enough,” Cox said.

Stephen Barlas (sbarlas@verizon.net) is a freelance writer who has covered developments in Washington, D.C., for 25 years. His profile of Rep. Barney Frank appeared in the March issue.

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