1) Regulatory costs are generally invisible to the average shareholder and consumer and thus much harder to identify the true cost of these actions; 2) Regulatory bureaucracies have been armed with free reign to regulate following the corporate scandals in 2002 and show no sign of letting up; 3) New regulations have created new constituencies which benefit from these regulations and will vigorously lobby to keep the regulations in place; and 4) Lack of political will to reign in the regulatory growth indicates this process will continue into the next few years.

The surge of regulatory costs over the past few years has had a pronounced effect on financial markets which is stifling economic growth. Companies are being forced to divert resources away from new investment just to comply with the surge of new regulations. In fact, from 1981-1999 regulatory costs were reduced from 25 percent of market capitalization to just 5 percent. The lower regulatory burden unlocked capital funding for companies to make investments, hire workers, increases wages and lower costs to consumers thus growing the economy.

Coupled with lower taxes and less federal spending as percentages of the economy, it is quite apparent the three variables combined played a role in the creation of $17 trillion of shareholder wealth (inflation adjusted) during this time period. Shareholder wealth increased an average of 12 percent per year during this time.

Yet, the regulatory burden doubled from 1999-2002 from 5 percent to 10 percent of market capitalization, a clear drain on economy. Moreover, the burden has only been reduced slightly and ended 2005 at 8 percent of market capitalization.

The prime culprit is Sarbanes-Oxley designed to clamp down on wrong doing by corporate leaders. The problem, however, was that out of the more than 13,000 companies reporting to the Securities and Exchange Commission, less than 20 companies were found to be fudging numbers.

Instead of stepping up enforcement efforts, the new legislation placed an onerous burden on productive companies, which has forced them to waste productive resources monitoring their activities rather than spending on new investment and job creation. The new internal controls being forced on companies have been found to use up 35,000 hours of internal manpower and to increase compliance costs for large companies by $4.6 million.

The burden has become so severe that a new paradigm in corporate finance is taking place in which companies are going private. As the chart below from International Strategy and Investment Group demonstrates the number of companies going private jumped significantly as Sarbanes-Oxley was implemented, largely small publicly traded companies which could not afford the new costs. And this process has continued, actually accelerating since 2004.

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