Advisory Committee on Tax Exempt and Government Entities (ACT ...

The Appropriate Role Of The Internal Revenue Service With Respect To Tax-Exempt Organization Good Governance IssuesAPPENDIX 2. FOR-PROFIT CORPORATE GOVERNANCEA. Enron, Sarbanes-Oxley and For-Profit GovernanceCorporate governance “best practices” in the nonprofit sector today borrow heavily fromthe for-profit world. 159 The history of regulation, and the pressure for greater selfregulation,in both sectors ebbs and flows, emerging most strongly in the face of publicindignation over abuses and crises, real or perceived, and the belief—or at least hope—that imposing additional “safeguards” can forestall similar occurrences in the future. 160In fact, it is virtually tautological that a significant failure by an organization is a failure ofgovernance.The enactment of groundbreaking federal securities laws often was prompted byprofound failure or crisis: 161• The passage of the Securities Act of 1933 162 (the first general federal law toregulate the issuance of securities, requiring among other things that certainissuers of securities file registration statements with the Federal TradeCommission and provide a prospectus with specified information to investorsand prohibiting misrepresentations and other fraud in the sale of securities)and the Securities Exchange Act of 1934 (the first federal law to regulate thetrading of securities, it created the Securities and Exchange Commission,gave the SEC the power to regulate the securities’ exchanges and prohibitedinsider trading and a number of other trading practice schemes) werepossible only because of the public’s loss of confidence in the public marketsafter the stock market crash of 1929 and the Great Depression.• The enactment of the Public Utility Holding Company Act (which gave theSEC power to limit the size and organization of utility holding companies) in1935 was the direct result of unfair practices by gas and electric companies,including excessive rates, self-dealing and unreliable service that hurtconsumers and investors.159See, e.g., supra notes 40, 42-43, and 47 and accompanying text.160Of course, as today, resources and politics play an important role in the extent to which Congress and regulators decide to adopt“reforms” and/or aggressively enforce existing rules and regulations. Thus, for example, in 1955, the SEC was faced with suchsevere staffing shortages that it issued a memorandum encouraging its regional offices to rely upon state authorities to investigateand prosecute securities cases. Its resulting ineffectiveness was the subject of criticism by the press (see, e.g., Time Magazine,Protection for Investors: The SEC is Unequal to the Job, July 16, 1956,http://www.time.com/time/magazine/article/0,9171,936723,00.html) and then Congress (see, e.g., Report of the House SelectSubcommittee on Legislative Oversight, H.R.Rep. No. 2711, 86th Cong., 1st Sess. (1959)) for failing to aggressively prosecutecases, particularly cases against large firms, and for failing to uncover the breadth of illegal activity by the American Stock Exchange(“AMEX”) when it brought an administrative action against a number of members of the AMEX, resulting in relatively light penalties.In 1961, a report requested by President Kennedy on federal regulatory agencies, including the SEC, emphasized the importance ofadequate personnel and resulted in increased staffing for the SEC. See http://www.sechistorical.org/museum/timeline/index.php.161See generally, http://www.sec.gov/about/whatwedo.shtml; http://www.sechistorical.org/museum/timeline/index.php;http://www.fuqua.duke.edu/conference/dei/nyse/docs/cautious_evolution_or_perennial_irresolution.pdf .162Despite the cataclysmic events that produced these laws, Wall Street protested the passage of the Securities Act of 1933 byrefusing to bring new stock issues to the market in 1933. http://www.sechistorical.org/museum/timeline/index.php.ADVISORY COMMITTEE ON TAX EXEMPT AND GOVERNMENT ENTITIES (ACT) June 11, 2008 79