Less than 24 hours after President Bush on Tuesday signed into law regulations to toughen oversight of the U.S. financial system, Washington attorney Warren L. Dennis was receiving e-mail from corporate directors whom he represents.
Within the array of new regulations were some stringent requirements demanding that corporate board members adopt a watchdog role to guard against inappropriate actions by top management - a responsibility that directors had often been pressured to abdicate during the go-go days of the 1990s.
The impact was immediate: Some of the e-mail messages were actually copies of letters the directors had started sending Wednesday to the firms of which they were board members, and were critical of - or even challenged - management decisions.
If the new rules spawn a rebirth in activism by corporate boards, that could help rekindle investor confidence in a financial system tattered by fraud and scandal, insist experts such as Dennis. "It is going to flow down [to investors]," said Dennis, a senior partner and litigation specialist with Proskauer Rose LLP, a law firm based in New York. "It's going to bring the balance back from Wall Street to Main Street."
As important as these new rules of director conduct might be, that's not where the political focus has been. Indeed, despite the long list of the changes the new regulations will bring to the U.S. financial system, most of the attention has been centered on the creation of new oversight for accountants, and the longer jail sentences for those who violated securities regulations.
The proposals for financial-system reform were rolled out with huge fanfare by Congress and labeled by the president as the most crucial financial reforms since those passed during the Great Depression.
While experts generally agree that the symbolic nature of the new rules alone should give consumer and investor confidence a boost, some observers see a few of the pieces as having more bark than bite - since the longest fangs will likely never pierce the flesh of offenders.
"This was something done by Congress just so that they could be seen doing something," said Charles H. Roistacher, a former U.S. prosecutor now in private practice as a defense attorney specializing in white-collar crime, describing the new rules that call for the long jail terms for executives who commit fraud.
Individual pieces of the overall regulations are likely to vary in merit. And with the legislation being signed only last week, other pieces have yet to take form. But once finished, many experts say, these additional guidelines and reforms will combine to form a framework of regulation, oversight and accountability that should temper fraud or shackle offenders with stiffer penalties.
Viewed that way, the overall benefits of the newly passed legislation are clear, said Sen. Paul S. Sarbanes, the Maryland Democrat who chairs the Senate banking committee.
"Two things are at work in this bill," Sarbanes said. "From a judicial standpoint, it establishes punishments and sanctions that punish the 'bad apples' ... obviously you want to punish the bad apples, but you also want to tighten up the system to the extent that you can in order to prevent the bad apples from ever emerging. You can't get 100 percent [success], but the whole financial system had gotten extremely lax."
The reforms "tighten" the financial system in a number of areas, with most of the focus being on large U.S. public companies. The rules require CEOs to vouch for their corporate financial statements and expose them to possible jail terms and fines for intentional deceptions. Securities fraud in general will carry longer maximum sentences.
Under the new laws, accountants for the first time have independent oversight. In most cases, a firm's outside auditors may no longer double as consultants for the same client. And they call for the Securities and Exchange Commission to draft new rules that will govern the conduct of Wall Street analysts.
All in all, "it's a step," said Richard Yamarone, chief economist for Argus Research Corp. in New York. "It comes at a point when consumers are not opening up their financial statements and not watching the evening news."
The desire to escape this period of listlessness has politicians highlighting - and investors focusing on - two parts of the new rules: One has a full set of teeth, while the other may never even get the chance to bite, experts say.
The new accounting-oversight rules are the ones with teeth, and are viewed as both needed and strong.
The regulations call for the formation of a five-member oversight board - appointed by the Securities and Exchange Commission - who in turn will enforce accounting standards.
"I really believe this oversight is going to become very important," said April Klein, associate professor of accounting at New York University's Stern School of Business.
But there are elements of the sentencing guidelines for securities fraud that may lack teeth, however, since some experts see a lot of snarling but little real chance of a CEO feeling the full bite of the law.
In this new era of compliance, CEOs of at least larger public companies must personally vouch for the veracity of their firms' financial statements - with jail time awaiting those who knowingly falsify information. Securities fraud is now a crime with a maximum jail term of 25 years.
The Stern School's Klein and others say there will very likely be many skeptics until a CEO or CFO is actually indicted, convicted and sent to prison for more than just a slap-on-the-wrist jail term. One such skeptic is Roistacher, a partner with the Washington office of the law firm of Powell, Goldstein, Frazer & Murphy LLP.
Roistacher said there was no need to create an entire new legal bureaucracy: There were already laws in place - such as wire fraud and mail fraud - that any good prosecutor could use to pursue and punish securities-laws violators. And even if a CEO or CFO gets convicted, Roistacher said, he finds it "farfetched that anybody [any CEO or CFO] is going to get 20 or 25 years in one of these cases."
The attorney also worries that this new layer of compliance, and the Damocles sword of the new personal guarantees, may have a chilling effect on corporate innovation for the next few years. Executives may avoid the kind of reasonable business risk that is the engine of capitalism.
"In my opinion, it's going to take away a lot of the [reasonable risk-taking] we expect companies to take - and that we all benefit from," Roistacher said.
With all the ballyhoo over the accounting rules and sentencing guidelines, many investors will likely miss spotting the quiet revolution taking place in formerly lax U.S. corporate boardrooms, said Dennis, the Proskauer Rose attorney. "The bark in the bill is not where people think it is," Dennis said.
During recent years, and especially as the stock market was soaring before the bubble burst in early 2000, Dennis said, there was a "peer-pressure" culture that discouraged dissent. Directors who said they didn't understand, or expressed concern about, the increasingly complex accounting maneuvers being used were ridiculed, brow-beaten into agreement or ousted outright, Dennis said.
"I call it the 'emperor's new clothes syndrome,'" he said. "You had the hubris of the big, visionary leader," to which all the directors seemed to yield.
The fallout was significant: Fraudulent finances festered and were kept hidden from outside auditors - until they erupted in scandals that led to huge write-downs and even bankruptcies.
With the new laws, Dennis says, corporate directors who shirk their watchdog duties will be liable. This new scrutiny will be good for companies, Dennis contends.
"It's going to change the culture and expectations of the directors," Dennis said. "When there's something wrong ... they're going to say so."
Whatever shortcomings there might be in the rules, they should help restore investor confidence, said Thomas F. Carpenter, chief economist for ASB Capital Management in Washington. And that's not only U.S investors: Foreign investors pour as much as $500 billion a year into U.S. securities or other types of investments, creating the cheap capital that fuels economic expansion.
"Our audience is the world," Carpenter said.