auded by some as one of "Washington's feistiest think tanks" and criticized by others as a "quasi-libertarian, well-funded front for corporations opposed to safety and environmental regulations," the Competitive Enterprise Institute recently opened the Center for Entrepreneurship specifically to make waves in the financial services realm.

The CEI is a nonprofit public policy think tank and advocacy group. Its objective is to limit governmental regulation of private enterprise, which it believes costs the nation $1.127 trillion annually.

Founded by Fred L. Smith Jr. in 1984, the CEI's basic assumption is that consumers are best helped by a free marketplace, not by government regulation of commercial interests.

Though the issues it addresses are complex, its mission is simple: to lower regulatory barriers to entrepreneurial innovation.

Since its founding in 1984, the CEI has grown into a $3 million institution with over 20 employees. It has been funded by Exxon Mobil Corp., Ford Motor Co., the American Petroleum Institute, Cigna Corp., Dow Chemical Co., EBCO Corp., Philip Morris USA and General Motors Corp., among other large corporations.

Blasting barriers everywhere

Most of the CEI's early efforts concerned regulatory barriers that affect the oil and gas, chemical, tobacco, biotech, agricultural, pharmaceutical, and automobile industries. It also opposes the concept that a global-warming crisis exists. Now, the CEI is going head-to-head with financial regulations like the Sarbanes-Oxley Act, also known as the Public Company Accounting Reform and Investor Protection Act of 2002.

In the spring of 2005, the CEI called on Congress and President Bush to repeal Sarbanes-Oxley in its entirety. "To deal with the problem of a few big-business bad apples, Congress created a web of costs and mandates that are shackling innovation," Smith said. "These rules disproportionately hurt the innovative entrepreneurs who run small public companies."

(For more information on how Sarbanes-Oxley affects our industry, see "Perspectives on SOX and payment processing," The Green Sheet, Feb. 27, 2006, issue 06:02:02.)

In August 2006, the CEI launched the Center for Entrepreneurship to address regulations affecting the financial services industry. "Financial markets are a critical and neglected part of our free-enterprise system," Smith said. "The Center will study how financial regulations - from securities laws, such as Sarbanes-Oxley, to banking rules - impede entrepreneurs in attracting investors and capital."

Strong center, strong leader

The CEI said the Center poses a crucial question: If entrepreneurs like Bill Gates, Sam Walton, or eBay's Meg Whitman were starting out today, what barriers would they face in raising capital and growing their businesses?

According to the CEI Web site, the Center "will look at the increasingly burdensome mandates in the area [of] securities law, such as Sarbanes-Oxley and accounting rules. It will also study innovations in financial markets to capital formation for small businesses, and whether public policy is hindering those innovations."

John Berlau, a CEI fellow in economic policy and former financial journalist, is serving as the Center's Director.

"As an analyst, John has a deep understanding of the problems now handicapping the financial market," Smith said in a prepared statement. "As a former journalist, he will be uniquely able to translate that understanding to decision makers and the general public. Under John's leadership, we are confident the Center will make a significant contribution to economic reform."

Berlau is the author of Eco-Freaks: Environmentalism Is Hazardous to Your Health, a book slated for release this month by publisher Nelson Current. He was also a staff writer at Insight magazine, a publication (no longer in print, but still online) described as "the conservative Newsweek."

The National Press Club awarded Berlau its 2002 Sandy Hume Memorial Award for Excellence in Political Journalism for his series in Insight about the conflicts of interest of now-former IRS commissioner Charles Rossotti. Berlau was also a Washington correspondent for Investor's Business Daily.

Berlau's Op-Ed pieces about financial services topics have also appeared in a number of newspapers. For example, in "Credit card ricochet" (The Washington Times, the sister publication of Insight, Sept. 17, 2006), he asserted that government control of interchange fees could harm innovation in the U.S. economy.

He has also argued that the Sarbanes-Oxley Act goes against a 30-year trend of general economic deregulation and is clearly a threat to overall economic vitality.

The nuts and bolts

The CEI issues press releases and policy papers, testifies at governmental hearings and instigates lawsuits against various governmental agencies. Staffers also create Web sites; make media appearances; place editorial and Op-Ed pieces, open letters, and paid advertising in the media; and publish books to "advance the principles of free enterprise and limited government."

CEI's Web site states, "We are nationally recognized as a leading voice on a broad range of regulatory issues - from free-market approaches to environmental policy, to antitrust and technology policy, to risk regulation.

"But CEI is not a traditional think tank. We frequently produce groundbreaking research on regulatory issues, but our work does not stop there. It is not enough to simply identify and articulate solutions to public policy problems; it is also necessary to defend and promote those solutions at all phases of the public policy debate."

Berlau said the Center will do much the same, focusing on securities, accounting and financial services regulations. "The federal government has created a lot of barriers to today's entrepreneurs, and we thought there should be a center to look closely at that - to see how these regulations could hinder, or help, entrepreneurs who are starting or building their businesses."

Data security scrutiny

One of the Center's immediate goals is to overhaul Sarbanes-Oxley. "Home Depot's co-founder Bernie Marcus has said that if Sarbanes-Oxley was in place in 1975, Home Depot could not have gone public - and they couldn't have grown the way they have," Berlau said. "It makes you wonder, Is the next Home Depot being held back? And I think it is, to an extent."

Other issues the Center hopes to address include the importance of hedge funds to the market, possible data security requirements, and stock option expensing and valuation issues. Regarding data security, Berlau said the government "needs to be very careful not to create a one-size-fits-all policy, which would not only hurt businesses, but could make it easier to crack, since everyone will be doing the same thing."

Berlau also thinks stock options have been under assault because of abuses, but they are a valuable tool for innovative but cashless companies to expand and lure employees.

"Mandated expensing rules that force startup companies to estimate a future-based value of employee stock options, combined with Sarbanes-Oxley's expensive mandates requiring audits of broadly defined internal controls, can make it difficult for companies to go public and raise capital," Berlau said. "We shouldn't punish companies for using stock options; that kind of dynamism is what makes America great."

Down with interchange regulation

The CEI and the Center also oppose interchange regulation. "Government control of interchange fees could harm innovation in the dynamic U.S. economy," Berlau said. "Many small businesses use credit cards in lieu of loans to finance equipment and supply purchases. If these startup entrepreneurs had to pay substantially more for this option, many couldn't get their businesses off the ground."

(Interestingly, the CEI accepts donations through its Web site via PayPal, not Visa- or MasterCard-branded credit cards.)

According to Berlau, the Center's role is to educate policymakers and the media - as well as entrepreneurs themselves - on the issues that could interfere with entrepreneurs' ability to start or grow their businesses. It also wants to expose the true costs of government regulation.

Berlau said the Center plays a vital role in smoothing impediments to entrepreneurship. "Regulations that hinder or act as barriers to entrepreneurs are counterproductive," he said. "If unnecessary rules prevent businessmen and women from launching their innovations, America's economy will stagnate."

Do government regulations play a positive role in financial services, or are they impediments to be dispensed with? Would regulation of interchange be a good thing, or would it come back to bite the hands of the ISOs and merchant level salespeople who fuel the industry?

The CEI and the Center for Entrepreneurship have made their positions crystal clear. Time will tell whether it's their voices or those of others that Congress will heed in the coming year.