We must protect them
I get a lot of interesting email, some of it from an active and successful scam watcher. Today, he gets a nod for pointing me toward an interesting article in the op-ed section of TheNew York Times. (Login required.)

Briefly put, it notes the brand-new shift toward less regulatory pressure on U.S. companies, noting "The Justice Department started by saying it would restrict prosecutors in corporate corruption cases. The Securities and Exchange Commission followed a day later by proposing looser auditing standards for thousands of smaller public companies."

"Less," you ask?

Yes, less. After all, a lot of powerful people think America's most precious little ones (corporations) need protection from the excesses of those who have tried to wheel in the corruption that typified the excess of the last big bubble. The usual bogeyman is Sarbox, but, as the Times notes, the efforts seem to have snowballed to include other enforcement.

Short memory
Sounds funny when you think about it, no? The scandals of the last chapter remain fresh. For example, consider the cooked books at Fannie Mae (NYSE:FNM). And we're still knee-deep in a huge number of options-grant backdating scandals, which have roped in companies as varied as UnitedHealth (NYSE:UNH) and Apple (NASDAQ:AAPL).

And if that's not enough, BusinessWeek has a great recent article on how executives seem to be generating market-beating returns, which shouldn't really happen if they're using so-called "prearranged trading" (or 10b5-1) plans the way they were intended. Starting and stopping the trading at will and running multiple plans are just some of the ways execs may have skirted the spirit, if not the letter, of the law. BusinessWeek was eyeballing the fortuitous trading by execs at Red Hat (NASDAQ:RHAT), Broadcom (NASDAQ:BRCM), Openwave (NASDAQ:OPWV), and Netflix (NASDAQ:NFLX), among others. Natch, they declined to comment.

Just when you thought all this was behind us, less than a week ago, TheWall Street Journal hit us with a story on how options exercise dating may have been used at many companies to cheat the tax man. (Why just stick it to investors when you can stick it to them and the tax man -- all with a few strokes of the pen?)

Friends in high places
But Treasury Secretary Hank Paulson and others seem to believe London's 58% share of IPO money for 2006 proves that Wall Street needs a hand. And it wants a pat on the back from the government regulators, or at least a thumbs-up and a promise to go easy on the market's freshest bundles of joy -- newly public companies, which tend to be small and have a tougher time paying up for compliance regulations, or so the sob story goes.

Who needs protection from whom?
But those arguments smack of desperation to this Fool. First of all, corporate profits are already at an all-time high, with profit margins peaking. Clearly, compliance costs aren't putting the brakes on most companies -- nor on executive pay packages, I might add.

And if you want proof that there's not much standing in the way of a Wall Street IPO, even for the most doomed of business plans, you need look no further than Vonage, or our friends at Shutterfly.

Yet we need less oversight? We need to protect these little companies? Against what?

Against the foreigners? (Remember that the apologists for the "don't expense stock options" position also used this argument.) But let's be honest. There may be plenty of other valid reasons for foreign, multinational, or even U.S. companies to list on overseas markets, and even if a lower burden of compliance is one of them, I have trouble seeing that as a bad thing.

What do Hank (a former investment banker, remember) and the rest of the "go easy" crowd prefer? Quality or quantity?

I'm afraid we're getting our answer. And it's the one without the L in it.

That's exactly what I would expect, of course, from a former Goldman Sachs CEO, because, for an investment bank, mo' money in the system means mo' money in their pockets. But I think individual investors need to take a more skeptical line.

Thriving despite the regs
As someone who pays a fair bit of attention to the seedier side of Wall Street and who keeps tabs on dozens of publicly traded money incinerators, along with plenty of outright frauds, I'm amazed that these continue to play out under the nose of regulators. That's why I have major trouble with the notion that small, publicly traded companies need regulators to lay off. If anything, I see a constant need for more enforcement: The serial scams out there not only soak up millions or billions of dollars in capital better deployed at real businesses, but they also stoke investor cynicism, making investors tighter with the wallet -- again, deploying capital inefficiently.

If small companies don't like it, hey, good luck overseas! With cross-ocean markets consolidating and information technology racing ahead, we individual investors can get many overseas shares on our own, and more global liquidity is coming along all the time, at levels accessible to small fry like us.

And if tender, youngling companies don't feel like playing by the rules of our public markets, there's a simple solution: Stay private. Or sell out to some of the trillions in hedge fund and private equity money that's out there desperate for a good idea. There are plenty of ways to raise money these days that don't involve pushing stubs onto Ma and Pa Oddlot. But of course, that means less of that lucrative investment banking biz.

That's why I see these latest arguments as red herrings. Loosening regulation to fight off those pesky foreigners always sounds great. U-S-A! U-S-A! Who wouldn't support that?

Well, maybe someone Foolish enough to take a look at the biggest beneficiaries of such a policy: investment bankers.

Foolish bottom line
If Paulson wants to push deregulation that will fatten the already-fat wallets of his former colleagues on Wall Street, I'm not surprised -- and maybe not even appalled. But individual investors need to keep their eyes open and make sure they're not heading back to the future, where the regulators simply don't have the time and resources to make sure that companies aren't out there Enron-ing it up. Too little regulation will not only ensure amazing scandals down the road -- it will make for less efficient markets, and greater risk for individual investors.

But since when have bankers on Wall Street (or bankers-turned-bureaucrats) been overly interested in that?

At the time of publication, Seth Jayson had no positions in any company mentioned here. View his stock holdings and Fool profile here. Fannie Mae and UnitedHealth are Motley Fool Inside Value recommendations. UnitedHealth and Netflix are Stock Advisor recommendations. Openwave is a Rule Breakers recommendation. Fool rules are here.