This week Senator Schumer and Mayor Bloomberg have commendably directed our attention to the danger that New York and America may be losing their competitiveness in the capital markets arena. As with last year’s report by the Committee on Capital Markets Regulation, much of the blame for the current decline and the apparent refusal of foreign companies to list their stock in American markets is assigned to the Sarbanes-Oxley Act.

Though the report does address securities litigation, the press coverage gives the impression that post-Enron reform has singlehandedly driven investors away from Wall Street. That’s a misimpression.

As someone who has consulted in the production of these documents, if only marginally, I think it is important to emphasize that Sarbanes-Oxley is not the key problem. For both the public and reformers, the emphasis should rather be on two things: acknowledging the importance of globalization and reining in litigation that harms investors rather than benefiting them.

Consider, for starters, the Sarbanes-Oxley problem. The principal provision in Sarbanes-Oxley that significantly increases costs is Section 404. The Securities and Exchange Commission has already released new proposals to downsize the requirements of the section, and once implemented, these should substantially ease the problem. This week the senator and the mayor suggested further liberalization of Sarbanes-Oxley by proposing that non-American companies and smaller American companies be permitted to opt out of some of its onerous components. In other words, this is a problem on its way to solution.

But to say the whole story is a “Sox story” is misleading. Sure, initial public offerings in America are declining as a share of the world’s IPOs, but that has been happening since 1996. As an accounting regulator, Charles Niemier, has noted, the American share of IPOs fell to 8% from 60% between 1996 and 2001, a year when Ken Lay was still viewed as a national hero.

Some of the pressure here is that of globalization. The reality is that many more Chinese want to invest than in the past, and they are happy to trade on exchanges close to home that use their language. Similarly, the euro has made European exchanges all the more attractive, and de-regulation in London has changed that city’s markets dramatically. And so on.

But there are real reasons why foreign issuers fear the U.S. market.

One might be called the danger of American “legal imperialism.” That is, if you enter America as a company, you may find that American law will be applied so as to pre-empt and overrule the local law of your own country. Securities litigation, just as the report says, poses a related danger. Capital in America might have a lower price tag than it does elsewhere, but the price difference can be more than offset by regulatory and legal risks.

Consider what actually can happen. A company is based in another country. It lists its stock on the home exchange. But, in addition, it also lists a small quantity of its shares as American Depositary Receipts in the United States. A shareholder in America decides to sue the company to allege that some wrongful action caused, say, a decline in share price.

That shareholder’s lawyer may stand to gain far more than the loss on his client’s shares. For U.S. courts are sometimes willing to certify worldwide class actions that multiply the damages to the point that the foreign issuer can face a risk of insolvency. At that point London’s markets become far more attractive than New York’s.

Legislation could cure this problem. But its likelihood has receded after November’s election. The solution will probably have to come from the SEC. Recent scholarship, including my own and that of Joseph Grundfest of Stanford, suggests that the SEC now has the power to restrict such suits through new rules. In fact, Congress has already authorized such reforms by passing the National Securities Market Improvements Act of 1996, which gives the SEC broad authority to adopt rules making exemptions. NSMIA, as it is known, added Section 36 to the Securities Exchange Act of 1934 giving the SEC power to “conditionally or unconditionally exempt any person, security, or transaction, from any provision or provisions of this chapter or of any rule or regulation thereunder, to the extent that such exemption is necessary or appropriate in the public interest, and is consistent with the protection of investors.” What could the SEC do? For example, it could place a ceiling on damages imposable in a single lawsuit against a major auditor, thereby removing the significant danger that another major accounting firm could fail and disrupt our markets.

The SEC could and should use its power not simply to protect foreign issuers, but rather to address basic problems that have made securities class actions increasingly dysfunctional. The scale of the recoveries in securities class actions has recently soared. Payments made to settle securities class actions in 2005 came to about $10 billion, even more if you count the pending Enron settlement. Not long ago, the annual amount was well under $1 billion.

I could go on, and have done so in a recent article in the Columbia Law Review. The point here is that the litigation is not a footnote to the story, but rather a major chapter in it. To make Wall Street competitive, we have to recognize that our courts cannot police the world.

Mr. Coffee is Adolf A. Berle professor of law and director of the Center on Corporate Governance at Columbia University.