The door behind outgoing U.S. Securities and Exchange Commission Chairman William Donaldson may not hit him in the backside, but it will be a close call. The microphone he used to announce his resignation last week was still warm when President Bush announced his successor, Christopher Cox.
Donaldson deserves a lot better.
When he took control of the SEC in February 2003, the agency charged with regulating the nation’s financial markets was confronted by a series of corporate scandals — Enron, Tyco, and WorldCom among them — that had badly undermined the confidence of investors who had lost a collective $2 trillion. His predecessor, Harvey Pitt, was a former Wall Street lawyer who seemed utterly deaf to their outcries. Morale was woeful among a grossly overworked staff.
Donaldson, who was 71 at the time, seemed an unlikely champion for investors. He was the retired chairman of the New York Stock Exchange with a long history in the financial industry. Not the kind to rock the boat, even if the boat was leaking badly. Nevertheless, he heeded the advice of Senate Banking Committee Chairman Richard Shelby, who said, “Now is the time to put some fear into people.”
And so he did. Fear, and resentment, too.
He aggressively implemented legislation intended to clean up corporate accounting practices and make chief executive officers responsible for the accuracy of company financial reports. He supported a move to put independent chairmen at the head of mutual fund companies, and rules that would impose penalties for questionable fund trading practices. In April, a commission majority voted to implement regulations assuring investors they purchased securities at the best price, regardless of which stock exchange cleared the trade.
“He certainly was a strong advocate on behalf of investors,” says Jonathan Boersma, director of standards and practices for the Chartered Financial Analyst Institute.
The institute did not agree with everything the commission has done the last few years, he says, but there was no question the Donaldson-led body was on the side of shareholders.
But some of the new rules, especially those addressing problems with corporate accounting, have gone down hard. Expensive and time-consuming, they have had the unfortunate side effect of encouraging some companies whose stock traded publicly to become private, and exempt from the reporting rules. Foreign companies think twice about listing their shares for trading in the United States, which detracts from the nation’s status as the premier financial marketplace. An accounting industry that countenanced some of the worst book-cooking in history is back in the chips, big time.
With each of the reforms, Donaldson wore out his welcome among old associates. Efforts to reverse some of the commission’s initiatives are under way in the courts and the Congress. Because many were approved by just a 3-2 margin, with Donaldson joining the commission’s two Democratic members in the majority, their status will be fragile without Donaldson or a like-minded successor to see them through to full implementation.
Enter Chris Cox, a younger man with tremendous intellect and energy. The former legal adviser to President Ronald Reagan has chaired the House Policy Committee and Committee on Homeland Security. Regrettably, he authored a 1995 bill that eroded investor ability to sue corporations for losses when their stock tanked. Changes were needed, but his bill was a green flag for the fraud that followed.
Still, Cox’s nomination has so far provoked little significant opposition. Respected former SEC Chairman Arthur Leavitt has spoken well of him. Fellow Californian Dianne Feinstein, as liberal as Cox is conservative, will introduce him to the Banking Committee when hearings start.
“He’s a man who has a lot of dimensions,” says Spokane financial adviser Brooks Sackett. “Even in politics, talent does matter.”
With some reforms already in place, he added, Cox will not be under the same pressure Donaldson was to do something, anything. And with New York Attorney General Eliot Spitzer turning his eyes to the governorship in that state, that aggressive antagonist of Wall Street will not be as actively shaming a placid SEC as he was two years ago.
If, that’s if, Donaldson’s SEC overreacted to calls for market reform, the agency did so with investor interests foremost. He should be credited for reviving a sleeping watchdog. Cox’s challenge will be finding the sweet spot where business can thrive without shorting the interests of investors who, as Sackett says, must look out for themselves.
“The most important line of defense is their own diligence,” he says.
But Shelby, as he leads his Banking Committee through the Cox confirmation process, might want to keep in mind his words of two years ago. Fear is still a useful tool.
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