With William Donaldson being replaced as chairman of the Securities and Exchange Commission, experts are looking foremost to see what elements of his agenda will remain intact.
On Thursday, President Bush nominated Rep. Christopher Cox (R-Calif.) to replace Donaldson. Experts said Bush might want a less aggressive chairman, but he needs to be careful.
“This is going to be a fine line to walk here for the administration,” said Paul R. Brown, an accounting professor at New York University’s Stern School of Business, saying an aggressive rollback of Donaldson’s work “could backfire pretty quickly.”
“I don’t think we’ll see an immediate reversal of anything,” Brown said. “I think they’ll be attempting to slow things down, but not letting it be read as a quick reversal.”
Key issues, Brown said, will be implementation of Section 404 of the Sarbanes-Oxley governance law–an expensive proposition for companies that requires assessment of internal controls–and any further delay in the expensing of stock options. Under Donaldson, the SEC already gave companies operating on a calendar year a six-month extension.
David Ruder, a former SEC chairman who is now a law professor at Northwestern University, said he expects Cox, if confirmed by the Senate, to undertake a fairly quiet transitional period and doesn’t foresee an overhaul of Donaldson’s legacy.
“The interesting clues would be if he went in some area toward reducing regulation rather than continuing it,” Ruder said. “I don’t see any chance that’s going to happen, frankly.”
Ruder praised Donaldson–who announced his resignation Wednesday, effective June 30–for a strong record on enforcement policy, particularly on the mutual fund scandals.
“He was more active than expected, and I think his legacy was consistent with the role of the SEC chairman,” he said.
Donaldson also has won praise for his implementation of Sarbanes-Oxley and bringing a more proactive and businesslike approach to the commission, but some experts expressed concern that the SEC has become increasingly politicized in recent months.
Donaldson aligned with the SEC’s two Democrats to push through several key initiatives by 3-2 votes, over strident objections from the other two Republicans.
In particular, he engineered passage of regulations mandating that mutual funds have independent chairmen; requiring that hedge funds register with the SEC for the first time; and adopting the so-called trade-through rule that guarantees investors the best price on stock trades, sometimes at the expense of speed.
Steven Thel, a former SEC attorney and professor at Fordham University’s law school, said the commission might revisit all three issues. He said he believed Donaldson “did relatively little. That progress is going to stop, and I think some of it may be rolled back.”
He also sees the commission under Cox taking a much more passive role.
“I think what’s going to happen is the commission is going to be less aggressive on regulation and less aggressive on enforcement. … That seems to me to be a tragedy,” he said.
“I think that, largely, rather than tackling big issues, what’s going to happen is we’re not going to tackle any issues at all.”
Congressional Democrats worried that Donaldson’s initiatives could be rolled back.
A key area for the new chairman will be in enforcement policy. Under Donaldson, the SEC levied several huge penalties, including a record $750 million case against WorldCom Inc.
Republican commissioners have objected to the size of some of the penalties, with Cynthia Glassman saying in a speech late last year that she was “concerned about the ever-increasing severity of monetary penalties.” She added that the SEC must punish malfeasance “without hurting the very investors we aim to protect.”
While much of the attention has been focused on hedge fund registration and other controversial votes, Eugene Imhoff Jr., an accounting professor at the University of Michigan’s Ross School of Business, said the new chairman’s real issues are far more fundamental.
“Probably the biggest problem our financial markets face … is just the problem at the board level,” he said. “I think the real issue is whether he does anything about this governance problem.”
He wants the SEC to require continuing education for board members and strengthen nominating committees to select truly independent directors.
Given his background, Cox is likely to be politically savvy, Imhoff said, but he doesn’t necessarily view that as a positive.
“I’m not optimistic,” he said. “I don’t have a lot of confidence in a politician leading along the lines of strengthening capital markets.”
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acountryman@tribune.com
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PROFILE
U.S. Rep. Christopher Cox (R-Calif.)
PERSONAL:
– Born Oct. 16, 1952
– Married with three children
– Lives in Newport Beach, Calif.
EDUCATION:
– Bachelor’s degree, University of Southern California; master’s in business administration, Harvard Business School; law degree, Harvard Law School
GOVERNMENT CAREER:
– Senior associate counsel to former President Ronald Reagan, 1986-88
– U.S. representative for California’s 48th Congressional District, since 1988
– Chairman of House Committee on Homeland Security
CAREER HIGHLIGHTS:
– Sponsored Securities Litigation Reform Act of 1995, which limits the ability of stockholders to sue companies or brokers for fraud.
– Led movement to repeal the estate tax, which the House recently approved.
– Led movement to cut dividend taxes.
