SEC’s policy path wavers
washington -- Back in June, members of the Securities and Exchange Commission offered a striking show of unity as they appeared before a House committee examining oversight of the financial markets.
There was no sign of the acrimony that had characterized the panel in years past. Credit for that went largely to Chairman Christopher Cox, the former Republican congressman from Orange County, whose policy smarts and collegial manner helped him land the appointment from President Bush in 2005.
“If you’re looking at a man trying to hold the moderate ground, trying to maneuver through very partisan waters and come out above it, that hearing is as good an exhibit of that as you will find,” said Damon Silvers, associate general counsel at the AFL-CIO and a close watcher of the SEC.
What a difference a summer makes.
One commissioner has left the five-member panel, and another has announced plans to step down, adding uncertainty to the agency’s future course. Meanwhile, a backlog of enforcement cases and unresolved policy issues affecting hedge funds and mutual fund governance raises further questions about the SEC’s direction -- and Cox’s ability to find common ground between factions.
“Chris Cox has done a fine job of leading the commission,” said Harvey J. Goldschmid, a former SEC commissioner and law professor at Columbia University. “But he is now entering a period where his leadership skills and ability to remain on a balanced course will be severely tested.”
If there is an overarching theme to Cox’s tenure at the SEC, it has been his quest for common ground.
Early on, Cox gained unanimous approval for his proposal to strengthen disclosure rules for executive pay. He has shepherded initiatives to encourage the use of interactive data in financial reporting and to explore whether U.S. companies should be able to use international accounting standards without undermining investor protections.
Members have agreed unanimously on about 98% of their votes, and a friendlier chemistry has been visible at the SEC’s public meetings, with commissioners smiling and whispering to one another rather than staring straight ahead.
Yet a sharp ideological divide remains, and it was underscored by a lawsuit argued last week before the U.S. Supreme Court involving Charter Communications Inc., a cable TV company that investors had accused of inflating its earnings.
At issue was whether shareholders had rights to sue not just corporations but third parties such as investment bankers, who may have been involved in improper transactions.
Earlier this year, the SEC prepared to weigh in on the side of shareholders. In a key, behind-the-scenes vote, Cox and the SEC’s two Democrats prevailed over two of the commission’s Republicans. The Justice Department ultimately rejected the SEC’s brief, and Republican Commissioner Paul S. Atkins recently upbraided his fellow commissioners over the matter.
“I hope that the court makes a better decision for our economy and for fairness in the judicial process than the SEC did,” Atkins wrote last week in the Wall Street Journal.
Atkins and Cox declined to be interviewed for this article.
One former SEC official said it would be nearly impossible for Cox to satisfy shareholder concerns as well as Atkins’ deep reservations about government involvement in the economy.
“Has Cox been able to cover that gap? I don’t think so,” said Lynn E. Turner, a former chief accountant of the SEC. “But it’s not a criticism of Chris. I don’t think anyone could have.”
Silvers of the AFL-CIO described Cox’s effort to submit the brief in the Charter case as “one of the most important pro-investor actions of his tenure.”
Yet even though Cox’s position in the court case was applauded by shareholder activists, he has been panned by the same crowd for an SEC initiative on shareholder rights.
Investor activists have long sought the authority to place the names of independent candidates for board positions on company election ballots, rather than be forced to pay out of their own pockets for long-shot, maverick campaigns.
Business lobbyists have fiercely resisted the idea, contending that it would politicize board deliberations and confer undeserved power on special interests. A 2006 court decision put pressure on the SEC to clarify its policy.
In July, the SEC launched a new effort to resolve the issue. In an unusual approach, members approved two differing proposals. One would empower companies to derail such shareholder efforts. The other set forth conditions that would give shareholders new power, but with barriers that critics consider insurmountable, such as requiring 5% of stock ownership to move forward with an independent campaign.
Cox voted in favor of each, a position he explained as a way to keep the debate moving forward. Shareholder activists are generally hostile to both proposals -- and displeased with Cox, who hopes to resolve the matter this year.
“Certainly, when you have a chairman vote for two conflicting proposals at the same time, it’s problematic,” said Lisa Woll, chief executive of the Social Investment Forum, which advocates “socially responsible” investing. “It’s very unclear from his votes what his actual view is -- because he’s taken two views.”
Cox, a free-market conservative who once led congressional efforts to restrict shareholder lawsuits, had initially surprised some shareholder activists by taking a moderate approach. More recently, however, the initiative on shareholder voting has led many to view him with renewed concern.
Some point out, for example, that the SEC has solicited public comment on how it might foster the development of online shareholder forums, an approach activists fear could replace nonbinding resolutions that many submit at annual meetings on such topics as global warming, takeover battles, executive pay and investment overseas.
“What a skilled, intelligent politician does is calm his constituencies,” observed Peter D. Kinder, president of KLD Research & Analytics Inc. The independent research firm has close ties to investor activists. “There is not much calm among my peers at the moment.”
Not that Cox is enjoying kudos from high-profile business representatives either. David Hirschmann, senior vice president of the U.S. Chamber of Commerce, credits Cox with doing “a good job” defusing tensions at the SEC and taking a careful approach to making new rules.
But he is not happy with the SEC’s limited progress toward easing regulation and costs that corporate leaders and the administration say threaten the competitiveness of the U.S. economy and capital markets.
“Our disappointment lies in him not making more progress on the regulatory reform and modernization agenda,” Hirschmann said.
As some see it, the SEC will have great difficulty setting long-lasting, credible policy in many areas unless it can approve such matters with bipartisan votes.
Democrat Roel C. Campos left the commission last month, and the remaining Democrat, Annette L. Nazareth, has said she will leave, though she has not set a date, adding to the uncertainty.
Traditionally, the White House will put forward nominations suggested by senior lawmakers of the other party -- in this case, Senate Majority Leader Harry Reid (D-Nev.).
Reid “is moving as quickly as possible,” said spokesman Jim Manley.
But Manley had no comment on a timetable.
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