SEC Gets a Chief From Wall Street
President Bush on Tuesday nominated William H. Donaldson, a former investment banker, academic and Wall Street official, to head the beleaguered Securities and Exchange Commission, in a move aimed at restoring confidence in the financial integrity of corporate America.
Donaldson would replace Harvey L. Pitt, who resigned last month after a series of controversies that raised questions about his ability to be a tough overseer of Wall Street amid this year’s torrent of business scandals.
Bush, in a turnabout, also announced plans to almost double the budget of the SEC, which has struggled to protect shareholders in an era when the public’s financial security has become increasingly linked to the fortunes of company stock through retirement plans, college accounts and other savings.
“The health and future of the American economy depends heavily on the honesty of American business and the integrity of the securities markets,” Bush said as he introduced Donaldson at the White House. “Investors must have completely fair and accurate information to make sound investment decisions.”
Donaldson, he said, “will be a strong leader with a clear mission -- to vigorously enforce our nation’s laws against corporate corruption and to uphold the highest standards of integrity in the securities markets.”
The 71-year-old Donaldson, a Bush family friend, sought a folksy way of saying the SEC should become a more effective watchdog: “As my mother used to say many years ago, it’s time for all of us to pull up our socks.”
He added, “I am firmly committed to doing everything that I can do to restore the confidence of investors in the U.S. corporate and financial industry.” But he said it would be inappropriate for him to be more specific about his priorities before his Senate confirmation hearings.
The SEC, an agency long considered insulated from political controversy, suffered a blow to its image this year after a flurry of revelations that major companies had misrepresented their books. Enron Corp., WorldCom Inc. and Global Crossing Ltd. were among the most widely publicized cases that have eroded investor confidence and cost thousands of workers their jobs as the firms were forced to file for bankruptcy protection.
In addition, Pitt, a top securities lawyer whom Bush named to the SEC post in spring 2001, stumbled repeatedly. This year, he agreed to private meetings with accounting executives even as the industry was blasted for failing to root out corporate fraud. In the summer, Pitt embarrassed the White House by lobbying to make the SEC chairmanship a Cabinet position.
In late October, it was revealed that Pitt had failed to disclose to the four other SEC commissioners that his choice to run a new accounting industry oversight board, William H. Webster, had headed the audit committee of a company that has been sued by shareholders alleging fraud. Pitt resigned Nov. 5.
The choice of Donaldson, who is known as a plain-spoken, low-key, consensus-oriented executive, came as a surprise to many observers. It was the latest move by Bush in an overhaul of the White House economic team.
Reaction was generally favorable, with many citing Donaldson’s broad background and personable manner as likely to be helpful in the task of rebuilding faith in the SEC and in corporate accounting.
“No one could be a stronger symbol of the need to restore integrity in the markets,” said Jeffrey E. Garten, dean of the Yale School of Management, of which Donaldson was the founding dean in 1975. “He’s a wonderful communicator and a very savvy public servant.”
Donaldson, a Marine rifle platoon leader in Korea, served in two Republican administrations. He is a graduate of Yale, the alma mater of the president and his father.
Donaldson, Lufkin & Jenrette, the investment banking firm Donaldson helped found, was a stalwart Republican contributor in the 1990s. The company made more than $2.5 million in so-called hard and soft political contributions from 1992 to 2000, 67.6% to the GOP, according to the database of Dwight L. Morris & Associates. The firm was bought by Credit Suisse First Boston in 2000.
Donaldson gave up day-to-day management of the investment firm in 1973. He served as an undersecretary in the State Department in the mid-1970s, during the administrations of Richard Nixon and Gerald Ford.
He went on to the dean’s job at the Yale School of Management and later was chairman of the New York Stock Exchange from 1990 to 1995.
In recent years, he has served as chairman of health-care giant Aetna Inc.
In his new role, Donaldson would be expected to marshal support for Bush’s proposed SEC budget increase to $800 million or more in fiscal 2004 from the current level of $438 million. The administration had balked at such a large increase.
The SEC also faces a major challenge in helping to launch the accounting oversight board, which answers to the commission. Webster stepped down Nov. 12, so the SEC will have to find a new head for the board.
In addition, the SEC is negotiating with major brokerages a sweeping settlement of allegations of widespread analyst misconduct in the late 1990s.
More broadly, Donaldson’s mission would be to renew public confidence in the honesty of corporate financial data at a time when the scandals have fanned broad cynicism.
Observers Tuesday said they hoped Donaldson would prove to be a steady, senior hand, providing a contrast to Pitt, whom many saw as a brilliant thinker but lacking in political finesse.
“Everyone’s going to listen to this guy,” said Los Angeles venture capitalist Steven Lebow, who got to know Donaldson while an employee of Donaldson, Lufkin & Jenrette. “He’s 71 years old. He doesn’t need money. He’s not afraid of anybody, and it won’t take him a year to figure things out. This is one of those times when a single person can make a big difference, and I think Bill Donaldson is really going to step up.”
Still, reviews were not 100% favorable. Some recalled Donaldson’s tenure as chairman of the New York Stock Exchange as less than stellar.
“No one was impressed particularly with him as chairman” of the stock exchange, said Andrew M. Klein, a Washington attorney and former director of the SEC’s division of market regulation. “On the other hand, I’m not sure what they expected.”
The nomination “is an effort to calm down Wall Street, calm down the commission, stop having legal combat among the commissioners and try to get some business done,” Klein said. “Maybe it will do that.”
Donaldson is certain to face questions into his recent ties to companies including Aetna.
“I look forward to a thorough confirmation process in which Mr. Donaldson’s record will be carefully examined and his views on the challenges facing the SEC fully reviewed,” said Sen. Paul S. Sarbanes (D-Md.), chairman of the Senate Banking, Housing and Urban Affairs Committee.
Others on Capitol Hill were more openly enthusiastic. Donaldson’s “understanding of Wall Street dynamics and his experience in both the private sector and as a securities regulator make him a first-rate choice for SEC chairman,” said Rep. Michael G. Oxley (R-Ohio), co-sponsor with Sarbanes of a landmark accounting reform bill passed by Congress in the summer and signed into law by Bush.
“The SEC desperately needs someone who both has a deep knowledge of how the markets function and at the same time possesses a rock-ribbed integrity,” said Sen. Charles E. Schumer (D-N.Y.), also on the Banking Committee. “Bill Donaldson is such a man.”
In the financial world, investors Tuesday drew a favorable contrast between Donaldson and his brash predecessor.
Thomas H. Lee, founder of a Boston investment firm that bears his name, said that Pitt, as a former SEC general counsel, was “really steeped in the laws and operations” of the agency but that Donaldson would be a more reassuring public face and better able to help in the primary job of repairing confidence.
Donaldson, said Lee, is the “soul of probity.”
Hardwick Simmons, chief executive of the Nasdaq Stock Market, described Donaldson as a consensus builder who will restore the morale of SEC staff.
“Bill is relatively low-key,” he said.
“The contentiousness and the political environment that have been part of the agency for the last eight or nine months will disappear, and you’ll see a much more civil organization.”
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Times staff writers Thomas S. Mulligan and Walter Hamilton in New York and Robert Patrick in Washington contributed to this report.
