Will There Be a Shift at the SEC?

With the reelection of President Bush, a burst of aggressive rulemaking at the Securities and Exchange Commission over how companies should be governed may be coming to an end.

“I think we’ve done the right things, and I think they’ve been important to the country, but there is the danger of a backlash” now that Bush is heading into a second term, said SEC Commissioner Harvey J. Goldschmid, the Democratic SEC commissioner who had been viewed as possible chairman in a John F. Kerry administration.

In fact, business lobbyists have for months been pushing against the unexpectedly activist agenda of the SEC’s chairman, Republican William H. Donaldson. And with the 73-year-old widely expected to retire in the next year or two -- perhaps much sooner -- they are counting on Bush to name a replacement more clearly willing to listen to corporate America.

“A change in administrations is always a chance to take a look at approaches, and I hope that whoever is chairman of the SEC next year will take a look to make sure that trigger-happy rulemaking is not the pattern moving forward,” said David Hirschmann, a senior vice president at the U.S. Chamber of Commerce.

“If the SEC was asleep at the switch in the 1990s, maybe trigger-happy rulemaking isn’t so good in this decade either.”

For two years, the SEC has stood out in the red tape-wary Bush administration as a vigorous regulator, pursuing an array of rules largely designed to prevent another wave of Enron-style scandals. The agency has moved against conflicts of interest affecting board members and auditors and demanded broader financial disclosures, greater accountability for senior executives and tougher reporting requirements by corporations.

In the process, Donaldson, a veteran of Wall Street and corporate America, has irritated business interests while gaining the support of shareholder activists. Although appointed by Bush, Donaldson has often voted with the commission’s two Democrats, tipping the balance.

Looking forward, “the big issue is whether there will be continuity,” Goldschmid said, “or a significant effort to roll back what has been done.”

That’s not to say that Donaldson’s SEC has given shareholders’ rights groups everything they want. Most notably, a proposal to give shareholders a greater voice over who serves on corporate boards has stalled.

If businesses hope that regulators will proceed with greater caution in the Bush administration’s second term, some argue that the marketplace itself -- chagrined at the scandals of recent years -- will prevent a dramatic retrenchment in oversight.

“We’re getting a lot of pushback from the corporate community on the regulatory side,” said Nell Minow, editor of the Corporate Library, an online source of information for shareholder activists. “They can mess with the SEC, but they can’t mess with the market.”

As an example, Minow pointed to the growing importance that shareholders and even ratings agencies place on corporate governance standards: “If Moody’s [Investors Service] is going to downgrade companies for bad corporate governance, you can’t go to the White House and get around it. You can’t game it.”

Others contend that the Bush administration can’t help but recognize the political benefits of staying vigilant against corporate misconduct. After the Enron debacle, the White House began to showcase its law enforcement crackdown on white-collar fraud, and corporate scandal didn’t become a major issue in the presidential campaign.

“I don’t think we’re going to see any significant change in terms of regulation,” former SEC Chairman Arthur Levitt told Bloomberg News on Wednesday. “The common wisdom is that the Republicans are deregulatory and are going to put the cuffs back on the SEC. It’s not going to work that way.”

One reason that the SEC might proceed with a less-hectic pace of major rule changes is that it achieved many of its goals over the last two years. Last week, for example, Donaldson pushed through a hotly disputed requirement that many hedge funds must register with the agency, opening themselves up to far greater scrutiny than ever before.

At the same time, a handful of pending matters are being closely watched.

These include recommendations on governance and disclosure requirements for stock exchanges, clearer disclosures to investors at the time they purchase securities and new fees that might be imposed to discourage investors from abusive, rapid-fire trading in mutual funds.

For James Cox, a law professor at Duke University, Bush’s reelection and the prospect of a more business-friendly successor to Donaldson suggest a drift back to the SEC’s pre-Enron agenda, with a focus on less-controversial reforms, such as streamlining disclosure requirements.

“There will be some steps to try to mollify the business community,” he predicted, although he doesn’t expect a wholesale retrenchment from recent reforms. But he added that the combination of a corporate backlash and Bush’s reelection may have doomed the plan to give shareholders a greater voice in board nominations, along with a proposal that would require lawyers to blow the whistle on wrongdoing they uncover inside a corporation.

“I think they’re dead now,” he said. “The wind has been taken out of their sails.”