SEC Chief Bent On Reform
When word spread recently that business lobbyists were seeking the ouster of William H. Donaldson, the reform-minded chairman of the Securities and Exchange Commission, the White House wasted no time coming to his defense.
“The president appreciates the job Chairman Donaldson is doing,” said Scott McClellan, a spokesman for President Bush. McClellan noted approvingly that Donaldson had “worked hard to help us crack down on corporate wrongdoing.”
Despite friction with business lobbyists, it appears that the SEC chairman will continue as Washington’s top cop for the investment world, pursuing an aggressive 2005 agenda that will take aim at issues including executive pay and the mechanics of stock trading.
In an interview, Donaldson declined to reveal how long he planned to stay at the commission. But he indicated that the job retained its allure.
“I serve at the pleasure of the president, and I carry on this job as I believe he wants me to,” Donaldson said. “Having said that -- and I don’t mean this to be an arrogant remark in any way -- I also serve at my own pleasure. What is fulfilling in this job is feeling that you’re making a difference, and I still feel that I’m making a difference.”
In the coming year, there are many areas in which Donaldson would like to make a difference.
One is executive compensation. Under current rules, expensive perks may lurk in the shadows of vaguely written filings. In September, for example, the SEC reprimanded General Electric Co. for failing to spell out a plethora of benefits granted to former Chairman Jack Welch, including a $50,000-a-month apartment in New York City and unlimited use of GE’s private jets.
To Donaldson, the issue isn’t about excessive pay but about the need for clear reporting to the public.
“It’s about getting [information] out there in a way that people understand what it is,” said an SEC official who is familiar with the chairman’s thinking.
Donaldson also supports measures to prevent mutual fund trading abuses, require better disclosure of mutual fund fees and install tougher controls to prevent underwriters from artificially pumping up demand for initial public offerings of stock.
He said he viewed an effort to update the ground rules affecting stock trades, designed to ensure that middlemen don’t put their interests ahead of investors, as “terribly important.”
Yet Donaldson expressed doubts about the fate of an effort he once appeared to champion: a bid to increase shareholder influence in board elections.
Groups such as the Business Roundtable and the U.S. Chamber of Commerce have argued that it would give special interests, such as union pension funds, too much leverage over corporate boards.
Donaldson had hoped to reach a compromise before the end of 2004.
“We’re not going to do anything here until we get some kind of approach that makes sense to parties on all sides of the issue,” he said, adding that “I don’t know” if that is going to happen.
Such remarks stoke the fears of shareholder activists that Donaldson’s reform agenda may crumble amid the growing backlash from business groups. Yet the reality may be far more complex.
Donaldson believes that an aggressive SEC has been a valuable asset for the White House, helping prevent Enron Corp.-style corporate wrongdoing from becoming an issue in the Nov. 2 election. At the same time, he said, his decisions aren’t made from a partisan standpoint.
“I think what we do is helpful for American business, and I think it’s helpful for the American people to restore investor confidence, to restore confidence in general in the commercial institutions of society,” Donaldson said. “If we do that, that is a good thing for any politician who’s in office.”
In any case, a growing portion of the agenda may be technical in nature, if corporate scandal fades as a political issue.
“I think the SEC will continue to be aggressive in its cleanup work of the various scandals,” predicted Donald C. Langevoort, a law professor at Georgetown University. “Deeper inside the agency there will be more attention to the agenda everybody thought we were going to have in 2000 -- and that is a deregulatory agenda.”
Consider the rules for stock offerings, crafted during the 1930s. The SEC hopes to bring them into the Internet Age, largely eliminating the “quiet period” before secondary stock offerings by major companies that are already public, as well as giving companies making initial public offerings more leeway to communicate with investors.
“This isn’t just regulatory; it’s deregulatory,” said Harvey J. Goldschmid, a Democrat whose SEC term will expire in the coming year.
Patrick McGurn, vice president and special counsel at Institutional Shareholder Services, a proxy advisory firm, said he expected to see “a return to normalcy” at the SEC. Initiatives sparked by the Enron and mutual fund scandals will give way to more nuts-and-bolts regulatory matters, he said -- although another big business scandal could change that.
“At any given moment we’re only one stone’s throw away from a riot on some of these issues,” McGurn said.
As the year unfolds, Donaldson’s moves will be closely watched by outsiders, not only because he is chairman but also because he occupies the tenuous middle ground on the five-member panel.
He often has sided with Democrats Goldschmid and Roel C. Campos for tough enforcement actions. But on Dec. 9, he joined Republicans Paul S. Atkins and Cynthia A. Glassman in rejecting the enforcement staff’s bid to slap former Global Crossing Ltd. Chairman Gary Winnick with a $1-million fine for his alleged failure to disclose financial transactions.
That prompted some quiet questioning inside the agency over a possible shift in the chairman’s pro-enforcement posture. Two weeks later, however, Donaldson sided with Goldschmid in voting to uphold a staff recommendation that called for Walt Disney Co. Chief Executive Michael Eisner to be reprimanded for failing to tell investors that the company had business ties to some directors. (Campos was recused for an undisclosed conflict, resulting in a 2-2 split and no action taken).
Some experts see little evidence that the SEC is setting aside its enforcement sword. One reason is that the agency has increased its muscle in the last two years with an infusion of more than 1,100 staff members who are mainly lawyers, accountants and examiners.
“They’re adding attorneys. They’re adding accountants. They’re adding investigators,” said Eugene Goldman, a securities lawyer with McDermott Will & Emery in Washington. “Their settlement demands make us litigate for clients more than ever before. I don’t see how that can mean less enforcement.”
On the rule-making front, others question whether the SEC can resist business lobbies that are pushing back against regulations with growing confidence.
For his part, Donaldson said he remained as committed as ever to upgrading ethics in the business world and enhancing public confidence in the financial marketplace. Some criticism has been unavoidable, he said, as the SEC began to hold people accountable more strictly than in the past and impose tougher rules.
“I believe we’ve been very fair, very deliberate, very thorough. If there is concern out there, it’s not necessarily unexpected,” he said. As for the SEC’s commitment to enforcement, he said, “there’s no change in where I’m coming from.”
Times staff writer Walter Hamilton in New York contributed to this report.
