O.C. Lawmaker Could Get SEC Post

Times Staff Writers

President Bush is expected today to nominate Rep. Christopher Cox of Newport Beach as chairman of the Securities and Exchange Commission, replacing William H. Donaldson, who resigned Wednesday after aggressively trying to restore investor confidence shaken by corporate scandals.

Bush’s choice of Cox to be the nation’s top securities cop was confirmed by two senior Republican officials late Wednesday.

The announcement is expected to be made by Bush today at the White House, said the officials, who spoke on condition of anonymity.

Cox, a Republican elected to Congress in 1988, is a graduate of USC and Harvard University’s law and business schools who served as a White House lawyer in the Reagan administration. The 52-year-old congressman may be best known on Wall Street for authoring a 1995 law that limited the ability of investors to sue companies over alleged securities fraud.


The resignation of Donaldson, who took over as SEC chief in 2003 at Bush’s behest, came as a surprise. He had been expected to serve through this year.

His June 30 departure will give the White House an opportunity to shift the course of the SEC, which has been bitterly split on some high-profile issues of business regulation and investor protection in the wake of corporate fraud and market trading abuses.

Donaldson, a lifelong Republican, adopted an activist approach at the SEC that sparked the ire of the U.S. Chamber of Commerce and other business interests.

In addition to replacing Donaldson, Bush must pick a successor to Democratic Commissioner Harvey J. Goldschmid, who has said he plans to leave this summer. Also, Democrat Roel C. Campos is at the end of his term, although he is expected to be renominated.


Goldschmid on Wednesday echoed the concerns of many investor advocates who fear that a more conservative SEC chief could spur a rollback of some of the reforms the commission has enacted in recent years.

“Everything we’ve accomplished is in doubt until we see the president’s selection of a new chairman,” Goldschmid said, before word of Cox’s nomination surfaced late in the day.

Donaldson’s decision to leave comes as business interests have pushed back with growing confidence against some of the additional regulation imposed by Congress and the SEC since 2001, after massive financial frauds at Enron, WorldCom and other companies, and scandals in the brokerage and mutual fund industries.

On Tuesday, the Supreme Court dealt a blow to the Justice Department’s prosecution of white-collar crime when justices unanimously threw out the 2002 criminal conviction of former auditing firm Arthur Andersen in the Enron fraud case.


Of greatest concern to some activist investors is that Donaldson’s departure may doom his signature plan to give shareholders a greater voice in naming nominees for corporate boards, as a check on management. The proposal, in limbo since last year, has become the top reform priority of major pension funds.

Donaldson also has championed the idea of forcing companies to disclose more details on executive compensation.

Two of the chairman’s initiatives are being challenged in court: a requirement that mutual funds have independent chairmen, and a move to regulate hedge funds, increasingly popular investment vehicles that have become a potent force in financial markets.

Given the opposition Donaldson has faced on those and other issues, “Clearly, there will be a strong push in the business community for someone ... with a deregulatory bent to become chairman,” said Patrick McGurn, vice president of Institutional Shareholder Services, an investor advisory firm.


Cox, whose nomination would have to be approved by the Senate, could be what business leaders are looking for. He wrote the 1995 Private Securities Litigation Reform Act, aimed at stopping what corporate interests -- especially Silicon Valley -- said was a flood of abusive securities-fraud lawsuits aimed at shaking down companies.

The law was passed after the House and Senate overrode President Clinton’s veto. Opponents of the measure said it limited investors’ ability to hold corporate managers responsible for ruinous actions.

Supporters of further business reforms are likely to focus on Cox’s authorship of the law in raising questions about how he regards federal oversight of corporate America and the financial services industry.

In his nearly two decades in Congress, Cox has served as a senior member of every House committee with legislative and oversight jurisdiction over the SEC, securities law and accounting standards. But his recent focus has been domestic security. He is chairman of the House Homeland Security Committee.


Over the years his name has been floated for other high-profile positions, including CIA director.

Donaldson, who turns 74 today, was Bush’s choice to stabilize a demoralized SEC in late 2002, a time when the Enron debacle was fresh in the public’s mind and missteps by previous SEC Chairman Harvey L. Pitt had drawn widespread rebuke.

Little in his background as a former investment banker and chairman of the New York Stock Exchange suggested Donaldson would be an activist regulator.

But he threw himself into the job of strengthening the SEC after Enron and other scandals made the agency appear flat-footed.


“I think he really did reestablish both the credibility and morale of the SEC,” said John Coffee, a law professor at Columbia University.

Donaldson oversaw a huge expansion of staff and a relentless calendar of rule making intended to restore public trust in U.S. markets. Congress left it to the SEC to implement much of the 2002 Sarbanes-Oxley corporate reform law, passed in reaction to the financial-fraud wave.

“I’ve had one thought in mind, and that is: Is this in the public interest and is it in the investor’s interest?” Donaldson said Wednesday. “And that’s been my guiding light.”

Bush, in a statement, said Donaldson “took on a tough job at a tough time, and he delivered for the American people. He vigorously and fairly enforced our nation’s securities laws and helped rebuild the public trust in corporate America that has been important to our economic recovery.”


Donaldson said that after more than two hectic years it was time to move on.

Responding to questions at a news conference, he downplayed any schism on the five-member commission, saying that out of about 3,000 decisions during his tenure, 99% were decided unanimously.

He said the disputes among commissioners on certain issues had “nothing to do” with his resignation. He also questioned accounts that corporate America was displeased with him.

Yet one of the hallmarks of his tenure was an unexpected alliance he forged at times with the panel’s two Democrats, to the chagrin of his two fellow Republicans. The inter-party alliance led to passage of the regulation of hedge funds, the independent-chairman requirement for mutual funds, and rules to modernize stock trading.


Donaldson’s proposal to make it easier for shareholders to nominate candidates for corporate boards proved so controversial with large businesses -- and the Bush administration -- that he backed off. It now appears dead, though die-hard supporters still hope he will resurrect it before he leaves.

Behind the scenes, Donaldson on occasion also sided with the Democratic commissioners in closed-door enforcement discussions, including some involving large corporate fines that unnerved business interests.

In a recent interview, a Chamber of Commerce official was sharply critical of the SEC’s direction under Donaldson. The chamber is suing the SEC over the rule mandating that mutual funds have independent chairmen -- individuals free of ties to the funds’ management firms. Critics of that and other rules have argued that they are overkill and won’t help investors.

“Do we think there is a pattern in the way the SEC is regulating -- that they don’t seem to be troubled by the need to find evidence that their regulatory approach is the right answer?” asked David Hirschmann, senior vice president of the chamber. “Absolutely.”


In recent months, Republican SEC Commissioner Paul S. Atkins has increasingly spoken out against Donaldson’s initiatives. In an April speech, Atkins assailed commission actions on mutual fund board independence and a set of new rules intended to control the increasingly electronic world of stock exchanges.

“An aversion for finding out how our actions actually affect people on the ground seems to have colored a number of recent commission actions,” Atkins said, using unusually sharp language for a commission member. He did not return calls seeking an interview Wednesday.

Republican Commissioner Cynthia A. Glassman, who at times was visibly troubled by commission debates, said in a statement on Donaldson: “Throughout his tenure, his commitment to the protection of investors has been unwavering. It has been a privilege to work with him, and I wish him every success in the future.”



Times staff writer Jean O. Pasco contributed to this report.



William H. Donaldson


* Position: Chairman, Securities and Exchange Commission

* Age: 74

* Education: bachelor’s degree, Yale University, 1953; MBA, Harvard University, 1958.

Career highlights


* 1959-1973: Co-founder and chief executive, investment bank Donaldson, Lufkin & Jenrette

* 1973-74: Undersecretary of state, State Department

* 1975-80: Dean and professor, Yale School of Management

* 1980-90: Chairman and CEO, Donaldson Enterprises


* 1990-95: Chairman and CEO, New York Stock Exchange

* 1996-2000: Senior advisor, Donaldson, Lufkin & Jenrette

* 2000-01: Chairman, president and CEO, Aetna

* 2003-present: Chairman, Securities and Exchange Commission


SEC tenure highlights

* February 2003: Takes over as SEC chairman.

* July 2003: Donaldson backs a proposal to allow shareholders to have more influence in the election of corporate directors.

* November 2003: The SEC approves stricter corporate governance standards for U.S. companies.


* June 2004: Donaldson backs a rule barring mutual fund chairmen from having ties to companies that manage the funds.

* April 2005: With Donaldson’s support, the SEC approves a controversial plan to overhaul U.S. stock trading.

Sources: Associated Press, Times research

Los Angeles Times