Curtain call

The Securities and Exchange Commission

Jun 2nd 2005 NEW YORK
From The Economist print edition

The chairman of the SEC bows out

IT HAS been, in many ways, a thankless job. When William Donaldson was appointed as the head of America's Securities and Exchange Commission (SEC) by George Bush in 2003, it was in the wake of enormous accounting scandals at Enron, WorldCom and others. His task was to restore investor confidence battered by news of rampant corporate malfeasance even as new scams—widespread trading abuses in the mutual-fund industry, dodgy dealings in insurance—were coming to light. On June 1st, after a tumultuous time in the job, Mr Donaldson announced his retirement from the agency.

Under Mr Donaldson, the SEC grew enormously in size in terms of budget, staff and reach. Indeed, Mr Donaldson is likely to go down as one of the most activist chairmen in the agency's history. Much of this was dictated by external events. The SEC, blamed by many for being asleep at the wheel during the Enron and other scandals, was also seen as a critical part of the cure. The SEC was charged with much of the rule-making and work of implementing the Sarbanes-Oxley act that was rushed through Congress in 2002 in response to the scandals. It was given expanded power to root out financial fraud, and was expected to do so.

Besides this inheritance, Mr Donaldson was faced with new scandals in the insurance and mutual-fund industries and involving market makers at the New York Stock Exchange (NYSE). In any case, sitting still was hardly an option once New York's energetic attorney-general, Eliot Spitzer, embarrassed the agency by being faster to tackle shady dealings in the mutual-fund industry and conflicts of interest involving Wall Street research.

Although a Republican from the elite ranks of the business establishment—Mr Donaldson was a founder of Donaldson, Lufkin and Jenrette, an investment bank since bought by Credit Suisse, and is a former chairman of the NYSE—he drew the ire of the business community for his aggressive regulatory stance. In a handful of prominent and highly contentious decisions—including support for hedge-fund regulation, various mutual-fund reforms and, most recently, reforms of trading rules at the NYSE and NASDAQ—Mr Donaldson sided with the two Democrats on the five-person commission against his two fellow Republicans. He did the same in supporting the use of heavy corporate fines for wrongdoing, rather than penalties for individual wrongdoers. Business groups, incensed by what they see as regulatory overreach, have in recent months stepped up their lobbying for a change of course. The US Chamber of Commerce has gone further: it is suing the SEC over the mutual-fund reforms.

Whether the SEC will change direction once Mr Donaldson has retired is an open question. Much depends on whether his successor follows the less interventionist line favoured by business lobbies and the two Republicans who are staying. On June 2nd, Mr Bush nominated Christopher Cox, a Republican congressman from California, as Mr Donaldson's replacement. The retirement this summer of Harvey Goldschmid, one of the Democratic commissioners, means that there will be another hole to fill. By convention the slot must go to a non-Republican—but, says John Coffee of Columbia University law school, not necessarily one to the liking of Senate Democrats.

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