So Much For Reform

U.S. Securities and Exchange Commission Chairman William Donaldson said on Wednesday he will resign on June 30, raising doubts about whether the agency’s tougher post-Enron stance on corporate misconduct will be sustained.

President Bush must name a successor soon for Donaldson, who backed a strong enforcement agenda at the SEC and pushed through new rules affecting mutual fund governance, hedge fund advisers and stock market trading and pricing.

Several newspapers, including The New York Times and The Wall Street Journal, reported that Bush was expected to nominate Rep. Christopher Cox, a California Republican, to head the SEC.

Some of Donaldson’s initiatives angered business executives and their allies in the Bush administration, who said they raised the costs of doing business and discouraged risk taking.

Business lobby groups wasted little time in calling for a change in tone at the top of the SEC.

The U.S. Chamber of Commerce, which is suing the agency over a mutual fund governance rule backed by the chairman, said his successor will have “a fundamentally different job than the one that Mr. Donaldson walked into, which was a job to focus on restoring confidence, transparency in our capital markets.”

Earlier, congressional aides mentioned several possible replacements, including former Paine Webber Chief Executive Donald Marron and, with a chance at being named acting chairman, SEC Commissioner Paul Atkins, a feisty libertarian who has clashed with Donaldson.

Also mentioned were securities lawyers James Doty and Jay Lefkowitz, as well as White House economic staffer Kevin Warsh.

Donaldson’s resignation will come just weeks before the expected departure of SEC Commissioner Harvey Goldschmid, who plans to return to teaching at Columbia University in New York.

Together, the Republican investment banker and the Democratic college professor have shaped the SEC’s agenda for two years.

“Bill Donaldson took on a tough job at a tough time, and he delivered for the American people,” Bush said in a statement. “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.”

Investor activists said they fear the two departures mean a different SEC could emerge.

“Investors should be concerned that business groups might attempt to hijack the nomination for the new chairman,” said Richard Ferlauto, director of pension and benefit policy at the American Federation of State, County and Municipal Employees.

Ferlauto said business interests could try to “roll back the important regulatory reform measures supported by Donaldson and Commissioner Harvey Goldschmid.”

Chamber of Commerce spokesman David Hirschmann said Donaldson’s successor should focus on “how to ensure America continues to be the place where capital comes to find innovative companies that can grow and succeed and do so on a level playing field.”

Donaldson said some business complaints are understandable, especially those about the costs of complying with parts of the post-Enron Sarbanes-Oxley corporate governance and accounting reforms. “The application of it can be improved,” he told a press conference where he discussed his decision to leave.

But he added, “I hope there will be no legalistic roll back” of Sarbanes-Oxley and other recent reforms.

Meanwhile, U.S. Treasury Secretary John Snow on Wednesday urged regulators to enforce the Sarbanes-Oxley financial reporting rules in ways that do not dampen economic development or innovation.

Congress passed Sarbanes-Oxley in 2002 in response to a series of high-profile corporate scandals that felled Enron, WorldCom and the accounting firm Arthur Andersen. The law, named for Ohio Republican Rep. Michael Oxley and Maryland Democratic Sen. Paul Sarbanes, calls for strict financial reporting standards and accountability.

Donaldson took over the SEC amid turmoil in early 2003 at the White House’s request, stabilizing the agency after the stormy tenure of Harvey Pitt, who resigned under pressure.

Under Donaldson’s leadership, the SEC in 2003 and 2004 smashed records by imposing more than $6 billion in fines and other payouts on securities law defendants.

As recently as 2002, the largest fraud fine ever levied by the SEC was $10 million. But in 2004, the SEC slapped 35 defendants with penalties of $10 million or more.

Donaldson backed the hard-hitting approach of the SEC enforcement division, which along with policy differences led to a fraying of relations within the five-member commission.

Donaldson’s fellow Republicans — Atkins and Cynthia Glassman — questioned the extent of the enforcement crackdown and differed with Donaldson on contentious new rules.

Working closely with Goldschmid, and with the support of junior Democratic SEC Commissioner Roel Campos, Donaldson pushed through rules requiring more independence among mutual fund directors; forcing hedge fund advisers to register with the SEC; and overhauling the national stock market system.

SEC Market Regulation Director Annette Nazareth, who played a key role in shaping the stock market rules, is being recommended to the White House as a replacement for Goldschmid. Campos, too, is seeking to be renominated this summer.