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If one thing has become clear in the three months since William Donaldson began his tenure as chairman of the Securities & Exchange Commission (SEC), it's that he's likely to avoid repeating the mistakes of his tin-eared predecessor, Harvey Pitt, whose procorporate bias led to his resigning in disgrace. Pitt, an attorney who had represented several global accounting firms, helped seal his fate when he met secretly with KPMG Chairman Eugene O'Kelly -- even as the SEC was investigating the accounting firm's less-than-thorough audits of Xerox Corp. (XRX ) from 1997 through 2000. It was a shocking display of conflict of interest.
Donaldson, by contrast, has been talking and acting extra tough ever since he started grappling with an array of regulatory issues that would have amounted to a decade's work for most past SEC chairmen. These include enforcing the new firewall between Wall Street investment bankers and their research-analyst colleagues, nurturing a new accounting watchdog that will overhaul corporate auditing, spearheading an examination of the hedge-fund industry, and proposing stricter corporate-governance rules for the major stock exchanges. All of this is being carried out against the background of the last year's Sarbanes-Oxley Act, the most comprehensive corporate-reform legislation in 70 years.
"DEADLY SERIOUS." Donaldson's confrontational style has manifested itself in several ways. He has publicly taken Morgan Stanley Chairman Philip J. Purcell to the woodshed for making light of the company's role in the recent scandals on Wall Street. Donaldson has bluntly informed the accounting profession that its days of self-regulation are over. He recently told the Economic Club of New York that employee stock options must be expensed. And he has asserted often that he's "deadly serious" about reforming a wide range of practices on Wall Street.
Donaldson is reaping praise for his approach. The Washington Post has cited his "tough, independent streak." The Financial Times has lauded him for "recognizing the political need to be more confrontational." Clearly, Donaldson's skill at using his "bully pulpit" has met expectations that he would move fast to clean up Wall Street.
The last SEC chairman with a mandate for such sweeping change came to the job amid no such expectations. That was Joseph P. Kennedy, who President Franklin D. Roosevelt tapped in July, 1934, to become the first leader of the brand-new SEC. Like Donaldson, Kennedy had thrived on Wall Street before coming to Washington, making millions as an investment banker. But the similarities end there. Kennedy reveled in being a back-room player who cultivated ties to anyone -- reputable or not -- with power and wealth.
"SLAP IN THE FACE." Kennedy's appointment met with outraged protests from both New Dealers inside the Roosevelt Administration and corporate reformers. The sense of betrayal was personified in Roosevelt confidante Roy Howard, liberal publisher of The Washington News, who wrote in his column that the President "cannot with impunity administer such a slap in the face to his most loyal and effective supporters as that reported to be contemplated in the appointment of Joseph P. Kennedy."
Kennedy was a major investor in Hollywood studios in the late 1920s, and his Somerset Importers became the exclusive U.S. agent for Gordon's Dry Gin and Dewar's Scotch after Prohibition ended in March, 1933. In donating hundreds of thousands of dollars to Roosevelt's Presidential campaign, he used the murky label "capitalist" to describe his profession to the President-to-be's skeptical handlers.
After becoming the youngest bank president in the country at age 25, Kennedy gained notoriety as a Wall Street speculator throughout the 1920s and early 1930s. In the 1930s, for example, he participated in the Libby-Owens-Ford stock pool, a scheme in which Kennedy and his partners created an artificial scarcity of Libby-Owens-Ford stock to drive up the value of their own portfolios. The pool, and others like it, was investigated by Senate Banking and Currency Committee counsel Ferdinand Pecora, who just a few years later would report to Kennedy as one of the SEC's commissioners. Clearly, Kennedy wasn't an obvious choice for the role of reformer. Indeed, Roosevelt is said to have responded to criticism of his appointment of Kennedy by saying, "It takes a thief to catch one."
IMPERFECT INSTITUTION. Yet Kennedy succeeded beyond anyone's imagination in his efforts to create a watchdog for the securities business -- to the surprise of both his Wall Street associates and those who distrusted him. In retrospect, it seems as though Kennedy understood that the SEC represented such a radical idea that it was doomed to fail unless he persuaded a defiant business community to offer a measure of cooperation.
In recollections he provided for a Columbia University Oral History Project in the 1950s, Chester Lane, who started as a staff lawyer at the SEC in 1935 and went on to become its longtime general counsel, said: "I often wonder if we would have had an SEC without Kennedy's reaching out to the business community. Kennedy's appointment by Roosevelt had been...a stroke of genius. The fact that he was elected chairman, that his name was the most prominent name among the commissioners, and that he was trusted by the financial community, undoubtedly made it possible for the new commission to get its feet on the ground."
Copyright 2003, by The McGraw-Hill Companies Inc. All rights reserved.
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