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Early in 1934, as Congress worked on the legislation that would create the SEC, New York Stock Exchange President Richard Whitney proclaimed the exchange "a perfect institution" -- and rejected the idea that the government should regulate the securities business. After passage of the Securities Exchange Act in 1934, Whitney, among others, proposed that financial institutions show their displeasure with the new law and its companion legislation, the Securities Act of 1933, by shutting down temporarily. Many leaders of Corporate America openly threatened to ignore the rules laid down by the new commission.
CONFIDENCE GAME. In his first major public speech on the issue, at the National Press Club on July 25, 1934, Kennedy tried to reassure the old guard. "Everybody says that what business needs is confidence," Kennedy said. "I agree. Confidence that if business does the right thing, it will be protected and given a chance to live, make profits, and grow, helping itself and helping the country. The rules are simple and honest. Only those who see things crookedly will find them harsh."
Kennedy's measured approach helped calm the situation. "I always had some doubt whether, if he had not been appointed chairman, the commission would have survived the attacks that it would have received from the financial community," said Lane.
The SEC did more than survive. Under Kennedy, the fledgling organization cleaned up the securities business. The chairman charmed members of the financial community with cases of Gordon's or Dewar's -- then traded upon that goodwill to go after companies that refused to acknowledge the legitimacy of the SEC by registering their securities with it.
Kennedy's zeal for reform may have been politically motivated
During Kennedy's 16-month tenure, the SEC investigated 2,300 cases of fraud, many more than during the three-year chairmanship of his successor, the supposed crusader John Landis. Kennedy even hired committed reformers, bringing into the SEC a young, liberal lawyer named William O. Douglas, who would later sit on the Supreme Court for more than 35 years. Most historians believe that Kennedy's zeal for reform at the SEC stemmed from his desire to move up in the Roosevelt Administration. That desire seems evident in newspaper clippings he sent the President in September, 1935, chronicling the SEC's investigation of a fraudulent credit union, the National Educators' Mutual Assn.
On July 1, 1935, Kennedy was re-elected chairman of the SEC for a one-year term. But he knew his job was nearly done. After lining up Landis as his successor, he resigned in September of that year and sailed to England with his wife and son Jack, the future President. A few years later, Kennedy would get his reward: Roosevelt named him Ambassador to the Court of St. James.
FORCE AND PERSUASION. At the time, the ambitious Kennedy couldn't have guessed that his greatest contribution to public life would be his leadership of the SEC. His assignment in London ended in disaster, as he insisted that England couldn't win a war against Hitler's Germany. He turned against President Roosevelt and resigned his ambassadorship early in World War II.
In retrospect, Kennedy's genius as a regulator was finding the right balance between force and persuasion. Up to now, Donaldson has demonstrated that he can lay down the law. If the time ever comes when he needs to turn on the charm, he may want to take a look back at the record of the most unlikely -- and most successful -- reformer in the history of the SEC.
Mike Brewster is author of the recently published Unaccountable: How the Accounting Profession Forfeited A Public Trust (April, 2003), and co-author of King of Capital: Sandy Weill and the Making of Citigroup (June, 2002)
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