You Can't Have a "Free-for-All"


Soft-spoken he may be, but there was nothing quiet about the way William H. Donaldson left the Securities & Exchange Commission. On June 29, one day before his planned retirement, the 74-year-old Wall Street veteran pushed through a controversial mutual-fund rule -- acting just a week after a federal appeals court said the agency hadn't adequately considered the rule's costs or alternatives.

Once again, the Republican chairman sided with the SEC's two Democrats in a 3-2 vote. The U.S. Chamber of Commerce, which sued to block the rule, says it will return to court, charging that the SEC acted too hastily.

It was a fitting end to Donaldson's reign. When he arrived at the SEC in February, 2003, investors were reeling from a wave of corporate scandals. Donaldson's activism bolstered investor confidence -- but antagonized business and the GOP. On June 28, Donaldson discussed his tenure with BusinessWeek Correspondent Amy Borrus and Deputy Washington Bureau Chief Mike McNamee. Below are edited excerpts:

Q: The business community seemed to breathe a collective sigh of relief when you announced plans to step down. Any regrets about leaving when Corporate America is openly chafing at reform?

A: I don't have any second thoughts about leaving. Boards and audit committees are functioning better. People are being careful to obey the law and not just step up to the brink [of misbehavior]. There's been a definite improvement.

Most businesspeople would say that the Sarbanes-Oxley reforms are good and are working, although there are a lot of complaints about the costs associated with Section 404 [rules requiring managers and auditors to strengthen internal financial controls]. We're attempting to address those.

We've done what Congress asked us to -- make fines not just a cost of doing business but a deterrent. We've got to have a balance between rules and enforcement of the law, and corporate and financial America picking itself up with an ethic that will be far better than laws can ever [create].

But there are parts of the business world that don't get it. Some business organizations should be helping companies conform to new laws and helping managements and [board] committees address the issues, instead of shouting about the pendulum swinging too far.

Q: How do you respond to complaints that your SEC overregulated in ways that were bad for business?

A: The market for securities or investments has to have rules. You can't just have a free-for-all without some sort of protection for investors. I'm the only commissioner who has built a business. You know, the idea that somehow I'm against capitalism, or free markets, or entrepreneurialism -- they're what I've stood for my whole life.

Q: As a Republican appointee, you've taken a beating in your party for siding with Democrats in 3-2 votes on high-profile rules and some enforcement actions. Could you have done more to encourage consensus?

A: I have worked very hard to have consensus around really sensitive issues. But I don't think there's any place for politics at the SEC. I've been guided by one principle: to act according to the mission of the SEC, and that is investor protection. Should I have changed what I thought was right to conform politically? I don't think so. That's not why I came. That's not why the President appointed me.

What if we had not acted on a 3-2 vote on hedge funds? Look what's happened in the last two years. The papers are filled every day with [stories about] hedge-fund problems. Regulators around the world are concerned. I don't see how, in all good conscience, we could not have taken the step we did to bring this huge amount of money under some sort of surveillance.

If you wait until you get consensus, you probably are going to have a compromise that doesn't get anything done. There was no way -- short of not acting -- that we could have bridged the 3-2 schism on the rulemakings where it occurred.

Q: A federal court blocked the SEC's rule on mutual-fund directors. You moved to reinstate it in a week. Critics say that rush undermines the SEC's credibility.

A: The court said we acted absolutely within our authority to insist that 75% of directors and the chairman be independent. It did not ask us to put this out [for public comment] again. It asked us to respond more fully about the rule's costs, and it asked us what we thought of the alternative idea of requiring a fund to disclose whether its chairman was independent.

We have all that information. We have five commissioners and a staff who spent more than a year thinking this through. After the end of this week, there will be a whole new group [headed by Chairman-Designate Christopher Cox]. This commission has an obligation to investors to finish what it started.

The hullabaloo out there about us acting quickly is being made by people who want us to open [the rule] up again.

Q: Did you get any inkling that your actions as chairman displeased the President? Did anyone at the White House suggest it was time for you to go?

A: I have been gratified by the support of the President right from the beginning. The decision to leave was totally my own. Nobody asked me to go. The President has known for months that I was planning to leave.

Q: What has come of your push for the SEC to see around corners to anticipate problems in markets and boardrooms?

A: We're getting out ahead [of abuses]. We have inquiries into pension fund advisory firms, private placement of securities. We've sent some warnings out there. We're getting more cooperation between [SEC staff] divisions. I hope [the process] will be institutionalized.

Q: What about your unfinished plans -- more disclosure of CEO pay and perks, and more investor say in electing directors?

A: I do believe in compensation for a job well done and exceptional compensation for an exceptional job. But I think that shareholders are entitled to know what your total compensation is, and it's almost impossible to tell. You've got to display that so people can understand what the total compensation is, and it's almost impossible to tell now. We're working toward that. We're close to getting there.

On proxy access, there is a problem: If you have more and more institutions owning stocks forever, how do they exercise their rights as owners when they're dissatisfied with how the company is run? The old maxim, you sell if you don't like what's going on -- they can't sell.

What we originally threw out was not necessarily the best way to fix the problem. There are legitimate concerns on both sides. Certain shareholder groups [like unions and governance advocates] want to influence the board for different reasons. But there are also major shareholder groups that have a legitimate desire to influence how the company operates. I think it's inevitable that something's going to be done.

Q: What has surprised you most in the 2 1/2 years you've been chairman?

A: The vehemence of the hardened political views that the country seems to be going through now affects anyone in government. I hate to see politics affecting decisions at the SEC.

The constant enforcement actions undertaken against investor bilking, fraud schemes. We beat one, and another one pops up. I'm astounded at the continuing flow of that.

We faced a difficult situation with much of the populace mistrustful of business and the financial community. We've worked hard to do something about that, but it's not completely solved. It will take a recognition by businesses that they have to do more to improve their ethical DNA.


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