Chris Cox's Standards for Corporate Fines


In the nearly 17 years that Christopher Cox represented his Southern California district in the House of Representatives, the conservative Republican lawmaker earned a reputation as a consensus builder. Now, as chairman of the Securities & Exchange Commission, Cox has a new opportunity to put those skills to use.

Among his top priorities is finding common ground among the five commissioners on a question that has divided the agency for a year: When should the securities cops levy stiff fines against corporate wrongdoers?

Cox's two fellow Republican commissioners -- Paul Atkins and Cynthia Glassman -- balked at some of the megafines handed down under former SEC chief William Donaldson during the post-Enron cleanup. Their objection: In many cases where companies had committed financial fraud, the fines hurt shareholders whose stocks had already been hammered by the company's misdeeds.

On Nov. 29, Cox talked to BusinessWeek correspondent Amy Borrus about his effort to get the commission to agree on standards for corporate penalties (see BW Online, 11/30/05, "Corporate Fines: The SEC's Search for Rules"). Edited excerpts from the conversation follow:

Why did you ask fellow commissioners to tackle the issue of financial penalties against corporations?

The applicability of corporate penalties isn't simply a matter of taste, it's a matter of law. There needs to be a very clear understanding of what the law requires of us, and among Americans, what the law requires of them. So [we have] gone back to the law, to examine in particular the [Securities Enforcement Remedies & Penny Stock Reform Act] of 1990, which is the source of our authority.

The inescapable conclusion is that corporate penalties are an important tool in our enforcement arsenal to deter behavior that harms investors. We will continue to use corporate penalties.

But there are several questions. One is when [fines on companies] are appropriate. Another is how do you determine what the level of penalties should be? What factors should be taken into account? The greater the degree of objectivity, the greater the deterrent effect, because if it's an objective measure, it's knowable in advance. There has to be a series of objective measures so there can be continuity from case to case, and predictability.

How are you deciding what criteria to consider?

It's possible to divine from careful analysis of the legislative history and the statute itself which factors are most important. We're attempting to lay out in writing our common understanding of what the law requires of us. The form it will take is not yet determined. It's important for us to publish clear guidance at the earliest possible juncture. I hope to do it this year.

What about the argument that a fine against a company punishes shareholders already harmed by the stock price's slide?

The Remedies Act makes plain that the commission is to avoid injuring investors. At the same time, there are clear cases where corporate penalties are necessary to vindicate investors' interest.

With the enactment of the Sarbanes-Oxley Act in 2002, the SEC was given a new tool to harmonize the objectives of punishing corporate wrongdoing on the one hand and protecting shareholders in those companies at the same time. That's the "fair funds" procedure [by which fines are returned to injured stockholders].

To date, most of the fair funds haven't been distributed to shareholders. Congress intended that "fair funds" would operate as a speedy means of getting investors their due. If getting money to investors with alacrity is our purpose, we can do a better job.

Corporate penalties have been a divisive issue at the SEC. Can you really get all commissioners on the same page?

I don't know that all the commissioners will agree on all aspects of corporate penalties as a result of this process, but we will all have a much more thorough appreciation of the statutory moorings for our actions. And we will all more fully appreciate one another's points of view.


Coke's Big Fat Problem
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