WASHINGTON, 28 September 2003 — William Donaldson has pulled up the socks of the US Securities and Exchange Commission, as he memorably pledged to do seven months ago when he took over an agency then in deep disarray.
But he’ll need combat boots to get through the next few weeks, which will present key tests and show whether the praise heaped on him thus far signals more than just relief that he isn’t Harvey Pitt, said academics and lawyers on Friday.
“He has certainly restored confidence in the agency,” said Roderick Hills, a lawyer and SEC chairman from 1975 to 1977 when he handled his own share of market-regulating crises. “The agency is comfortable with itself and it’s comfortable with him. That’s no small task, especially after the sadness that Harvey (Pitt) found himself in,” Hills said.
“But there’s huge complaints from the world out there about the way they’re handling themselves. So this is a tough time.”
On Monday, Donaldson is expected to meet with John Reed, a high-profile Wall Street banker who has just been named interim chairman of the New York Stock Exchange. Reed replaces Richard Grasso, ousted amid a furor over his $140-million pay package. In the aftermath of the Grasso flap, Donaldson has been closely involved in the NYSE’s efforts to draw up a set of internal reforms meant to answer criticism that the Big Board is too clubby and unaccountable to investors.
The SEC chairman, who headed the NYSE himself from 1991 to 1995, has rejected preliminary NYSE proposals as inadequate, making some sort of rapport between him and Reed crucial.
On the same day as their meeting, the SEC will unveil recommendations on regulating hedge funds — loosely regulated investment pools favored by institutions and the rich that some critics say need more government policing. The chairman has helped shape an SEC staff report that will recommend reforms such as having more hedge fund managers register with the SEC. But support for it among the other four SEC commissioners is shaky and a fight could be in the offing.
On Tuesday, Donaldson will go before the Senate Banking Committee to discuss hedge funds, as well as mutual funds and brokerage analysts — two topics recently thrown into the spotlight by New York Attorney General Eliot Spitzer.
Spitzer upstaged the SEC again this month by announcing a probe of illegal trading in mutual fund shares. Like his probe last year of misconduct by brokerage analysts, this one left the SEC looking flat-footed and embarrassed.
“What’s happened in the last few weeks is a major test for Donaldson,” said Donald Langevoort, a Georgetown University Law School professor. “There have been a number of crises and the SEC hasn’t always looked the best in how it’s performed.”
On Wednesday, Donaldson has to report to the House of Representatives Financial Services Committee on what the SEC is doing about overseeing and reforming the mutual fund business.
The report to the House panel will not involve a hearing or a written document, according to SEC sources. The chairman may be thankful for that. When he last testified to the committee, he faced tough questioning on mutual funds and relations with state regulators.
“There always is a point where the honeymoon ends and Congress gets meaner, but he’s showing more willingness to take the bull by the horns than quite a few SEC chairmen,” said Columbia University Law School professor John Coffee.
Next month, other tests loom, including a struggle over giving shareholders the right to nominate director candidates through the corporate proxy statement. Donaldson has won praise from investor activists for his support of proxy access.
In the meantime, the mutual fund share trading probe and a probe of suspected illegal trading by NYSE floor specialists linger, not to mention the two-year-old probe of Enron Corp. and other corporate scandals that broke on Pitt’s watch.
Donaldson has been widely lauded for helping boost the SEC’s budget, seeing through a $1.4-billion settlement with Wall Street over analysts’ misconduct, as well as talking tough afterward to sullen Wall Street bankers. His handling of the new Public Company Accounting Oversight Board and appointment of former New York Federal Reserve chief William McDonough as its chairman have also won applause.
But Joel Seligman, dean of the Washington University School of Law in St. Louis, said, “So far, I think he’s doing a very good job. But part of the reality is, you get the tough ones when you’re in the chairman’s office.”