You have no enemies, you say?
Alas, my friend, the boast is poor.
He who has mingled in the fray
Of duty, that the brave endure,
Must have made foes. If you have none,
Small is the work that you have done.
You've hit no traitor on the hip,
You've dashed no cup from perjured lip,
You've never turned the wrong to right,
You've been a coward in the fight.
-- Charles Mackay
What a tour of duty it's been for Securities and Exchange Commission Chairman Bill Donaldson. Chosen by President Bush in 2003 to take over for beleaguered Harvey Pitt, he faced the Herculean task of restoring investor confidence and implementing Sarbanes-Oxley in the wake of the Enron, WorldCom, Tyco, and other corporate scandals. Donaldson's selection initially appeared to represent just another male, pale, and Yale face with a patrician air and a Wall Street pedigree.
Well, partisan Republicans have since registered their complaints. Instead of embracing a caretaker role or adhering to traditional lines, Donaldson himself notes that his tenure represents "an extraordinarily active and effective time for the Agency. It may well be remembered as the most consequential and productive period in the Commission's history since its founding in 1934." When he steps down on June 30, the U.S. Chamber of Commerce, the Business Roundtable, and many congressional Republicans will cheer. They believe Donaldson went too far, especially in terms of siding with the SEC's Democratic commissioners on issues concerning mutual funds, hedge funds, and stock market trading. Some pundits even claim that Donaldson's departure should be heralded because stock market values might increase with less regulation.
Debating Donaldson's legacy as head securities sheriff is fair game, but it should be measured with respect to the SEC's role. The SEC's mission is to protect investors and maintain the integrity of the securities markets. Notice that the agency's task is not to fatten your portfolio. The question for you, dear investor, both Republican and Democrat alike, is this: Do you feel more confident in the integrity of the securities markets than you did 2 and 1/2 years ago? I do. Here's why.
1. Investor research has improved. In April 2003, Donaldson approved the $1.4 billion settlement of civil claims against 10 of Wall Street's largest firms, ending several investigations into alleged conflicts of interest stemming from the Blodget/Grubman era of Wall Street analysts touting lousy stocks to garner investment-banking business. The settlement required brokerages to provide customers with independent research. Several academic studies and tracking services now report that the quality of both independent research and brokerage firms' in-house recommendations is becoming more credible.
2. Financial reports say something. What good is information that's not accurate and reliable? Or just not there at all? Donaldson championed implementing Sarbanes-Oxley, including its disclosure and accountability features. Annual reports must now include a statement by corporate management of responsibility for internal controls over financial reporting. All material off-balance sheet transactions must be reported, and pro forma financial information must not be misleading. While many small companies have complained about the onerous cost of effectively implementing Sarbanes-Oxley, for individual investors trying to decipher financial statements on their own, this is a win.
3. Someone's home at the SEC. Donaldson beefed up the SEC's reputation as well as its resources in his quest to make the agency more proactive than reactive. Under his leadership, the SEC pursued 1,716 cases and raked in $7.7 billion in penalties and disgorgements.
4. Mutual funds must play fair. Donaldson led the charge in reining in abusive practices in the $7 trillion mutual fund industry. The SEC unanimously voted to require funds to disclose more information about fees and adopt ethics codes, while also allowing funds to impose penalties for selling fund shares within seven days of their purchase. In a contentious 3-2 vote, Donaldson sided with the majority, adopting a rule -- scheduled to go into effect in January 2006 -- that requires fund boards to have independent chairmen.
5. Someone is thinking about hedge funds. Donaldson sided with a 3-2 majority that required registration by hedge fund advisers managing more than $25 million for 15 or more clients, starting in February 2006. Amid headlines oscillating between blaring that everyone and their grandmother is starting up their own fund to predictions of imminent collapse of highfliers, I don't know the right answers, but I find the focus being placed on this growing $1 trillion industry comforting. Free enterprise, you say? Don't forget the 1998 demise of Long-Term Capital Management, which needed the Federal Reserve's assistance to orchestrate a bailout.
6. There's hope for an honest price. Donaldson sided with a 3-2 majority on a rule requiring that investor orders be filled at the best price, if the order can be executed immediately. This rule, which will be phased in beginning in April 2006, sounds good for the average Joe.
7. Water cooler talk is now fun again. Finally, office chatter can return to the real important topics of our times; namely, whether next season's Desperate Housewives will turn out to be a dud, instead of those bothersome yesteryear questions like whether someone spotted the big boss buying fancy shower curtains using the company credit card or whether there really is a corporate office in Grand Cayman.
Fraud will never disappear entirely, and the impact of Sarbanes-Oxley and other regulations may mean that some rules need tinkering. Hedge fund headaches remain. A few may even argue that Donaldson did not go far enough.
What's clear is this: When an investor opens a new account, he does not specify his political party affiliation. He does expect, though, that he will be investing in companies that fully disclose significant facts and trade within a fair market. Meaningful disclosure, good corporate governance, and transparent markets breed respect in financial markets, foster fair competition, and ultimately help corporations attain real shareholder value. Donaldson, working in a bipartisan manner, has done much to restore confidence in the U.S. capital markets. He may have earned some powerful special-interest enemies, but he's got a friend in the investor community, too.
For more, check out:
- Are SEC Reforms Harmful?
- New SEC Chief on Track?
- Bush Fills Slots, Feels Heat
- SEC Chairman Pitt Resigns
Fool contributor S.J. Caplan is a former Wall Street attorney. She recalls meeting Donaldson years ago when he was chairman of Donaldson, Lufkin & Jenrette, but has little doubt that he would not recall meeting her. The Motley Fool is investors writing for investors.