How Might Rulemaking Change under Cox?

SEC chairman William Donaldson's announcement that he will step down on June 30 threatens (or promises) to swing the regulatory balance of power.

Ever since Christopher Cox was nominated to succeed William Donaldson as chairman of the Securities and Exchange Commission chairman, interested parties have been maneuvering to influence his confirmation, or at least his agenda.

Donaldson, a Republican who was appointed by George W. Bush, has sided with Democratic commissioners Harvey Goldschmid and Roel Campos on a number of high-profile issues such as mutual fund and corporate governance, stock trading, and hedge fund regulation. Those positions were opposed by the SEC’s two other Republicans, Paul Atkins and Cynthia Glassman.

But in the wake of Goldschmid’s announcement earlier this year (he will leave the SEC this summer to return to teaching at Columbia Law School), and in light of the fact that Campos’s term expires this month (though he is up for renomination), Donaldson’s announcement that he will step down on June 30 threatens (or promises) to swing the regulatory balance of power.

The Wall Street Journal suggests that Cox’s opponents may question his relationship with First Pension Corp., which once was accused by regulators of cheating investors out of more than $120 million. Before he became a Republican congressman from conservative Orange County, California, Cox was a securities lawyer for Latham & Watkins. According to the Journal, Cox did work for First Pension and its founder, William E. Cooper, who subsequently pleaded guilty to felony charges in connection with the scandal and was sentenced to prison. A White House spokeswoman told the paper that Cox had been dismissed from a civil lawsuit over the matter.

Although Senate Democrats don’t have the votes to defeat Cox’s nomination, they may offer Republicans a horse trade: In exchange for the Bush Administration’s nomination of Annette Nazareth to fill Goldschmid’s seat and the renomination of Campos, they might grant the administration the opportunity to avoid a contentious confirmation process.

On the other side of the fence, the U.S. Chamber of Commerce and The Business Roundtable have called on the commission to be more transparent about its enforcement practices and not to put too many initiatives on its plate. According to the Financial Times, David Hirschmann, senior vice president of the U.S. Chamber of Commerce, recently called for “balancing the need for aggressive enforcement against fraud with the need to provide a fair and predictable process for honest companies.” And Thomas Lehner, director of public policy at the Business Roundtable, reportedly asked for “a consistent enforcement environment at the SEC, so that everybody understands what the ground rules are.”

Indeed, some business groups are pushing for a moratorium on new regulations so that companies can have enough time to digest the mandates of the Sarbanes-Oxley Act. “The reforms need to be given time to be absorbed and implemented by companies before there is any discussion of new reforms,” Lehner reportedly said. And Mark Lackritz, president of the Securities Industry Association, has called for the SEC to make greater use of cost-benefit analysis in any new regulations, according to the FT.

Another voice for regulatory restraint was Frank Speight, chairman of the Microcap Company Political Action Committee. In a press release, he urged Cox to “[provide] “exemptions from Sarbanes-Oxley for companies with less than $100 million in annual revenues and relax mandates for firms between $100 million and $200 million.”

Shareholder groups, however, are not simply standing by. Rich Ferlauto, director of pension investment policy at the American Federation of State, County and Municipal Employees, recently opined that “Cox’s track record in Congress should concern investors,” Added Ferlauto: “Cox voted to gut FASB’s efforts to require the expensing of options and in 1995 advocated an early version of the Private Securities Litigation Reform Act that would have repealed the recklessness standard in shareholder suits. This proposed standard would have let Bernie Ebbers and Ken Lay off the hook for the financial manipulations at WorldCom and Enron.”

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