TCS Daily

Mistake at the SEC

By James K. Glassman - October 18, 2004 12:00 AM

When President Bush admitted in Friday's debate that he had "made some mistakes in appointing people," he certainly had in mind someone with the initials P.O'N.

But perhaps he also was thinking of someone with the initials W.D. William Donaldson, who last year became chairman of the SEC, the nation's top financial regulator, had all the right credentials: co-founder of a Wall Street investment firm, dean of the Yale School of Management, chairman of the New York Stock Exchange, and CEO of Aetna.

Yet, to put it mildly, Donaldson, 73, has been a disappointment. It's hard to believe his is the Bush Securities and Exchange Commission.

More and more, policies reflect the views of a hard-line Democrat, Harvey Goldschmid, a Columbia University law professor who was SEC general counsel during the Clinton Administration.

On key issues these days, Donaldson sides with Goldschmid and the other Democrat, Roel Campos, a broadcast executive, against the commission's two Republicans, lawyer Paul Atkins and Cynthia Glassman (no relation to me), a Ph.D. economist who served 12 years on the staff of the Federal Reserve.

The coalition of Dems-plus-Donaldson is pushing measures that threaten the nation's economic health. Among them: a disastrous plan for "shareholder access" that would give labor unions and radical environmental groups more say in running corporations; heavy regulation of hedge funds (against the objections of Fed Chairman Alan Greenspan); and a dangerous overhaul of the management structure of U.S. mutual funds, which, like many of the SEC's other initiatives these days, will likely result in fewer choices and impaired performance.

But the problem is not merely an ideological bias that favors Washington dictates over market discipline. The SEC, as Peter Wallison, my colleague at the American Enterprise Institute, wrote recently, was "once known for the thoroughness and professionalism of its staff work and analysis."

Now, under Donaldson, it "has begun to propose and adopt rules and regulations without support in empirical data. If this pattern continues, the agency will forfeit its reputation for deliberate action and make serious policy errors."

The staff -- that is, the permanent bureaucracy of lawyers, especially in the Enforcement Division -- has always steered the course at the SEC, but it has been kept in check by a culture of restraint and respect for data. Lately, the attitude has become, "Don't bother me with the facts. Let's get on with it."

A good example is the commission's decision in June to force mutual funds to hire a chairman with no ties to management. The SEC simply ignored research showing that funds with such a set-up charge higher fees and get lower returns than those without it.

"We have entered the age of atmospherics," Atkins says. "We appear to be more concerned with doing something and going with gut feelings than we are concerned with making sure what we do is right."

The problem began when the SEC panicked as Eliot Spitzer, New York's attorney general, scored with high-profile investigations of investment analysts and mutual funds. Spitzer was "taking victory laps at the SEC's expense," said Business Week. The SEC began cracking the whip in all directions, with little coherence or strategy. Meanwhile, the commission neglected its own long-overdue structural reform, which should have been Donaldson's first priority, and dragged its feet on fixing antiquated trading rules that favor the NYSE over higher-tech competitors.

The victims of the flailing SEC are businesses and the small investors who own them. Rarely, however, will anyone fight the excesses, for fear of reprisals. One word from the SEC can send your stock tumbling.

But, in the past few weeks, a potential challenge has emerged from American International Group, Inc., the widely respected global insurance giant headed by Maurice (Hank) Greenberg.

Earlier, the SEC and the Justice Department told AIG that it was under scrutiny over a deal that involved some transactions with a banking client. The big issue now, is "not the actual transactions, mind you, but press releases referring to the transactions," reported last week. The Wall Street Journal quoted a former SEC commissioner as saying, "I would tentatively hypothesize that AIG was standing up for its innocence." Regulators, on the other hand, "don't want to hear you say you have other ideas. 'If we tell you you've done wrong, better admit you've done wrong right away."

Today, in so many areas, it's the SEC that's doing wrong. That's one mistake the president can easily fix.


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