TCS Daily

An Inspired Choice

By James K. Glassman - June 2, 2005 12:00 AM

Shed no tears for Bill Donaldson. He was a gigantic disappointment as chairman of the Securities and Exchange Commission. He consistently sided with the two Democratic commissioners against the two Republicans. It was Harvey Goldschmid, a hardline Democratic law professor from Columbia, along with the permanent bureaucracy of interventionist lawyers, who really ran the SEC in the Donaldson years. (Goldschmid, by the way, will depart later this year.)

Donaldson, who turns 74 today, resigned yesterday and leaves office at the end of the month.

As nominee to fill the post, President Bush has made an inspired choice: Rep. Christopher Cox (R-Calif), who, in my experience, understands the authority of free markets better than all but a handful of members of Congress.

Cox should be quickly confirmed. When he is, he must immediately turn to undoing the mess that Donaldson created. With two superb commissioners, Paul Atkins and Cynthia Glassman (no relation), behind him, he will have little trouble.

First, Cox should rewrite Regulation NMS, which was passed earlier this year and denies investors the freedom to choose the way they want their trades executed. Next, he should revoke a misguided measure that requires mutual funds to have an independent chairman and a large majority of independent directors. He should give full exchange status to the Nasdaq Stock Market and at the same time require the New York Stock Exchange to adopt the same regulatory model as Nasdaq -- contracting with a private regulator, not trying to regulate itself.

There is other work to do: Cox must rein in the Financial Accounting Standards Board, which has become a law unto itself. FASB is obsessed with forcing companies to expense stock options -- a move that hurts the competitiveness of high-tech companies, many headquartered in Cox's home state.

Cox must also change a culture that views more complex and onerous regulations as the goal. Instead, the SEC should focus on fighting fraud, on encouraging companies to be more transparent and on urging the adoption of other metrics besides GAAP accrual accounting.

Cox should also conduct a thorough review of the Sarbanes-Oxley law, which has put a damper on risk-taking, boosted corporate expenses and produced no significant benefits for investors. To the contrary.

Donaldson resigned before he could enact another damaging measure, a plan for enhancing "shareholder access," which, in reality, would give labor unions and radical environmental groups more say in running corporations.

Unlike his predecessor, Arthur Levitt, a Democrat, Donaldson failed to make investor education a high priority. Levitt held dozens of popular Town Meetings -- a practice that Cox should resume.

Donaldson was recently embarrassed by a $48 million budget shortfall and by an audit by the Government Accountability Office that concluded that the commission "failed to institute some of the same financial controls it requires of the public companies it polices," according to a news story in the Wall Street Journal.

The Cox SEC should revitalize the empirical research for which the SEC, in pre-Donaldson days, was known. In recent years, the commission, charged my AEI colleague Peter Wallison, proposed and adopted rules and regulations "without support in empirical data." Wallison said the SEC risked forfeiting "its reputation for deliberate action and [could] make serious policy errors."

Those errors have been made. But they can be corrected. And there is no one better suited to the task than Chris Cox.



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