Mistake at the SEC

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, CEO of Aetna, Under Secretary of State to Henry Kissinger.

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 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," TheStreet.com 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.

James K. Glassman is a resident fellow at the American Enterprise Institute.

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About the Author


James K.
  • James K. Glassman is a visiting fellow at the American Enterprise Institute (AEI), where he works on Internet and communications policy in the new AEI Center for Internet, Communications, and Technology Policy.

    A scholar, diplomat, and journalist, Glassman rejoins AEI after having served as under secretary of state for public diplomacy and public affairs, during which time he led America’s public diplomacy outreach and inaugurated the use of new Internet technology in these efforts, an approach he christened “public diplomacy 2.0.” He was also chairman of the Broadcasting Board of Governors, the independent federal agency that oversees all US government nonmilitary international broadcasting. Most recently, Glassman was instrumental in the creation of the George W. Bush Institute, where he remains the founding executive director.

    Before his government service, Glassman was a senior fellow at AEI, where he specialized in economics and technology and founded The American, AEI’s magazine, which he led as editor-in-chief until his departure from AEI in 2007.

    In addition to his government service, Glassman was a former president of The Atlantic, publisher of The New Republic, executive vice president of US News & World Report, and editor-in-chief and co-owner of Roll Call. As a columnist for The Washington Post, Glassman wrote about political and economic issues. He was also the host of CNN’s “Capital Gang Sunday” and of PBS’s “TechnoPolitics.” In 2000, he cofounded TCS, a technology and policy website. His most recent book is “The Secret Code of the Superior Investor” (Crown Forum).

    Glassman has a B.A. in government from Harvard College where he was a managing editor of The Crimson.


  • Email: [email protected]

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