Paul S. Atkins is making waves at the normally staid Securities & Exchange Commission. At 46, he's the youngest of the commission's five members, and, like SEC Chairman William H. Donaldson, he's a Republican. But Atkins, a firm believer in limited government, has harshly criticized Donaldson's drives to regulate hedge funds, force mutual-fund boards to have independent chairmen, and promise investors that the best prices will be protected when they buy or sell stock. And behind the scenes, Atkins balks at some of the stiff fines the commission metes out to corporate fraudsters.
A soft-spoken, congenial lawyer, Atkins believes the SEC shouldn't rush to regulate without empirical evidence that proposed rules would significantly benefit investors. That has endeared him to many in business and conservative circles, who think the SEC is in regulatory overdrive. But Atkins' outspoken ways have irritated some staffers and Donaldson, and fragmented the SEC's voice, spurring doubts about the agency's commitment to post-Enron reforms. BusinessWeek Washington Correspondent Amy Borrus interviewed Atkins about his views and his role on Jan. 31. Edited excerpts from the interview follow:
Q: You have warned of the dangers of regulatory overreach by the SEC. How should the agency approach rule-making?
A: First, we have to empower investors through education and better disclosure. We should be as effective and efficient as possible in finding fraud and punishing fraudsters. We must make sure our rules are clear. If a compliance officer can't point to something and say "Look here, this is prohibited activity, and you shouldn't do this," and the manager's response is "Where does it say that?" it undermines the authority of the compliance officer.
But we have to realize that markets have great power to discipline people. We shouldn't try to second-guess them.
Q: Is the SEC too quick to regulate?
A: When we see problems, we shouldn't take a one-size-fits-all approach. If we make rules based on a lack of empirical evidence or pick and choose among approaches without a firm philosophical grounding, I'm not sure that helps investors.
It's like buying insurance on your house. Different people have different levels of risk tolerance. What some of our rules do is decide for investors how much insurance they should have on their investments. Take the requirement that mutual funds have independent chairmen. We have no idea whether it works. If you look at the mutual-fund scandals, some of the worst problems were at complexes with independent chairmen.
Q: What's wrong with requiring hedge-fund managers to register with the SEC?
A: We're taking resources that ought to be used for the 95 million investors in mutual funds and spreading them out to parts of the investor community that are more able to protect themselves. Our actions should be based on what's the most effective use of government resources to help the most people.
Q: The SEC is considering a plan to overhaul stock-trading in a way that promises investors the best price when they buy or sell. Do you support that proposal?
A: The New York Stock Exchange is developing a hybrid model [of electronic and manual stock-trading]. Let's see how that works and then reassess what needs to be done.
Q: What other issues should the commission tackle?
A: What I hear over and over when I talk to investors is "information overload." People don't understand prospectuses or mutual-fund statements. We really have to look at our rule books and see what is and isn't working.
Q: Why have you opposed some fines for corporate wrongdoers?
A: [Former SEC Chairman] Richard Breeden used to say "I want to leave them naked, homeless, and without wheels," which I thought crystallizes very well the idea that we should show no quarter to people who intentionally, willfully lie, cheat, and steal. They should not be left with the fruit of their misdeeds.
But when we extract a penalty from a company for financial fraud, it affects shareholders and employees. If you're a shareholder who held shares through all that and are still holding the shares now, your shares are worth less, but now we're taking money from the company to give only pennies on the dollar back to you. That hurts the the company's ability to grow and ultimately hurts shareholder value.
Are we just sort of headline-grabbing? Is that really the best way to deter bad conduct, by hurting the people that we're supposedly helping? No. The best solution is to hold individuals accountable because someone in the company cooked the books. We ought to hold individuals accountable, not shareholders.
Q: Why have you been such an outspoken critic of so many SEC initiatives?
A: I'm trying to be honest. We have philosophical differences from time to time, but on the majority of things, we are in agreement.
Q: Your critics suspect you of bad-mouthing the commission and Chairman Donaldson to Administration officials, and of trying to position yourself to succeed him. Is there any truth to that?
A: No. The chairman has my loyalty. As for my ambitions, that's completely wrong. This job has been much more rewarding than I ever expected it to be. I'm not out to climb the ladder.