Commentary: What the Next SEC Chief Needs: A Passion for Reform

By Mike McNamee and Paula Dwyer

When George W. Bush took office in 2001, Wall Street waited anxiously for the President to name a new Securities & Exchange Commission chairman. It took months. The job simply wasn't that important to the new Administration. Now the helm of the SEC is unmanned again. But this time, Bush doesn't have the luxury of delay. Investor confidence in financial markets in the two years leading up to Bush's own reelection bid depends in no small part on the President's pick to run this small, no-longer-obscure agency.

Still smarting from corporate scandals and huge stock losses, investors aren't likely to return in force to the markets unless the SEC and Congress keep the reform momentum rolling. The next SEC chief must bring to the job a passionate desire to rid Wall Street of its conflicts and to force business to clean up its accounting and financial engineering.

That's not the view within the Administration, which largely believes that a few bad executives are spoiling the reputation of the whole country club. Emboldened by its election sweep, the White House could figure all it needs is a tough cop at the SEC. It could make a splash by recruiting former Wall Street prosecutor and New York Mayor Rudolph W. Giuliani, but he's thought not to want the job. Other enforcers dominate the list of likely candidates: Assistant Attorney General Michael Chertoff, who's playing a key role in the Justice Dept.'s corporate-crimes task force, or Mary L. Schapiro, head of National Association of Securities Dealers' regulatory arm.

Enforcement is fine. Yet Bush also needs a true reformer. And he should pay careful attention following the self-immolation of Harvey L. Pitt, who resigned as SEC chief on Nov. 5 after committing one gaffe too many. Pitt's problem wasn't that he was a weak cop: He spurred the SEC's Enforcement Div. to come down harder than ever on executives from WorldCom Inc., Enron Corp., and the like. No, what undid Pitt was the sense that he would take only minimum steps to bring change to corrupt, conflicted systems.

The next SEC chairman has a lot of damage to undo. The Bush Administration has waffled on providing the SEC with the staff and pay levels it needs. No one should take the job without demanding that the White House sign off on the full $750 million in SEC funding that Congress has proposed. Morale at the agency suffered badly under Pitt, so the next chairman ideally would be an SEC veteran who can quickly restore the agency's esprit de corps. Pitt also weakened the SEC's relations with Capitol Hill, even as he needlessly politicized the agency. "The next SEC chairman needs to be a peacemaker because Pitt got the commission voting on party lines," says Paul B.W. Miller, accounting professor at the University of Colorado at Colorado Springs.

So who meets the necessary criteria? Bush's onetime lawyer, James R. Doty, a former SEC general counsel, certainly does. Former federal judge and SEC enforcement chief Stanley Sporkin would bring even more gravitas to the job. But the best test should be whether a new SEC chief is determined to outlaw practices that favor financial interests over investors. Wall Street is desperate for a strong hand at the SEC to rein in New York State Attorney General Eliot Spitzer. Yet Spitzer wouldn't have become such a powerful force had Pitt's SEC not downplayed the Street's conflicts. The next SEC boss must make true changes--especially in the IPO process--to cure those conflicts.

And let's not forget the accountants. Pitt's choice to head a new accounting oversight board, William H. Webster, is likely to step aside. The remaining four commissioners should appoint John H. Biggs, until recently CEO of pension-fund giant TIAA-CREF. It was Pitt's rejection of Biggs after the accountants objected to him that greased the skids under the SEC chief. Without Biggs, or someone like him, investors will think the SEC isn't serious about audit reform.

No one in business likes regulation, and any reforms must be balanced. But investors are still awaiting proof that the seamy underside of the markets, so vividly exposed over the last year, has really been cleaned up. Wall Street, the business community and, ultimately, the Bush Administration will all be better off with an SEC chief who realizes that the job of reform has just begun.

McNamee and Dwyer cover the SEC.

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