The SEC: Victim of the Press
By Mike McNamee
Now that the Securities & Exchange Commission has wrapped up the busiest rule-making rush of its 69-year history, the natural question is: How did investors fare? With headlines screaming about the SEC "caving in" to accounting lobbyists and "watering down" the Sarbanes-Oxley Act, it would be easy to conclude that Harvey L. Pitt, the chairman who won't go away, has led the SEC into another debacle, sacrificing crucial shareholder protections to satisfy his special-interest backers.
That's the easy story -- but it's wrong. In fact, the SEC rules for accountants and lawyers, approved on Jan. 22 and 23, go far beyond what Congress' corporate reformers asked for in Sarbanes-Oxley. The final regulations put tough limits on the consulting that accountants can do for their audit clients. They subject accounting-firm peddling of tax shelters to strict scrutiny by board audit committees for the first time ever. And they make it clear that corporate lawyers must answer to directors and shareholders, not to conniving managers -- another first.
All these rules passed the SEC unanimously, with strong support from the commission's two Democrats as well as the Republican majority.
It's true: The final rules passed by the SEC didn't go as far as some early draft proposals did. But politicians and regulators almost always propose far more than they can hope to achieve. When Pitt's predecessor, Arthur Levitt Jr., got 60% of what he proposed, he was hailed as a political master. Pitt, by contrast got at least 90% of his proposals (see BW Online, 1/30/03, "A Fact Sheet on the SEC's New Rules"). But he was condemned for selling out, and the SEC staff was tarred as well.
Why were these rules, which exceeded anything Congress asked for, widely denounced as weak compromises foisted on investors by powerful lobbyists? The episode is a fascinating illustration of how pack journalism and groupthink works in Washington.
As is their practice, senior SEC staffers briefed reporters on the upcoming accounting rules on Jan. 21, the day before the SEC voted. But the staffers, who had been working around the clock on the complex proposals, were ill-prepared for reporters' skeptical questions about how the rules had been changed from the first drafts. They didn't explain the changes clearly or spell out their rationale.
The SEC staff works for the chairman, and for most of the press, the notion that Pitt would weaken the rules in favor of his old accountant clients fit a familiar template. Pitt resigned on Nov. 5 amid a furor over his mishandling of Sarbanes-Oxley reforms, but he's still chairing the commission while awaiting Senate confirmation of William H. Donaldson as his successor. The press has long suspected that Pitt is hanging on so he can block corporate reforms -- and now reporters thought they had the proof.
One person could have stopped that line of reasoning, but he was in China. SEC Commissioner Harvey J. Goldschmid, the agency's senior Democrat and a tough-minded reformer, was spending hours on the phone with his colleagues from Shanghai helping polish the final rules, which he strongly supported. But Goldschmid, whose phone number is on the speed-dial of most Washington financial reporters, wasn't available to explain the changes to journalists or give the final versions his blessing.
Once the story hit the front page of The New York Times ("Staff at SEC Is Said to Dilute Rule Changes"), the facts didn't stand a chance. The Times story accurately reported that the rules had been pulled back from the SEC drafts, not from Sarbanes-Oxley's requirements. But the clear impression it left was that Pitt and his staff were undermining Sarbanes-Oxley. The rest of the press chimed in: The Washington Post moved the story from the business section on Jan. 22 to page one the next day.
LONG, HARD WORK.
Now, it's absolutely true: Pitt should have left the SEC back in November. He casts a dark shadow over his agency that it can't escape. Someone at the White House should have told Pitt to pack his bags months ago.
Still, this time the blame doesn't go to Pitt. The SEC staff and commissioners labored long hours, under incredibly tight deadlines and intense scrutiny, to build a huge book of new law on accounting, financial disclosure, professional conduct, and corporate governance. They weighed competing interests, withstood heavy lobbying, and came out with tough but balanced rules.
Then, as they neared the finish line, they were waylaid by bad analysis and journalists' inability to resist an easy political line. It's a sad ending to a historic achievement.
McNamee is a senior correspondent for BusinessWeek in Washington
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