Commentary: Don't Stop Now, Mr. Donaldson

By Mike McNamee

If William H. Donaldson has the heart of a reformer, he does a darned good job of hiding it. Low-key and avuncular, the Securities & Exchange Commission chairman says all the right words about restoring integrity to Corporate America and financial markets -- but with none of the fire that can make the SEC job a bully pulpit. At the Apr. 28 press conference laying out the terms of the $1.4 billion settlement with investment banks, his voice barely rose as he declared himself "profoundly saddened and angry" over the scandal. Nowhere has Donaldson articulated a particular vision about his priorities for the agency.

That's why many see the 71-year-old ex-Wall Streeter as a caretaker, installed by the Bush Administration to keep the SEC out of the headlines following Harvey L. Pitt's 18-month reign of tumult. "What's his agenda?" says one investor advocate. "Ask Karl Rove," the White House spinmeister.

Yet does an SEC chief have to summon fire and brimstone to be a reformer? Donaldson "has focused very, very intensely on getting a few things right," says a longtime senior SEC staffer. With three key achievements in his first two months, he has started to steer the agency in the right direction. More important, Donaldson has set three tasks that will soon determine if he'll match his quiet reform talk with muscular action.

Donaldson's biggest public triumph: recruiting William J. McDonough, retiring president of the Federal Reserve Bank of New York, to chair the Public Company Accounting Oversight Board -- a crucial step to restore confidence in the corporate sector. Donaldson used the process to smooth relations with the other four SEC commissioners, going to their offices to seek their input and listening to them before he speaks in meetings.

Donaldson also has restored morale among the SEC's battered staff. While Pitt quizzed staffers over footnotes, Donaldson focuses on the big picture and lets his underlings take care of the details. Take the analyst settlement: Donaldson could have second-guessed the deal with the 10 Wall Street firms. Instead, he counted on enforcement chief Stephen M. Cutler to settle the details -- and made sure Cutler got the credit.

Unfinished business and repair work are fine, but what more will Donaldson do? Besides passing tough rules to back up the analyst settlement, the SEC chief faces three pending issues that challenge business-as-usual for important SEC constituencies:

-- Proxy voting. By July, the SEC staff must report on the barriers that shareholders face in exercising their most basic right: putting issues before management and nominating shareholder advocates as directors. Today's system is designed more to stall corporate raiders than to give shareholders a voice. Donaldson supports the review, but he'll have to overcome vigorous lobbying by Corporate America just to publish the staff report, let alone make changes.

-- Mutual funds. In the third year of a bear market, investors are acutely aware of costs that chew up meager returns or worsen their losses. After hauling in mutual-fund execs for a hearing-cum-show-trial in March, the House Financial Services Committee ordered Donaldson to report by June 11 with an agenda for reforming fees, how fund directors are chosen, and how fund managers are paid. "He can write back: 'Thank you for your interest,"' says a former SEC lawyer. "Or he can say: 'Here's what needs to be done.' The staff wants No. 2." Donaldson should, too.

-- Stock trading. Allegations that the New York Stock Exchange's floor traders are squeezing excess profits from customers' trades have spotlighted trading questions. Critics say the NYSE has blocked efficient electronic rivals, while NASDAQ is withering under an onslaught of competitors. There's no deadline for Donaldson to act on rules that will cut trading costs. As a former chairman of the Big Board, Donaldson must realize that the SEC risks Wall Street's global preeminence if it doesn't move soon to strike the proper competitive balance.

It's a full plate. But Donaldson needs to tackle these issues to prove he's more than a caretaker.

McNamee covers the SEC.

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