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Wall Street's Top Cop

June 06, 2005

There's something fitting about William H. Donaldson announcing his departure from the Securities and Exchange Commission in the same week that the Supreme Court reversed the conviction of the Arthur Andersen accounting firm. Both events mark a return to normalcy for corporate America after the Enron, WorldCom and other scandals roiled confidence in the integrity of this nation's financial markets.

But the all-clear signal shouldn't breed too much complacency in Washington about the need to remain vigilant. Regardless of the legal merits of the criminal prosecution of the now-defunct Arthur Andersen, there is no disputing that in several cases the firm failed miserably to fulfill its duty to protect shareholders, and that the SEC's own negligence helped breed an ideal environment for fraud.

Rep. Christopher Cox, the amiable Newport Beach Republican nominated by President Bush to replace Donaldson, should be mindful of that.

In Congress, Cox has been an ardent supporter of lessening business regulations, but he will have to temper some of his views if he is to succeed in his new job. Whether he will oppose moves to require that companies treat the cost of stock options as expenses affecting their bottom lines will be an early test. His mandate now is to protect capitalism, not just big business.

Donaldson's 28-month tenure at the helm of the commission always had the feel of wartime leadership. A former Wall Street insider who exudes gravitas, he worked feverishly to fight fraud and restore public confidence in capitalism. The near doubling of the SEC's budget reflected that there was a financial parallel to the war on terrorism.

Donaldson antagonized business lobbyists -- not to mention White House insiders and Alan Greenspan -- with his regulatory activism. He sided with the two Democratic commissioners in stiffening penalties for financial wrongdoers, forcing out Richard Grasso from his perch atop the New York Stock Exchange and seeking tighter oversight over the mutual fund and hedge fund industries.

Donaldson was beaten back in his attempts to democratize boardrooms, and in some of his moves -- such as on the hedge fund front -- he may have overreached. Going forward, the SEC should also carefully consider whether the Sarbanes-Oxley anti-fraud legislation passed after the Enron scandal imposes unnecessary burdens on corporations.

But on the whole, Donaldson proved himself a devoted champion of individual investors. We hope Cox will emulate him more than is widely anticipated and won't repeat the mistakes of Donaldson's predecessor, Harvey L. Pitt. The last thing the SEC needs is a restoration of see-no-evil complacency.

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