SEC Choice Has the Good,
But Does He Have the Grit?

WASHINGTON -- Wall street veteran William Donaldson, President Bush's pick to head the Securities and Exchange Commission and restore confidence in the stock markets, clearly has the credentials for the job. But will he be tough enough to beat corporations and accountants into law-abiding submission?

A review of his record raises several issues that could dog the nominee as he tries to persuade the Senate that he will fulfill the president's promise in nominating him Tuesday to "vigorously enforce our nation's laws against corporate corruption and to uphold the highest standards of integrity."

The SEC disciplined the New York Stock Exchange over a floor-broker trading scandal that began on Mr. Donaldson's watch as NYSE chairman. During his tenure at the Big Board, from 1991 to 1995, he unsuccessfully urged the SEC to allow listed overseas companies to disclose less information than required under U.S. rules.

He later opposed the agency's efforts to force companies to disseminate information about their financial condition more broadly, and he was dismissive of an SEC proposal to have stock prices quoted in decimals rather than one-eighth increments, a move intended to squeeze traders' profits for investors' benefit.

Both SEC initiatives were adopted and are widely considered successful.

"The real question is, can Bill Donaldson be as effective an advocate for our nation's investors as he was for our nation's principal securities market?" said Rep. Edward Markey, a Massachusetts Democrat active on investor issues.

White House spokeswoman Claire Buchan said Mr. Donaldson is an "an individual of high integrity who has long experience and is committed to the highest standards of corporate management and ethics." She added that he has "long been in favor of getting more information to shareholders."

Mr. Donaldson's nomination has for the most part been warmly received on Capitol Hill by members of both parties.

Supporters note that Mr. Donaldson was a co-founder of the well-regarded research firm Donaldson, Lufkin & Jenrette, where he championed the need for unbiased stock analysis and chastised Wall Street for the conflicts that can occur when research is tied to lucrative investment-banking fees.

"An analyst that perverts or distorts his or her research in order to gain an investment-banking client will soon no longer be a top analyst. They'll lose their credibility," he said in a 1999 interview with Dow Jones Newswires.

One question facing Mr. Donaldson involves an investigation of NYSE floor brokers who exploited their knowledge of large pending stock orders by trading in those stocks to make quick profits for themselves. It is illegal for such brokers to trade for themselves, and in 1998 the U.S. attorney's office in Manhattan charged several of the brokers with securities fraud -- for activities that began when Mr. Donaldson was chairman.

The defendants' attorneys disputed the charges with evidence showing that the way the brokers were trading for themselves was widespread in the early 1990s and that the NYSE knew this at the time. One 1992 memo relating to the practice was sent to Mr. Donaldson himself, among other officials.

The memo recounted a meeting in which a committee suggested that brokers be verbally informed of their "responsibilities in engaging in this practice [of trading for themselves]. It was felt that this would be preferable to distributing an information memo, since the latter could result in unwarranted media attention."

The evidence forced the prosecutors to reduce the charges, and nine brokers eventually pleaded guilty. In 1999, the SEC brought an unprecedented administrative proceeding against the Big Board for allowing the illegal trading to go undetected. The NYSE argued that in some circumstances, it wasn't illegal for floor brokers to trade for themselves.

The SEC disagreed, and the exchange eventually settled the matter -- without admitting or denying wrongdoing -- by agreeing to beef up floor surveillance.

Dominic Amorosa, a lawyer for a broker implicated in the scandal who is trying to clear his name, said he recently asked the SEC to hold a hearing on the NYSE's role in the matter, but given Mr. Donaldson's nomination, he now will ask for an independent arbitrator.

Mr. Donaldson has been a harsh critic of several SEC proposals that proponents said would protect individual investors, including Regulation Fair Disclosure, which was enacted in late 2000 to bar companies from giving market-moving news to select investors and analysts. In an interview with Institutional Investor magazine in October 2001, Mr. Donaldson called it a "terrible rule" and "a giant blackout" that "is paralyzing communications between analysts and companies."

Mr. Donaldson also clashed with the SEC about the accounting standards that should govern foreign companies that list in the U.S. During his tenure as Big Board chairman, Mr. Donaldson -- concerned about competition from electronic exchanges -- wanted to allow listings by foreign companies that didn't conform to U.S. accounting standards.

"It is not necessary to force a foreign company to adhere to the letter" of U.S. rules, he said in a 1993 interview. "What is necessary is for U.S. investors to get the information they need."

He proposed instead that the NYSE create two classes of securities -- American and foreign -- and make sure investors were aware that the foreign group was held to different standards. The SEC refused to make any substantial concessions, and foreign companies still must meet U.S. accounting standards.

Given this record, some Wall Street watchers predict Mr. Donaldson will be sympathetic to foreign complaints about elements of the just-enacted Sarbanes-Oxley Act, which regulates the accounting industry.

The White House's Ms. Buchan says Mr. Donaldson's Big Board efforts to lure foreign listings was aimed at expanding "investor choice," not weakening accounting standards.

Mr. Donaldson also wasn't supportive of trading in decimals rather than fractions, at one point derisively comparing the idea to switching Americans to the metric measurement system. The proposal benefited investors. Stock dealers usually profit from the difference between the price at which they buy a stock from an investor and the price at which they sell to another investor, known as the spread. The introduction of decimals allowed that spread to shrink to as little as one penny from a minimum 12.5 cents, with much of the savings flowing to investors.

Write to Michael Schroeder at mike.schroeder@wsj.com¹ and Robin Sidel at robin.sidel@wsj.com²

Updated December 12, 2002 12:07 a.m. EST