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Chris Cox’s Legacy

Peter Wallison assesses SEC Chairman Christopher Cox’s likely legacy:

[U]nless Chairman Cox begins to work with the Republican members of the Commission--something he has been largely unwilling to do since taking office--there may be no major initiatives from the SEC for the balance of the Bush administration.

Nevertheless, the Cox era at the SEC will have historic significance because of his efforts to improve disclosure to investors--principally by making the SEC’s files machine-readable, but also by appointing an advisory committee to consider and recommend improvements in the full range of investor disclosure. The SEC is also on the verge of approving the use of International Financial Reporting Standards (IFRS)--an alternative to Generally Accepted Accounting Principles (GAAP)--for financial reporting by foreign companies in the United States. Both disclosure initiatives will almost certainly have the support of the Republican members of the Commission, so Cox may thus be able to complete his chairmanship by setting the SEC on a course that both improves disclosure to investors and integrates U.S. securities markets with the growing world capital markets.

... The Cox legacy--not an inconsiderable one--is likely to revolve around improved disclosure for investors, but one wonders what his legacy might have been had he worked with the Republican members of the SEC instead of adopting Donaldson’s initiatives and ignoring calls for deregulation or relief from regulatory costs. ...

In 2006 and early 2007, three key reports suggested that excessive regulation and litigation risk in the United States were reducing the attractiveness of U.S. public securities markets for foreign issuers. There is indeed considerable evidence that foreign companies were willing to access our capital markets to raise needed funds, but preferred to do it through private transactions that would not subject them to the regulatory costs and litigation risks associated with a listing of their securities in the United States. There is also evidence that smaller companies were privatizing at a higher rate than normal, and that the process by which venture capital firms were financing new tech companies and taking them public was being impeded by excessive regulatory costs. If Chairman Cox had moved the SEC to address regulatory costs and litigation risk, he would likely have had the support of the Republican commissioners and might have averted or limited many of these problems. There are two areas where his intervention might have been particularly helpful: the Sarbanes-Oxley Act (SOX) and the SEC’s own enforcement activities.

Throughout the controversy over these costs, Chairman Cox refused to acknowledge that SOX was more costly to public companies than anyone in Congress or on the SEC had anticipated and should be cut back by Congress. In the absence of his leadership on this issue, efforts in Congress to modify the act got no traction.

All of which strikes me as correct. The failure to address the costs imposed by SOX (especially the refusal to scale section 404 so as to reduce the burden on microcaps), the failure to address private securities litigation abuses, and the effort to expand shareholder proxy access all constitute serious negatives in Cox’s record.

This is not news, of course. Indeed, it’s been noted before that “for many free-market conservatives, Cox has been a disappointment. ‘He’s losing the opportunity of a lifetime,’ says Fred Smith, president of the Competitive Enterprise Institute. ‘It’s frustrating.’”

Cox has done little on two important issues that Donaldson left him—forcing mutual fund boards to be led by outsiders and expanding the power of organized shareholders (often unions) to choose corporate directors. Advocates of free markets had expected Cox to toss out both initiatives and to move quickly to trim the power of Sarbanes-Oxley. He hasn’t. “I guess I would counsel patience,” says a senior SEC official who is known for being very market-friendly.

Others say that Cox has squandered a precious chance to shift the course of the SEC by clearly defining its mission. As one academic critic puts it, “the purpose of SEC regulation is to promote efficient, transparent financial markets and accurate pricing of financial instruments. That may sound obvious, but it is quite different from the purpose espoused by [Cox], which is to protect investors and promote investor confidence.” The SEC’s website says that the commission’s goal is “to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation.” The very next paragraph reads: “As more and more first-time investors turn to the markets to help secure their futures, pay for homes, and send children to college, our investor protection mission is more compelling than ever.” The problem with “investor protection” as the primary mission is that the phrase is so broad that it offers a hunting license for practically any action—for example, mandating that chairmen of mutual funds be outsiders—with only the most amorphous justification. (A hallmark of the Donaldson administration was promulgating rules under precisely this credo, with little or no empirical evidence to back them up.) But on the other hand, Cox himself has, at other times, defined the SEC mission in the opposite order: “to promote capital formation and to protect the rights of investors.” Which is it?