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SEC Chief Says Proxy Rule Needs Rewriting

Donaldson Holds Hope for Changes During His Tenure

By Ben White
Washington Post Staff Writer
Thursday, February 10, 2005; Page E03

Securities and Exchange Commission Chairman William H. Donaldson said yesterday that a controversial proposed rule to give shareholders more power to elect corporate directors has no chance of passing in its current form and will have to be rewritten.

In an interview, Donaldson said he still hopes the SEC will approve some measure during his tenure to give shareholders more power to elect board members of their choosing, but that doing so will be difficult. "My hope is we could accomplish something here in a shorter time, but it's not going to be easy," he said.

SEC Chairman William H. Donaldson, shown speaking in Florida, said in an interview that he opposes congressional tampering with Sarbanes-Oxley. (Steve Mitchell -- AP)

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Shareholder groups have made the proposal, which would give investors more power to elect directors under certain limited conditions, a top priority, saying it would be the most effective way to curb soaring executive pay and end the clubby atmosphere in boardrooms.

But business groups, including the U.S. Chamber of Commerce and the Business Roundtable, have fought hard against the proposal, saying it would allow special-interest groups to hijack boards and push narrow agendas.

The proposal has been stalled for a year. The two Republican commissioners oppose the rule, while two Democrats support it. Donaldson has been trying, so far unsuccessfully, to broker a compromise.

One of the two Democrats, Harvey J. Goldschmid, is leaving the SEC this summer to return a teaching post at Columbia University. The term of the other Democrat, Roel C. Campos, is up this summer, though he could be renominated.

Donaldson said he did not know when Goldschmid would be replaced. Shareholder activists have said they fear that the Bush administration will leave the post vacant for an extended period, making it harder for strong regulatory proposals to get through

"That's sort of out of my hands," Donaldson said about filling Goldschmid's seat on the commission. "It's a presidential appointment, and they've got a lot of things on their platter right now."

Investor groups have accused Donaldson and the SEC of losing momentum on corporate reform issues and caving in to pressure from big business and the White House. The groups cite, among other things, the languishing proxy rule and the agency's willingness to discuss problems in the implementation of the landmark 2002 Sarbanes-Oxley corporate reform law.

Businesses have complained most about Section 404 of the law, which requires that companies demonstrate that they have effective internal controls in place to protect against fraud.

Donaldson acknowledged that coming into compliance with Section 404 has been difficult for some companies, but he strongly denied that the SEC's approach to corporate reform has changed. "It has been a painful process and expensive, particularly expensive for small businesses," he said. "It's always been our plan to take a look at [Section 404] and see if we can't play around with making it more cost-effective and getting rid of the inefficiencies. It's not the pushback from the business world; it's part of our process here."

In other comments yesterday, Donaldson said he is opposed to Congress making any legislative changes to the Sarbanes-Oxley Act. And he strongly rejected a complaint from Fidelity Investments about a rule requiring that mutual fund boards have independent chairmen. Donaldson said the rule was among the most important changes the commission approved following the mutual fund late-trading and market-timing scandals.

Donaldson declined to discuss his own future, saying he serves at the pleasure of the president and is pleased with the "nice noises" coming out of the White House about the job he has done.

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