William H. Donaldson presided over the last public meeting of his controversial 21/2-year tenure as Securities and Exchange Commission chairman yesterday in a hail of barbs and even threats of litigation, but he shrugged off the rancor as just part of the job.
As Donaldson sat quietly beside them, fellow Republicans on the panel castigated him for trying to push through last-minute changes, with one colleague condemning him for "one of the saddest days in the commission's 71-year history."
"The atmosphere in Washington these days has heightened the attacks that come from right and left," Donaldson, 74, said afterward. "It's in many ways hostile territory. Anybody who tries to do something opens themselves up to criticism."
Agency meetings typically feature dry, technical debates about law and policy. But at yesterday's nearly four-hour session, tensions among commissioners that had long simmered came to a boil.
President Bush has nominated Rep. Christopher Cox (R-Calif.), a self-described free-market conservative and champion of a measure to limit class-action lawsuits, to replace Donaldson -- a former chairman of the New York Stock Exchange and a moderate Republican with ties to the Bush family.
While Donaldson was chairman, the SEC passed scores of new rules and brought a record 1,700 enforcement cases -- the most active it has been since the Great Depression. In recent months, it also has become increasingly dysfunctional as some of the agency's five members almost stopped speaking to each other because of battles over policy and mundane issues such as the location of offices in new headquarters near Union Station.
Yesterday's dispute pivoted on a rule that forbids chairmen of mutual fund boards from having ties to management. Supporters say the rule, which previously had been approved by the SEC, is designed to address conflicts of interest in the $8.1 trillion mutual fund industry, which counts more than 92 million U.S. investors and has been shaken by disclosures of trading abuses and favorable treatment to big investors.
The U.S. Chamber of Commerce, the nation's largest business lobby, had sued the agency, arguing that the SEC had overstepped its authority and failed to consider the costs and alternatives to such a rule, which affects 80 percent of the industry.
Last week, an appeals court affirmed the SEC's power over mutual fund governance but agreed with the chamber on narrow points and sent the provision back for more work. Within hours of the court ruling, Donaldson placed the issue on the agenda for his final public meeting. And yesterday, the commission voted by the same 3 to 2 margin to approve it a second time.
Agency leaders cited Donaldson's imminent departure as a reason for racing to complete their review, lest it be caught in limbo as Cox awaits Senate confirmation.
On the other side were the chamber, eight Republican senators, and former SEC commissioners, all pushing the SEC to take more time to evaluate the court ruling and its implications. That would delay a vote, perhaps until Cox is confirmed. He has not expressed a position on the issue, and no hearings have been scheduled on his nomination.
Former commissioner Bevis Longstreth appealed to the agency to slow down, writing that the mutual fund issue "is saturated with politics." Donaldson's predecessor as chairman, Harvey L. Pitt, sent a letter comparing the move to Machiavelli's principle of the end justifying the means, "even means that are legally suspect and immoral."
Yesterday, chamber chief executive Thomas J. Donohue called the speedy vote "outrageous" and vowed to take legal action -- again.
Meanwhile, the tenures of Donaldson's key allies remain uncertain. The terms of Democratic commissioners Harvey J. Goldschmid and Roel C. Campos have expired, but Goldschmid has said he will stay through the summer. Campos, who is seeking another five-year term, is eligible to remain at the agency for about 17 more months. With Donaldson's departure today, however, the three will no longer command a majority. That fact has not gone unnoticed by the business community, which has been frustrated by Donaldson's votes alongside Democrats.
Donaldson's departure is a far cry from his entrance to the agency in 2003 after scandals at Enron Corp. and WorldCom Inc. rocked the stock markets. Donaldson helped get the agency out of the headlines -- at least until the recent internal disputes spilled into public view. Some news reports had billed him as the antithesis of Pitt, who resigned after criticism about his staff's vetting of a nominee to lead an accounting industry oversight panel.
At yesterday's meeting, Republican commissioners Cynthia A. Glassman and Paul S. Atkins invoked Pitt's name, giving him credit for launching an important effort to deregulate the way public companies register stock and communicate with investors. Their comments also served as an affront to Donaldson in his waning days at the helm.
"We should tip our hat to former chairman Pitt," Atkins said. "He deserves some of the credit for this hard work.
Investor advocates yesterday praised Donaldson's tenure, particularly his efforts to bolster the enforcement unit and to register hedge funds, largely unregulated pools of capital from mostly wealthy investors.
"I hope this meeting does not detract from Donaldson's extraordinary legacy as chairman," said Ann Yerger, executive director of the Council of Institutional Investors.
SEC historian Joel Seligman said commissioners are within their rights to mount vigorous dissents. But, he added, discord among the panelists appears to have reached new heights.
Atkins has been perhaps the loudest critic of the Donaldson regime. Earlier this year, he sought to invite a witness to give testimony to the agency at a public meeting, over the chairman's objections. Yesterday, he produced a chart called "The SEC's Race to Beat the Clock" to emphasize his objection to the independent-chairman rule and the process.
Glassman, an economist who stresses the need for data and cost-benefit analysis, also clashed with Donaldson over the initial adoption of the mutual fund rule. At a meeting last year, Donaldson said he placed little value on empirical studies, saying they can easily be manipulated to produce a desired result.
Yesterday, Glassman delivered another impassioned argument against the rule and how it was adopted, calling the documents the majority cited "an assembly of false statements, unsupported assumptions, flawed analysis and misinterpretations."
Goldschmid observed shortly thereafter, "Emotions have run extremely high in this area."
Later, Campos derided accusations that the commission had acted in a "sneaky" way.
"If we're talking about hidden agendas or other goals, let's be very clear," Campos said. "Delay often means death to a rulemaking. And there is a desire to have a different commission take a look at this issue."
Campos said the failure to act now could hurt investors, to which Glassman shook her head and asked for a moment to respond.
"I very much support investor protection, which anybody who listens to me would understand," Glassman said.
The agency's new auditorium filled with securities lawyers, reporters, and current and former SEC staff, many of whom were present anticipating rhetorical fireworks over the mutual fund rule, the final item on the day's agenda.
After the commission adopted the less controversial rule on stock registration, SEC corporation finance deputy Martin P. Dunn said he would give the audience a "palate cleanser" before the main course -- launching into a discussion of abusive practices at shell companies. "Think of this as your lime sorbet this morning or whatever," Dunn said.
As the meeting ended, the two Republicans walked away, leaving Donaldson to exchange warm words with the Democrats.
"Your leadership, honesty and courage will long be celebrated, and I cannot say how much we will miss you," Goldschmid told Donaldson during the meeting.