THE RESIGNATION of William H. Donaldson closes a dramatic chapter in the history of the Securities and Exchange Commission. Mr. Donaldson became chairman in February 2003, in the wake of a series of financial scandals and the passage of the biggest overhaul of securities law since the 1930s. Though appointed by the Bush administration, which resisted that reform, Mr. Donaldson implemented it courageously. He added some extra reforms of his own, requiring that mutual fund boards have independent chairmen, that stock exchanges get investors the best price and that hitherto unregulated hedge funds register themselves with the commission. Demonstrating independence from the Republican Party, Mr. Donaldson often sided with the two Democratic commissioners on his board and against the two Republicans. Though he caved in on one issue, withdrawing his support from a good measure that would have given shareholders more say in the choice of company directors, his brief period in charge must be judged successful.
The question is whether this success will be sustained. To fill Mr. Donaldson's position, President Bush has nominated Rep. Christopher Cox (R-Calif.), an able lawmaker and lawyer who worked in the White House counsel's office during the Reagan years as well as in private practice. There is no question about Mr. Cox's competence or qualifications. But his reputation as a deregulator and his record on corporate governance raise doubts about the SEC's direction.
Mr. Cox has twice sought to subvert the independence of the Financial Accounting Standards Board, which writes the nation's accounting rules. In 2000 he sponsored legis- lation to postpone the implementation of a rule on accounting for mergers; FASB's chairman, Edmund L. Jenkins, called this "legislative interference with the FASB's ability to do its job." In 2004 Mr. Cox spoke out in favor of a bill that would have blocked a FASB proposal to require employee stock options to be treated as an expense, apparently believing that Congress is better qualified to determine accounting issues than the technical agency that's responsible.
It's unfortunate that the nominated head of one independent agency should have a record of disrespecting the independence of another one. But that's not the main issue here: If Mr. Cox is confirmed, he will no doubt defend the SEC's turf with as much conviction as he showed in trespassing on FASB's. The main issue is Mr. Cox's willingness to stand up for investors and against business lobbies. Stock-option expensing was a test of his mettle. He failed it.
We hope this was an aberration, a reflection of the high-tech lobby's powerful grip on California's congressional delegation. We also believe that some aspects of the recent regulatory push have gone too far; selective retreats are warranted. But, if confirmed, Mr. Cox would be in a position to gut Mr. Donaldson's legacy with a series of partisan 3-2 votes. We hope that is not his intention.