Confidence recovering, SEC chief says
Donaldson says new rules are also improving corporate integrity
By KATHERINE M. SKIBA [email protected], Journal Sentinel
Thursday, July 31, 2003
Washington — The year-old federal laws cracking down on corporate crime and accounting abuses may have unleashed batteries of lawyers and left boardrooms preoccupied with making a mistake under the new rules, but good, honest companies should not fear them.
That was the message Wednesday from William H. Donaldson, chairman of the Securities and Exchange Commission, who said the laws are restoring investor confidence and improving the integrity of corporate America and will help firms attract capital and investment.
Donaldson, who became the SEC’s top executive in February, said that in less than six months the commission has filed 258 enforcement actions, 72 involving financial fraud or reporting. Meanwhile, the commission has sought to bar 95 offending corporate executives and directors from holding such positions in publicly traded companies. It is also using the new laws to return money to investors who have suffered losses “rather than merely collect those funds for the government.”
The tougher laws result from the Sarbanes-Oxley Act, named for Sen. Paul Sarbanes (D-Md.) and Rep. Michael G. Oxley (R-Ohio).
Addressing the National Press Club, Donaldson, 72, said the laws are the most important securities legislation since the original laws of the 1930s.
Talking about the booming markets of the ’90s, he said the new rules marked the “climax of an era that began in exhilaration and ended in disillusionment or worse.” After 40-plus years in business, “I don’t recall any other period like the one we’ve lived through for the past eight years or so,” he said.
Donaldson said the markets beginning in the mid-’90s mirrored enormous changes in the economy and society fueled by revolutions in information technology and communication.
But when the bubble burst starting in the second quarter of 2000, “stock prices plummeted, investors fled the markets and the IPO market disappeared,” he said. As happened during the crash of 1929, the falling market led to other revelations, beginning with the Enron scandal in October 2001. “It became apparent that the boom years had been accompanied by a serious erosion in business principles. The low points in this story are now household names — not just Enron, but WorldCom, Tyco, Adelphia and others.
Donaldson said that while the intensity of suffering was not as great as during the Depression, this downturn affected “many more” people because so many had invested more of their savings in the stock market.
Ahead, he said, the SEC is examining the mutual-fund industry, from how it does business to the fees it charges, and given its extraordinary growth, the hedge-fund industry will be reviewed with recommendations from commission staff in the next month or two.
On other topics, he said:
— There is an expense associated with giving stock options to executives, and this should be reflected in profit-and-loss statements. He said the Financial Accounting Standards Board is trying to develop a formula to appraise the value of options.
— One of the country’s “ticking time bombs” is pension program funding, especially in industries with considerable pension liabilities and older work forces. “This is a major area of concern, and government has recognized that . . . a lot of work needs to be done.”
