POINT OF VIEW: Donaldson Is Now Okay With Regulation FD
By Neal Lipschutz

02/06/2003
Dow Jones News Service
(Copyright (c) 2003, Dow Jones & Company, Inc.)

A Dow Jones Newswires Column

NEW YORK -(Dow Jones)- The likely next chairman of the Securities and Exchange Commission sounded the all-clear on the agency's fair disclosure regulation, amending an objection he made in a news article in late 2001.

William Donaldson's backing for the concept of Regulation Fair Disclosure and his pledge not to propose changes in it was part of a friendly and supportive coming-out party for the SEC-chairman-designee held Wednesday with members of the Senate Banking Committee.

During the nomination hearing, Donaldson said he would, as SEC chairman, look into a number of issues in potential need of new or changed SEC attention, but he kept his options open on eventual actions.

Donaldson's approval to head the SEC at this crucial juncture in its history and at a time of down markets and tattered corporate credibility is expected soon from the committee and the full Senate.

Regulation FD, which prevents companies from providing material information to a few Wall Street analysts or institutional investors, came up in a question from Sen. Charles Schumer, D-N.Y., who cited the press reports of Donaldson's earlier opposition and asked the former head of the New York Stock Exchange for his current thoughts.

Saying his Reg FD quote was "taken out of context" when he was a private citizen, Donaldson added that his "initial reaction was I thought it was crazy because, at that time, I was chairman of a major U.S. corporation that was trying to deal with the implementation of it, and I was in the throes, at that time, thinking there were some unintended consequences. I'm totally for the intention of the law, but at that time there were some unintended consequences that were having just the reverse effect, shutting down information flow.

"So, my present attitude towards it is that it's working better. And from all I can see, FD is working better and my attitude is as chairman of the SEC, if I become chairman, would be to constantly monitor the implementation of FD and to make sure that we are not having unintended consequences."

(All quotes used in this column from the Wednesday hearing are taken from of a transcript of the event.)

Schumer then followed by saying "So, your initial reaction would not be to propose any changes one way or the other?" And Donaldson agreed he would not make any such proposals.

Donaldson, who helped found the Wall Street firm of Donaldson, Lufkin & Jenrette and served as a director and chief executive officer of Aetna, was quoted in October 2001 by Institutional Investor magazine as objecting to Regulation FD. His objections were along the lines voiced by others, that the rule was making some companies clam up between official pronouncements, hurting the flow of information for analysts.

While there is some truth to the charge that overly conservative companies shut off one-on-one conversations with Wall Street analysts, the fact is Reg FD put a stop to the unfair practice of company management tipping a few analysts to big developments ahead of broader dissemination. Before the flood of accounting, stock analyst and related scandals, such early tip-offs of material developments were already undermining U.S. equity market credibility.

Donaldson was wise to come around on Reg FD because it's a good rule that's worked and because he doesn't need to pick a fight early on with its proponents.

Also, there's little incentive for invective against Reg FD because it is no longer the big issue it was upon adoption, when it changed the corporate disclosure landscape. Most companies have long come to terms with it, as have the analysts and other professionals who might grumble about lack of access and canned presentations, but who now realize they have to do more independent work in evaluating companies.

Also, corporate disclosure rules falling into place in light of the Sarbanes-Oxley Act that reforms so many corporate practices are putting an affirmative obligation on companies to broadly release important new developments, even between quarterly reports. Reg FD carried no such obligation.

The SEC nominee showed dexterity and poise on a number of issues and said all the right things about wanting to restore investor trust, SEC staff morale and weed out the bad actors in the securities industry.

As happens at such hearings, a number of issues that fall under the SEC's broad jurisdiction were aired, at least partly and almost always briefly.

One of the more interesting ideas on corporate governance was offered up by Sen. Elizabeth Dole, R-N.C. She said she is still concerned about auditor independence since auditors are paid by the companies they audit. "And so, in a sense, they are beholden to that company, which is paying the bills."

As a possible alternative, Dole cited a recent academic paper that would require financial statement insurance. "In other words," Dole said, "companies would buy insurance on the quality of their audit reports. And the liability for false or misleading statements in those reports would then run with the insurance company rather than with the board of directors. And this would provide an independence, because the insurance company would then hire the auditors rather than the company ..."

Donaldson said he would be happy to look at the professor's paper. "I might just say parenthetically that the concept of having some new ideas and ways of approaching some of the problems is very appealing to me, and so I would welcome having us discuss that."

Neal Lipschutz is senior editor, Americas, Dow Jones Newswires.

-By Neal Lipschutz, Dow Jones Newswires, 201 938 5152

neal.lipschutz@dowjones.com