Led by its chairman, former Republican California Congressman Chris Cox, the SEC earlier this month, in a 3-1 vote along party lines, quashed the right of American shareholders to influence the makeup of corporate boards. The sole Democrat on the Commission, Anne Nazareth, opposed the decision. Nazareth has announced her intention to leave the SEC at the end of this year; the other Democratic seat is now vacant. House Banking Committee Chairman Barney Frank (D. Mass.) condemned the SEC vote as "a step backward for shareholders." It will dramatically reduce the likelihood of strong, independent directors at a time when corporate malfeasance is rearing its ugly head once again -at companies like Countrywide and at the nation's largest banks.
This unfortunate SEC decision underscores the importance of the recently missed opportunity by the Senate Democratic Leadership to fill the two Democratic vacancies with individuals with a demonstrated commitment to protecting shareholders - the statutory mission of the SEC. We must not repeat this sorry experience when a new SEC chairman is named by the next hopefully Democratic administration.
While requiring White House approval, the Senate Leadership had a rare opportunity to significantly recast the SEC with these two nominations. In certain quarters - and in many boardrooms - it was a closely watched choice. Which Democrats would show up: those favoring reform of our nation's markets - or "blue dog" business Democrats acting more like Republicans every day? Unfortunately for the country, it was the blue dogs by a mile.
A little history is helpful here. When the SEC was established as the ultimate Depression era watchdog, their overarching purpose was to protect investors from the big business shenanigans that so characterized Wall Street in those times - and in these times too. For decades, the Commission performed this role well. But as markets changed and expanded in our global economy, the Commission's powers have proven insufficient. And too, its role was reduced - especially during the fast money 90's, when deregulation reigned supreme. Happy to fill this regulatory gap, the fraudsters came out from under their collective rocks at Enron, Tyco, WorldCom, HealthSouth and elsewhere.
Then, of course, the chickens came home to roost (as chickens will always do). In March of 2000, the tech bubble burst. Americans of every economic stripe -- from small investors to multi-billion dollar institutional investors -- lost hundreds of billions of dollars -- their pensions, their life savings, their homes, their faith in the financial system. Enron, "America's most innovative company," went bankrupt. Confidence in the integrity of U.S. markets was rocked worldwide. Suddenly everyone -- the Congress, the pundits, the investors, the bankers -- were all asking the same question. How did our institutions fail us this badly? Where was the SEC? Asleep at the switch, that's where -- an afterthought -- understaffed, under funded, out-gunned and often too cozy with The Street it was supposed to regulate.
Some of the harshest SEC critics at the time were, of course, Democrats -- feisty and out of power. Even then, however, their criticism was muted. After all, some of their own, like Clintonista Robert Rubin (now head of Citibank), had lobbied the Bush White House on Enron's behalf.
Slowly, we have crawled back. Almost unanimously, Congress enacted Sarbanes-Oxley, the securities reform legislation signed with fanfare by born again regulator George W. Bush. The Justice Department awoke -- and the worst of the lot, Ken Lay and Jeffrey Skilling and Dennis Kozlowski and Bernie Ebbers and even poor Martha Stewart went off to prison. Class action lawsuits brought record recoveries; at least some shareholders got some of their losses back. Even the financial media, for too long the cheerleader (some would say lapdog) of corporate America finally found its voice. It was morning in America.
But now it seems the sun may be setting again. The reform balloon in Washington DC has burst. Clean up Wall Street? Have you seen those Democratic campaign coffers?
Meanwhile, buffeted by the price of oil and the subprime mortgage meltdown, the market shifts, turns and bounces, more of a kangaroo than a bull or bear. What clearer evidence could there be that markets don't regulate themselves than this subprime mess? It's the "Roaring 20's" all over again -- mortgage brokers giving loans willy nilly, banks turning them into bonds, some rated "AAA" based on next to nothing, them selling them to us -- at a hefty fee.
So, in choosing their two SEC nominees, the Democrats were faced with a dilemma. Which breed to choose: pit bulls or cocker spaniels? Get tough or go for the green? Money barks.
It is too soon to tell whether the two nominees chosen, Luis Aguilar and Elisse Walter, are up to the job. That will be addressed now during Senate confirmation, where this week's decision to eviscerate the role of shareholders in choosing corporate directors will certainly be front and center. But what is clear is that neither nominee is a reformer nor has a lick of experience in protecting investors. Aguilar, who will replace Roel Campos, was Invesco general counsel and has questioned the effectiveness of Sarbanes-Oxley. More of a blank slate, Walters spent her career inside the Beltway as an administrator. An opportunity has been sorely missed.
Instead of (big) business as usual, what the SEC needed was a shakeup. The Senate Democrats could have sent a strong, clear message that there is a new sheriff in town. That was done with the last Republican appointment after all; Chairman Chris Cox is a card carrying champion of deregulation. Who on the SEC will champion investors? Who will argue that we cannot trust brokers, bankers and corporate executives to give us a fair deal - especially in volatile markets like these? Isn't that debate what democracy - and elections - are all about?
And it's not just about proxy fights over corporate boards. Will Sarbanes-Oxley be effectively implemented or instead rolled back to improve American market "competitiveness?" If investment banks are let off the fraud hook by the Supreme Court in the Stoneridge case, what should be the SEC response? Will the nation's major emitters of greenhouse gases be required to disclose their potential liability for climate change? All of this and more is squarely before the SEC.
But in a very real sense, the Democrats' choice of these two SEC nominees was about far more than the Commission. For the past seven years, our government has been of the corporation, for the corporation and by the corporation. In response to that pro-big business agenda -- and corresponding K Street cronyism -- the voters threw the rascals out. Delay, gone. Armey, gone. Abramoff, gone. Pambo, gone. The new Democratic majority came into office with (to use an overused term) a mandate. Clean house. No more business as usual. We're a democracy, not a plutocracy.
For the first few months, the new Congress got the message. A fresh wind blew and real reforms happened -- from the minimum wage to the campaign finance reform. Now it seems that that wind is becoming a gentle breeze. Reforms impacting the rich and powerful, from taxing hedge funds to eliminating sugar subsidies, have come to a near standstill. Those newly in power seem more concerned about keeping than using it.
An attorney in Los Angeles, Al Meyerhoff is co-counsel for the class in the Enron shareholder litigation.