Updated from 2:33 p.m. EST
William Donaldson's reign as chairman of the
Securities and Exchange Commission
is ending controversially with a parting shot at the mutual fund industry.
On his second-to-last day on the job, Donaldson pushed a bitterly divided SEC to once again approve a controversial regulation that would overhaul the management structure of mutual funds.
By a 3-2 vote, the SEC on Wednesday adopted a rule that would require funds to hire independent chairmen and dramatically boost the number of outsiders on their boards. The vote, in which Donaldson crossed party lines to side with the SEC's two Democratic commissioners, was a virtual replay of last summer's initial vote on the corporate governance measure.
The SEC took the action just one week after a federal appeals court ordered regulators to take another look at the rules. The court, in a unanimous decision, directed the SEC to consider the economic impact of the regulation on the mutual fund industry.
It's all but certain the latest vote will end up being reviewed by the same three-judge appellate court that rejected the earlier measure.
The new regulation was proposed in the aftermath of the mutual fund trading scandal, which sullied the reputation of more than a dozen big mutual fund families in the $8 trillion industry.
When the court's decision was announced last week, many believed the regulation was all but dead given that Donaldson was stepping down as SEC chairman on June 30. But in a surprising move, Donaldson, who had lobbied hard for the reforms, ordered the SEC's staff to quickly perform the economic analysis mandated by the court and put the measure up for another vote.
The vote occurred during the last public meeting of his term.
The SEC's swiftness in responding to the court ruling is notable, given the agency's reputation for deliberation.
Over the past weeks, legislators on Capitol Hill, representatives from the mutual fund industry and the U.S. Chamber of Commerce, which filed the lawsuit challenging the original rule, all protested Donaldson's action. The critics have characterized Donaldson's decision to hold another vote on the measure as a rush to judgment and an insult to the court.
In a rare of display of disharmony at the SEC, that criticism of Donaldson's tactics spilled over into the SEC vote on regulation. Cynthia Glassman and Paul Atkins, the two other Republican commissioners, accused the majority of running roughshod over the court's demand that regulators consider the economic impact. Both questioned how such a review could be done in eight days.
"The majority's action today demonstrates a profound disrespect for the rule of the law," said Atkins. "This is one of the saddest days in the commission's 71-year history."
In a similar vein, Glassman offered her "apology'' to the appellate court for the SEC's action.
But Donaldson countered that the SEC needed to act quickly in light of his decision to step down. He said it might be a long time before his successor arrives, leaving room for the measure to languish.
President Bush has tapped California Congressman Christopher Cox, a conservative Republican, to replace Donaldson.
"The governance rules are a critical component of our reform effort," Donaldson said. "It's not at all unusual for the commission to act swiftly."
Harvey Goldschmid, one of the agency's two Democratic commissioners, said the vote in favor of the rule was proper since the appellate court will probably still have a chance to rule on its legality. He added that the commission also had the option to reconsider the regulations at a future date.
The other Democratic commissioner voting in favor of the rule was Roel Campos.
In other regulatory business, the SEC votes were more amicable.
The commission unanimously approved a measure that officially ends the so-called "quiet period,'' during which company's are limited in what they can say about an upcoming stock offering. In another 5-0 vote, the agency also imposed more stringent disclosure requirements for so-called "shell companies,'' publicly traded entities that have no underlying operations and exist solely to provide an alternative way for private companies to go public.