William Donaldson is no fan of Regulation Fair Disclosure, the securities regulation that's supposed to level the playing field between Wall Street pros and Main Street investors by giving them equal access to market-moving information. But don't expect him to move to overturn the rule if he's confirmed as chairman of the Securities and Exchange Commission. People who know Donaldson, 71, who was nominated Tuesday by President Bush, say such a radical move would be inconsistent with the management style he's displayed through his long career on Wall Street. Donaldson's main objectives are more likely to center on bringing stability to the SEC, they say, especially after the brief but stormy reign of outgoing SEC Chairman Harvey Pitt. Indeed, most Wall Street observers say Donaldson will have so much on his plate when he takes over the SEC that the idea of taking another look at Regulation FD probably won't be a high priority. The 2-year-old regulation was the crowning achievement of former SEC Chairman Arthur Levitt during the Clinton administration. The controversial rule, which many on Wall Street opposed, prohibits corporate executives from providing Wall Street analysts and institutional investors with a heads-up on potential market-moving information. Levitt and investor advocates argued the rule was needed to make it more difficult for Wall Street firms and institutional traders to buy and sell shares of a stock before a major corporate announcement was released to the general investing public. Critics like Donaldson, meanwhile, said the regulation would force corporate executives to stop talking to analysts and result in all investors getting less guidance about future earnings. But securities experts say it would be pretty much unprecedented for an SEC chairman to come in and try to overturn a regulation he didn't like, even one with a long Wall Street pedigree like Donaldson, the founder of the New York investment bank Donaldson, Lufkin & Jenrette. That's because the chairman is just one of five commissioners who sets SEC policy. And most of the time, it's the SEC staff that initiates investigations and enforcement actions -- not the chairman. The more likely way for a chairman to influence the staff's decisions is by appointing top deputies who share his philosophy.
"We're going to see more Reg FD cases," said Donald Langevoort, a securities professor at Georgetown University School of Law. "The chairman has nothing to do with the initiation of cases. The only real control a chairman has is putting in place the senior staff." Indeed, Donaldson's comments opposing Regulation FD were made in an interview with another publication a year ago. It's not known how he feels about the rule today. Undoubtedly, the longtime Bush family friend will be asked about his views on the rule at his upcoming confirmation hearings. But expect lawmakers to spend more time asking Donaldson about his approach to dealing with accounting fraud and what he did during his five-year stretch running the New York Stock Exchange -- the previous job that most closely matches his new duties at the SEC. Indeed, Wall Street observers note that Pitt was no fan of Regulation FD either, and he said so during his confirmation hearing. Yet the SEC, under Pitt, recently brought the first enforcement actions against three companies for
violating the rule . In fact, Pitt didn't move to amend Regulation FD during his tenure. Again, that may be because the critics' worst fears have not materialized. As for Donaldson, taking a look at Regulation FD probably will take a back seat to other pressing issues. For starters, there's the ongoing talks with state regulators and a dozen securities firms, aimed at reaching a global settlement of the many regulatory investigations into Wall Street's business practices. Pitt hasn't taken an active role in those negotiations with firms, such as Citigroup ( C), Merrill Lynch ( MER), Goldman Sachs ( GS), Credit Suisse First Boston and J.P. Morgan Chase ( JPM). But Donaldson may choose to do so, if a settlement hasn't been reached by the time of his confirmation hearing. The SEC also has a big agenda next year because of a series of mandates in the Sarbanes-Oxley corporate reform law. The measure, passed in the wake of the corporate scandals at Enron and WorldCom, requires the SEC to take a number of steps aimed both at improving the quality of corporate financial disclosures and restoring investor confidence.
The SEC, for instance, is in the middle of conducting a review of the work of corporate credit-rating agencies, such as Standard & Poor's and Moody's, to determine whether they are doing their jobs properly. The SEC also must get cracking on an analysis of the extent to which companies are using off balance sheet partnerships and special-purpose entities to move debt off their books. Securities regulators also must get to work on formulating rules and regulations that will require corporations to make faster disclosure of so-called material events that could have an impact on a company's financial performance. And maybe most important of all, Donaldson will have to pick a chairman of the new accounting industry oversight board, which is the cornerstone of the corporate reform law. It was Pitt's botched handling of choosing a person to lead the accounting board that ultimately led to his Nov. 5 resignation. Donaldson's tenure at the SEC, in light of the controversy stirred up by Pitt, may well be judged by the person he nominates to chair that important board. "The real test will be who he nominates to the accounting board," said Langevoort.