The nomination of congressman Chris Cox to chair the Securities Exchange Commission is a brilliant stroke and an inspired decision by President Bush.
While the Californian will certainly not roll back the anti-fraud Sarbanes-Oxley provisions designed to tighten corporate accountability and financial management, he is likely to reinterpret some SEC rules in a much more investor- and business-friendly manner than did his predecessor William Donaldson. At times, Donaldson appeared to be contributing to an overly hostile regulatory climate for business. Watch Cox reverse this environment in his first 100 days. That said, Cox will insist on honest accounting and complete accountability from chief executive and chief financial officers. There will be no opening the door to number-fudging under Cox. But just as surely, a number of costly paper-work burdens will be reduced.
Cox, a former Reagan White House counsel who presently chairs the House committee on Homeland Security, is one of the best and brightest members of Congress. His credentials for SEC chair are impeccable. He is a former securities lawyer who did a lot of M&A work for tech companies in California. He is a forward-looking, Internet-minded visionary, and one of the leading advocates of the Internet tax moratorium. Certainly, he will favor electronic trading for the nation’s stock markets; NYSE reform can’t come quick enough for Cox.
Trial lawyers should beware. Cox has no patience for the Bill Lerach-type class-action lawsuits that arrive in court every time a company’s stock price dips. Securities litigation reform, especially the curbing of shareholder lawsuits, will surely be on Cox’s priority list. In fact, Cox was an author of the 1998 Securities Litigation Reform Act — which made it more difficult for investors to sue for misconduct — a bill that became law over President Clinton’s veto.
He’s also no friend of the immediate expensing of options. Instead he believes that free markets are efficient and are constantly pricing in options expenses. Black-Scholes-type option-pricing models are Sarbanes-Oxley overkill. Cox has little sympathy for them, according to Washington analyst James Lucier.
Indeed, Cox will be very sympathetic to the argument that the post-Enron Sarbanes-Oxley era is chock-full of regulatory overkill, the kind that has lowered the animal spirits of entrepreneurship and risk-taking. It is doubtful, for example, that Cox will be tolerant of out-of-pocket fines for corporate directors who have no knowledge of company misdeeds. He is more likely to focus on the miscreant behavior of individual corporate wrongdoers than bring down entire companies (as was the case with Arthur Anderson). He is also likely to make it easier for foreign-domiciled businesses to register in the U.S.
Outgoing SEC chairman Bill Donaldson generally voted with the commission’s two Democrats and their frequent attempts to hogtie and re-regulate American business. He often followed the overzealous regulatory instincts of the SEC staff bureaucracy while opposing Republicans Paul Atkins and Cynthia Glassman. The free-market Atkins may provide a window into the thinking of the free-market Cox. Three-to-two votes henceforth are likely to favor the Republicans on the five-member commission, much to the benefit of economic growth and job creation.
This isn’t about politics as much as it’s about what works for growth-minded capitalist societies. Cox, importantly, learned his economics from supply-side guru Arthur Laffer. The two are close personal friends. Not surprisingly, the pro-growth Cox is a flat-tax reformer who favors the elimination of taxes on capital gains, dividends, and estates. As he’s a budget reformer in the House, it would not be surprising to see Cox exercise considerable new discipline with SEC staffing and expenses.
Chris Cox’s keen intellect and free-market viewpoint will provide a breath of fresh air at the Securities Exchange Commission. The rule of law, corporate accountability, and financial transparency are all key factors in the smooth and efficient workings of financial markets and corporate America. But business people both large and small complain that the overly harsh implementation of the Sarbanes-Oxley legislation is a heavy burden.
Rodgin Cohen, chairman of the estimable New York law firm Sullivan & Cromwell, complained recently that “Sarbox” has become a “metaphor for a regulatory system that is overly intrusive and legally imperialistic.” He is not alone: U.S. Chamber of Commerce president Tom Donahue has echoed this thought.
As chair of the SEC, Chris Cox can be expected to create a better balance between regulatory burdens and economic growth opportunities. He is not one to throw the baby out with the bathwater.