Christopher Cox will most likely be remembered as the regulator who was unable to do enough to protect investors during the worst financial crisis since the Great Depression.
When the 28th chairman of the U.S. Securities and Exchange Commission steps down early this year, he will leave behind an agency tarnished by regulatory missteps and threatened with being reorganized out of existence by a reform-minded Congress.
Under Cox’s watch the investment banks that the SEC loosely supervised either collapsed or reorganized as bank holding companies in 2008 and the agency was criticized for interfering with free markets when it temporarily stopped investors from making bearish bets on financial stocks.
The most recent blow to the agency, now entering its 75th year, was its failure to spot financier Bernard Madoff’s alleged $50 billion securities fraud despite his activities being flagged to SEC staff over many years.
Some of the criticism is undeserved, securities experts said, as the genesis of the crisis began well before Cox became chairman and the cures extend beyond the reach of the agency. However the perception remains that the 56-year-old former California congressman did not do enough to protect investors.
“Cox had the greatest perception of inactivity in the face of this crisis. People wanted the SEC to be this outspoken proponent of investor protection, reinvigorate its mission and let people know that the SEC was on top of this,” said Jay Brown, a securities professor at Sturm College of Law.
“What has ended up happening is that it has been one inadequacy after another. Not only does the chairman not get out in front of these issues, it looks like the SEC was asleep at the switch.”
Cox was criticized for reassuring the public about Bear Stearns’ capital levels just days before the investment bank’s dramatic collapse and federally engineered rescue last March.
The SEC’s inspector general, an internal watchdog, issued reports scolding the agency for failing to adequately supervise Bear Stearns and limit the amount of risk it took on.
A devastating article in the Wall Street Journal in June described Cox as missing from critical meetings and conference calls during the Bear Stearns crisis and bailout, exacerbating the perception of a regulator who was missing in action.
Cox said in an interview that the WSJ article was disappointing and that he worked around the clock the weekend of the crisis. He stayed in Washington instead of going to New York because the SEC’s main operations are in Washington.
The agency was founded during the Great Depression to help restore investor confidence in securities markets by requiring public companies to tell the truth about their businesses and by demanding that those trading in securities treat investors with fairness and honesty. But it was never meant to, like the Federal Reserve, regulate broader safety and soundness issues.
“To the extent the SEC’s 2004 adoption of voluntary regulation for investment banks cast it in the role of a safety and soundness regulator — a role for which it has neither tradition nor statutory mandate — the SEC fared no better than banking regulators,” Cox told Reuters in an interview.
The questions about the SEC’s performance come at a particularly bad time, as Congress gets ready to revamp the country’s financial regulatory structure. A report issued by the Treasury Department at the end of March recommended a less powerful SEC and a merger between securities and futures regulators.
HIRED TO CALM
President George W. Bush appointed Cox as head of the SEC in 2005 to heal deep divisions among the agency’s commissioners and bring calm to an institution that had bulldozed its way through regulatory reforms and accounting scandals involving Enron, WorldCom and other companies.
For much of his tenure, Cox did just that. The SEC remained out of the limelight and its five commissioners unanimously adopted noncontroversial securities rules.
Cox focused on modernizing the SEC and corporate disclosure through tools such as a machine-readable computer code, XBRL, or interactive data. He made it easier for investors to read and understand mutual fund prospectuses, forced companies to disclose their executives’ compensation in a standard format, and instilled rules to make it easier for shareholders to communicate via the Internet.
He defended the Sarbanes-Oxley corporate reform law, enacted in response to the Enron debacle, and reached agreements with international regulators in an effort to improve coordination on securities policy, accounting rules and global enforcement cases.
And unlike some Bush appointees, Cox enjoyed cordial relations with key congressional panels after spending 17 years in the House of Representatives.
However, he angered shareholder activists by overriding a court decision and restricting their access to the annual corporate proxy document used to nominate board directors. And although the agency brought its second-highest number of enforcement actions in 2008, Cox made it harder for staff lawyers to negotiate settlements with companies.
Cox, who was a senior associate counsel to former President Ronald Reagan, had a free-market philosophy which was perfectly aligned with the business-friendly Bush administration. But the administration’s stance proved to be a weakness as it failed to adequately regulate increasingly sophisticated financial products that blew up and triggered the financial crisis.
Former SEC chairman Harvey Pitt, who resigned in 2003 after a tumultuous 18-month tenure, praised Cox as a strong chairman who had to deal with an unprecedented crisis.
“The question really is, was he true to the SEC’s mission and mandate and did he try to improve his effectiveness? In my view, the answer is yes,” said Pitt.
James Cox, a securities professor at Duke Law School, said it is unfortunate that the outgoing chairman will likely be seen as symbolic of a weak agency as he has pushed hard on mutual recognition of regulatory standards and interactive reporting technologies that will ultimately revolutionize the entire financial reporting process.
Others predict Cox, who will leave when President-elect Barack Obama’s administration takes over later in January, will be remembered less warmly.
Lynn Turner, the SEC’s chief accountant during the Clinton administration, described Cox as “the worst” SEC chairman to ever lead the agency of 3,500 employees. “I can’t think of anything he did that was really protecting investors,” Turner said.