Friday Editorial: The SEC, Chairman Cox and Investor Protection

In prior posts, we have touched upon the role of the SEC in the corporate governance process.  With exchanges engaging in "for profit" activity and the states racing to the bottom, it is the SEC that has the primary responsibility for protecting investors. So we read with great concern the article in the NY Times last week about the possible changing course of the SEC. 

The article indicated a retreat by the Commission from the traditional role of protecting investors.  According to the article, Chairman Cox “has begun to send signals, both directly and through aides, that he may be swinging the pendulum more toward business and Wall Street interests and against investor groups.”  As evidence, it points to the Chairman’s decision to speak at the Chamber of Commerce, the amicus brief filed by the Commission in Tellabs on the standard for pleading scienter under the PSLRA (a copy is here), and the resistance to the regulation of hedge funds. While this is an area that warrants close attention, the article misses the mark.

The examples given do not demonstrate a shift or a pro-business bias. One speech, an amicus brief, and an absence of regulation are not enough evidence. Moreover, Chairman Cox has taken a number of important pro-investor stands, including statements of support for SOX.  See testimony here.  Testimony of SEC Chairman Christopher Cox Concerning The Impact of the Sarbanes-Oxley Act, before the US House Committee on Financial Services, Sept. 19, 2006. 

Having said that, there are some troublesome aspects to the oversight exercised by the Commission under the reign of Chairman Cox in the area of corporate governance. This Blog has criticized the Commission for not taking a more active role in ensuring the independence of the regulatory function of the NYSE. In addition, however, the Commission, without traditional notice and comment, amended the requirements for the disclosure of executive compensation to reduce the amount of required disclosure. Similarly, the agency increased the disclosure threshold for conflict of interest transactions from $60,000 to $120,000.  The big unresolved issue concerns Rule 14a-8 and the right of shareholders to submit proposals concerning the election of directors. 

The Commission’s approach on this issue will tell us whether the Chairman truly takes seriously the investor protection mandate of the SEC.