Good Bye Mr. Cox

SEC Seal.gifYesterday was Christopher Cox’s last day of a 3.5 year term as Chair of the Securities and Exchange Commission, the United States federal agency charged with investor protection. Investors may be tempted to feel some relief. He leaves the agency weakened and its staff demoralized. But he also leaves its continued existence in doubt, given its manifest failures and contributions to the global financial crisis. It may be undiplomatic to say, but it is possible that his tenure was among the worst in the agency’s history.

Despite the agency’s primary mission of investor protection, Mr. Cox mostly ignored or subordinated that mission in preference to elevating other goals, such as promoting capital formation and engagement with technology and globalization. Headline dramas illustrating these problems include how, during Mr. Cox’s tenure, the SEC:

• failed to interdict Bernard Madoff’s Ponzi scheme despite warnings, costing investors billions, with Mr. Cox later saying he was “deeply troubled” that he didn’t catch it;

• failed in its oversight of the investment banking industry, which led to its extinction, costing investors hundreds of billions more (with multiplied costs for the rest of the economy and probably permanently impairing the economy of New York City, the country’s center of investment capital), with Mr. Cox later describing the SEC’s oversight program as a total failure;

• reduced enforcement intensity for securities law violations (measured by year-to-year reductions in fines and restitution of about 2/3), with uncertain but probably significant future costs for investors from reduced deterrence; and

• reversed major parts of the 2002 Sarbanes-Oxley Act’s implementation concerning corporate internal controls, the costs and fallout from which will not be known for months or years when accounting scandals emerge as a result of the increased opportunities for fraud, although the costs may again run to billions of dollars.

In addition, as Chair of the SEC, Mr. Cox concentrated considerable personal and institutional resources on two subjects that subordinated investor interests to pursue projects that Mr. Cox believed in for some other reasons. In particular, Mr. Cox and the SEC Staff at his direction:

• spent thousands of hours and enormous other resources pushing an ill-advised campaign to eliminate US accounting standards in favor of global ones, although this was fortunately delayed in the final months of his term in response to investor and academic criticism; and

spent considerable resources promoting policies to let non-US enterprises access US capital markets, without any US regulatory oversight or legal enforcement, so long as they are overseen at home by authorities deemed comparable, also an idea that luckily has gained little traction and may die on the vine.


Such failures and inverted priorities, amid the financial crisis and political reform agendas, now put the SEC’s continued existence in doubt. Many students of the SEC’s history would regret termination of the SEC. It has done an overall very good job of investor protection in its 75 year history. But there is serious discussion in policy circles, from left to right, about abolishing it.

And there is reason to suppose that Mr. Cox may not mind if the SEC were soon eliminated. Certainly, his performance on the job suggests his disbelief in the agency’s mission of investor protection. His pre-SEC service as a 17-year free-market Congressional ideologue, and the fact that he was hand-picked for SEC Chair by like-minded former Vice President Dick Cheney, may support this admittedly speculative view. Even so, the best way to kill a federal agency may be to put in charge someone who doesn’t believe in it to run it accordingly.

As Mr. Cox left office, several prominent law professors from around the country commented on his performance (in this Bloomberg story). None suggests substantive support, even in the diplomatic terms that law professors may tend to adopt. The story reports the following:

• Harvey Goldschmid (Columbia), notes that Mr. Cox was too passive and that the SEC now faces morale problems;

• Bob Hillman (Davis), notes that Mr. Cox was slow to recognize problems, and was perhaps more interested in building consensus within the agency than addressing substantive problems, and politely supposes that he may be the “unluckiest” of SEC Chairs;

• Don Langevoort (Georgetown), offering a most charitable and sympathetic comment, notes that Mr. Cox came to the SEC hoping to modernize it and reduce burdensome regulations, but says that his agenda “ran up against unprecedented cataclysmic events;” and

• Marc Steinberg (SMU), notes that the SEC’s numerous failures during Mr. Cox’s tenure cannot be blamed on the SEC Staff, but on a “culture that came from the top.”

My own foregoing assessment is far less diplomatic than these and less than I am usually inclined to offer. But the record, in my view, is that unfavorable to Mr. Cox. No doubt, the incoming SEC Chair, Mary Schapiro, has her work cut out for her. It is my informed guess that investors will eagerly support any efforts she undertakes to rebuild the agency.

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10 Responses

  1. Thomas says:

    –The SEC certainly didn’t catch Madoff early. The NY Times reported just a couple of days ago that the earliest signs that the SEC staff somehow missed may have come in the first Bush administration. The one that ended 16 years ago. The culture apparently came from the top for each of those 16 years.

    –Cox never said that he was deeply troubled that “he” didn’t discover Madoff’s fraud. It would be deeply troubling if he thought that was his role.

    –The idea that securities laws compliance should be measured by fines is ludicrous. Do we measure police effectiveness by arrests and convictions, or by crime rates?

    –Focusing on the costs of failing to implement internal controls requirements on small public companies seems to me to miss half the issue, and all of the balancing. The costs of compliance would run to the billions on the front end.

    –The SEC had been working toward global accounting standards for years before Cox arrived.

    What does that leave? Mutual recognition, about which there isn’t much to say. Morale problems, which by my understanding are real, and for which Cox must be held at least partially responsible. But, really, to the extent that the agency’s morale was damaged because Cox publicly blamed the staff for failing to discover Madoff’s wrongdoing, well, the staff had it coming. And then there’s the failed oversight of the investment banks. To a large extent, that failure was a direct result of the regulatory regime adopted by the SEC in 2004, when Donaldson was Chair. Certainly that isn’t Cox’s fault.

  2. Lawrence Cunningham says:

    Thomas—

    Thanks for your comments, which usefully qualify how the Madoff scheme incubated long before Mr. Cox’s watch and for which it is unfair to say that he is personally responsible. But your comments do not amount to much of a defense of his tenure.

    1. I’m not sure ludicrous is the right way to think about fines and restitution as a proxy for securities law enforcement intensity; certainly, large year-to-year reductions signal something about an agency’s commitment and thus can influence deterrence levels.

    2. My referenced internal control reversal is to Mr. Cox’s gutting of the primary standard initially adopted by the Public Company Accounting Oversight Board for large public companies, not the special dispensation given to small ones. The cost-benefit calculus is elusive but there is little doubt that the reversal was a response to intensive lobbying by the Chamber of Commerce and managerial groups, not the Council of Institutional Investors or other investor groups.

    3. Although the SEC worked on global accounting standards for years, as my linked article examines, Mr. Cox made it a top priority and pushed it with such alacrity that the SEC overlooked many vital issues, released official documents containing fundamental errors, and showed an overall slapdash quality that was uncharacteristic of historical SEC output. (Again, my linked article examines these points in detail.)

    4. From my examples, that leaves at least mutual recognition and morale problems, as you say, which are non-trivial, plus investment banking oversight failures, on which you may be right to assign fault to Mr. Donaldson for the regime’s design in 2004; but that does not exactly mean that Mr. Cox did a good job.

    5. My list was not intended to be complete. One may add Mr. Cox’s ineffectual and anti-investor policies curtailing short selling of many equity securities as the credit crisis spread to securities markets in late 2008.

    6. A real defense of Mr. Cox would provide examples, if there are any, of policies that he did pursue or adopt that show a strong commitment to investor protection. I can’t think of any.

  3. JollyRoger says:

    WARNING: Attempts to chronicle the failures of the previous Administration may lead to blurred vision, depression, decreased sexual desire, fatigue, abdominal pain, and intestinal bleeding. It is further advised that anyone attempting to chronicle these failures do so from a ground floor room, far from knives or other sharp objects which one might be tempted to use on one’s self.

  4. Thomas says:

    I didn’t mean to offer a defense of Cox’s tenure. I think his tenure in many ways is a failed one.

    On the other points:

    1. One thing you miss is that the background shifted at the same time. Sarbanes-Oxley significantly increased the criminal penalties for violations. Why would we expect the same amount of wrongdoing after enactment as before? The change in fines is the fact that piques interest and leads to actual analysis–it shouldn’t be the conclusion, as you have it.

    2. Check the comments to see if the Council of Institutional Investors disagreed with the changes.

    3. It’s undoubted that global accounting standards were a top priority for Cox. I would note that the complaints about the resources devoted and the slapdash quality of the output, while certainly not in tension, reflect very poorly on the staff.

    5. I’d note that Cox has admitted error on this point, and that it is clear that the short selling proscription wasn’t his idea.

    6. There was a significant amount of modernization work done during his tenure–everything from eproxy to electronic filing to SEC web posting of no action letters.Compensation disclosures were strengthened.

  5. Nate Oman says:

    Lawrence: Do you really think that the SEC did in the investment banking industry? It seems to me that in many ways their basic business model has been in trouble for a long time. My understanding is that a significant reason for their overleverage was the comparatively small margins they were making. It seems to me that the industry no longer really made sense, and it was going to die one way or another. Perhaps a different regulator might have made the end less dramatic, but I’m skeptical that we can really pin this on Cox.

  6. Lawrence Cunningham says:

    Thomas,

    Thanks again. We seem close to agreement on the overall assessment and I accept your qualifications on many of the points, especially 1 and 6.

    Still, I underscore how, even with your qualifications, and perhaps others that could be mentioned, these do not reflect a commitment to investor protection (even with your replies on points 1, 2 and 6), effective stewardship of the agency or supervision of its Staff (on your reply to point 3), or successful leadership among other regulatory authorities (on your reply to point 5).

    The upshot remains that the agency’s continued existence may seriously be in doubt and it seems difficult to conclude that the agency’s Chair in the period leading up to such doubt should escape responsibility.

  7. Lawrence Cunningham says:

    Nate,

    It may be that low margins explain the investment banks’ over-leveraging and that the basic business model was unsustainable.

    But it also may be that failure was due, in part, to how they, and the SEC’s oversight program, thought about capital adequacy risks, which seemed to adapt a commercial banking model to the very different needs of investment banking.

    Whether these or other explanations are true, there is little doubt that the SEC’s oversight failed and that is a minus in assessments of Mr. Cox’s tenure.

  8. Thomas says:

    Lawrence, thanks for the responses.

    As I said, I think Cox’s tenure in many ways was a failed one. The morale issue is, as I understand it, very real. Whether because the staff saw him as a politician (in that he was focused too much on PR and on avoiding blame), or because he wanted to lead them where they didn’t want to go, it’s clear that he didn’t get great results from the staff.

    It’s also clear that some of what he devoted a lot of attention to (and what you devote much attention to) just isn’t relevant to today’s circumstances. Mutual recognition and global accounting standards are relevant to the world of 2005 perhaps, but really aren’t relevant today. Cox’s failure to anticipate that isn’t a fault, but it does mean that much of what he focused on just doesn’t really matter now.

    You say that the agency’s continued existence may be in doubt, and I suppose that’s true. (Are we really glad that the SEC and CFTC didn’t merge a dozen years ago?) But it’s true largely because the agency has a focus that isn’t the focus many would give to a regulator now, when the issue isn’t investor protection but systemic protection.

    You also suggest that Cox should have resisted the urgings of the Treasury Department and the Fed. I think that Cox and you are both right that it was a mistake. But note that it was a mistake that focused on systemic risks, not investor protection, so it in a sense is the one thing that Cox did that anticipates the future. (Yes, ineffectual and wrongheaded systemic regulation is our future.) And it wasn’t the failing of a free-market ideologue, but the failing of a too modest pragmatist who deferred to the experts’ warnings.

  9. Nate Oman says:

    Lawrence: I guess my question is whether applying different capital adequacy requirements to investment banks would have driven them out of business any way because they wouldn’t have been able to deliver returns on a scale to attract capital

  10. A.J. Sutter says:

    Thomas, I’m curious why you say “mutual recognition and global accounting standards … really aren’t relevant today.” I thought that some European leaders and others were talking about creating some global oversight agency for the financial industry. Even if that’s a long way off, I’d think that proposal, at least, would keep the global standards issue alive. Do you mean simply that Treasury will be too distracted by domestic issues in the next few months?