Good Bye Mr. Cox
Yesterday 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.