Strengthening the SEC

February 11, 2003

WHEN THE Securities and Exchange Commission last year set out to require the nation's largest 945 companies to directly sign off on their financial statements for the first time, the agency found it didn't have a database sufficient to create a list of those firms.

A decade of anemic funding will do that - and more. In fact - after a year of corporate scandals that, if nothing else, have underscored the SEC's crucial watchdog role - the agency still has only about 100 accountants plumbing the finances of 14,000 public companies.

Now the SEC appears set to get new leadership and a lot more money. And both these changes are way overdue for America's financial markets, which still suffer from badly eroded public confidence, along with the nation's economic ills and the prospect of war.

Despite the funding boost - President Bush has proposed 2004 spending of about $300 million more than the agency's 2002 level of about $550 million - the SEC still would be a government profit center, taking in more than twice as much money in fees and penalties as its budget. But the increase would enable the SEC to attempt to update its outmoded technologies, double its corporate finance accounting staff and offer more competitive pay.

That's only the beginning of the patching-up needed at the SEC, a job now likely falling to William H. Donaldson, the former New York Stock Exchange chairman nominated by Mr. Bush as the agency's new leader. He will probably be approved today by the Senate Banking Committee - and perhaps by the full Senate within a week - to replace Harvey L. Pitt, who remains on the job after resigning three months ago amid widespread criticism.

Under this lame-duck leadership, the SEC just completed one of the most extensive rounds of rule-making in its history. Advocates of stronger regulation have criticized the results as too lenient, but auditors, lawyers and mutual funds all emerged with stiffer SEC requirements. If confirmed, Mr. Donaldson must continue this tightening of the agency's corporate and market regulations - and see that the SEC's enforcement keeps pace with the new rules.

But Mr. Donaldson's most pressing task would be to appoint a person of stature and credibility to the first chairmanship of the new Public Company Accounting Oversight Board, an independent body created last year to regulate auditing. It was Mr. Pitts' mishandling of this task - among other very public missteps - that triggered his downfall.

For some, Mr. Donaldson may not be the best choice for SEC chairman. There have been questions about his handling of trading illegalities at the New York Stock Exchange and whether he best served stockholders as CEO of Aetna. But with a coming infusion of cash, tighter regulations and the right appointment to lead the new oversight board, Mr. Donaldson has the chance to eclipse those questions by restoring strength to the SEC - and confidence in corporate America.

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