SEC chief: Tough rules helping

Marcy Gordon

Wednesday, July 30, 2003 | 10:51 a.m.

WASHINGTON -- The recent crackdown on corporate corruption has helped lure investors back to the stock market, but some companies still haven't grasped the importance of reform, the chairman of the Securities and Exchange Commission says.

In an interview Tuesday with the Associated Press, William Donaldson also said new rules may be needed to ensure companies put enough money into their pension funds for employees.

Some corporations have made overly optimistic projections of their future earnings, allowing them to boost short-term profits with money that otherwise should have gone to shore up pension funds. And some companies have been forced to scramble for money to restore to the pension funds.

The accounting "is murky and needs a lot of attention," Donaldson said, noting that the SEC and the Labor Department are looking into the issue.

Donaldson spoke a day before the one-year anniversary of sweeping anti-fraud legislation, enacted at the height of the scandals at Enron, WorldCom and other companies that wiped out billions in investors' savings. The legislation imposed new criminal penalties, changed how companies operate and brought the accounting industry under stricter supervision.

The chief sponsors of the legislation, Sen. Paul Sarbanes, D-Md., and Rep. Michael Oxley, R-Ohio, were appearing at a news conference Wednesday with Donaldson and William McDonough, chairman of the new accounting oversight board, to discuss the law's impact.

The new corporate accountability law has the helped market's recent resurgence, Donaldson suggested.

"Clearly investors have gotten back into the market because they like the market," he said. "Clearly a part of that is a feeling that the change is under way. ... People recognize that we have a rigorous program under way."

Donaldson said some companies still "haven't gotten the message" when it comes to lavishing pay packages and stock options on executives, incentives that encourage short-term leaps in a company's stock price often at the expense of a company's long-term financial health. He did not single out any company but said it was important for boards of directors to set longer-term goals for their chief executives and avoid slavishly trying to meet Wall Street's quarterly profit targets.

Stock compensation has been blamed for enticing executives at companies like Enron and WorldCom to manipulate earnings to boost the stock price and then sell their lucrative personal holdings.

Congress is divided over possible new restrictions on stock options. Lawmakers friendly to high-tech industries are pushing against requiring companies to count options as an expense against their bottom line. And the head of a standard-setting board for corporate accounting has accused the lawmakers of improperly intervening in its work by proposing a three-year delay of such a requirement.

"There is a cost to options," Donaldson said in the interview. "They're certainly not costless" for businesses.

He said the standard-setting board will be able to devise a formula for valuing compensation in the form of stock options -- a calculation opponents contend is too tricky and relies on predicting future economic events.

Donaldson, a Wall Street veteran and former chairman of the New York Stock Exchange, has been the government's top securities regulator for about six months. He was named by President Bush to replace his first SEC chairman, Harvey Pitt, who resigned in November after a series of political missteps amid the wave of corporate scandals.

Donaldson said mutual fund companies should be required to make fuller disclosures to investors of fees, which are too complicated for many consumers to understand. Investors also should be told if their brokers have been given special inducements to sell particular mutual funds, he said.