Donaldsonís Next Test

What a difference one person can make. In the few short months since former investment banking and brokerage chief William Donaldson became chairman of the Securities and Exchange Commission, a modicum of confidence in our financial markets already has been restored.

It will take more than a few meaningful gestures to heal investors‚ confidence from the damage wrought by the Internet bubble and the accounting scandals of the past three years. And it will require more than a few quarters of accurate financial reporting to get there from here.

But whereas his predecessor, Harvey Pitt, spent his first few months sending all the wrong signals to investors, the financial markets and Wall Street, Donaldson has yet to make a misstep. Of equal importance is the fact that he appears to be focusing on a handful of priorities and avoiding the mistake so many people make in the public sphere–trying to do too much. Convincing New York Federal Reserve Bank Chairman William McDonough to become head of the new financial accounting standards board demonstrated the new SEC chairman‚s ability to attract A-level public servants to challenging tasks.

Donaldson also revealed that he has no fear of dressing down Wall Street big shots who need to be brought into line. When Morgan Stanley CEO Philip Purcell treated his firm‚s $125 million fine for investment banking and research scandals as little more than a jaywalking ticket, Donaldson indicated that he or the SEC‚s director of enforcement could personally explain to Purcell why the settlement–and his own remorseless attitude toward it–involved more serious and troubling problems.

Even in the small corner of the universe inhabited by investment advisors, Donaldson has shown that his years of experience provide him with insights that the legalistic Pitt didn‚t possess. While Pitt talked of creating new bureaucracies to regulate both mutual funds and investment advisors, an expensive undertaking for a federal government recording annual budget deficits of $500 billion, Donaldson questioned why there was a need to fix something that wasn‚t broken. Indeed, it‚s not as though the financial services business has a shortage of problems.

Donaldson will face yet another challenge in the months ahead. Back in 1999, then-SEC chairman Arthur Levitt proposed a rule that would exempt brokers at the nation‚s largest wirehouses from investment advisor regulation on client accounts involving fee-based asset management. Several advisors who met with Levitt on this subject came away convinced that he held commission-based client relationships in such low esteem that he was willing to bend the rules to wean wirehouse brokers away from them.

Over the last four years, the proposal has languished as the SEC has grappled with more pressing problems. But now a high-profile coalition of advisor and consumer groups has united to urge the SEC to discard the proposed exemption. In light of all the scandals that have been uncovered at wirehouse brokerages, the argument for exempting these folks from rules by which everyone else must play looks weaker than ever.

Folks at the Financial Planning Association, the National Association of Personal Financial Advisors and the CFP Board of Standards were wise to enlist the support of several consumer groups to tackle this issue. They have rightly transformed it into much more than a small territorial issue affecting a small segment of the financial services business. If Donaldson figures this out, then there is even better reason to be optimistic about his tenure at the SEC.