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Unmasking Chris Cox

From the March/April 2007 Issue

When Chris Cox became chairman of the SEC, the Washington and Wall Street smart guys were sure what he would do. Instead, he fooled them by acting like…well, like Chris Cox.

Chris CoxWhen Christopher Cox took the oath on August 3, 2005, as the 28th chairman of the Securities and Exchange Commission, he was a known conservative commodity—or so people thought. Born in St. Paul, Minnesota, he spent 17 years in Congress, representing a district in Orange County—the Republican stronghold between Los Angeles and San Diego—and serving for a majority of that time as chairman of his party’s policy-setting committee. Before that, he was a senior associate counsel in the Reagan White House, and before that a lawyer at Latham & Watkins, specializing in venture capital and corporate finance, an entrepreneur who started a business translating Pravda into English (he speaks fluent Russian), and a law clerk to a federal appeals court judge. A graduate of a Catholic military academy, he was also something of an academic wunderkind, earning his bachelor’s degree from the University of Southern California in three years, then his MBA and law degree simultaneously from Harvard at the age of 24.

Throughout, he has been a fervent believer in supply-side economics, low taxes (he wrote his thesis on eliminating double taxation of corporate dividends), and limited regulation. In 1995, he favorably reviewed The Letters of Ayn Rand for The New York Times, writing that “Rand herself rejected not only Communism, fascism, and socialism, but also every economic system except free enterprise precisely because they subordinate the individual’s pursuit of laughter, joy, and pride, and achievement to the ‘greater good’ of society.” Ronald Reagan has been his lifelong political hero, and in 1976 he was a  member of one of the smallest extracurricular organizations in academic history: Harvard Law Students for Reagan.

When he was in the House of Representatives, Cox sponsored the Internet Tax Freedom Act, which preserved the net as a tax-free zone; championed cuts in dividend and capital gains taxes; and led the fight for the 1995 Private Securities Litigation Reform Act, which sought to curb abusive lawsuits and made it harder for plaintiffs to win large settlements in corporate fraud cases. The day before he became SEC chairman, Cox published an op-ed piece in his hometown newspaper, The Orange County Register, summarizing his years in Washington. After extolling the spread of liberty abroad, he wrote, “here at home, too, we have come to recognize that ‘as government expands, liberty contracts’…. Over the years, I’ve occasionally been able to take a nip here and a tuck there out of the federal behemoth. For example, we eliminated the oldest government regulatory agency, the Interstate Commerce Commission; and my closure of the wasteful National Helium Reserve was the third largest privatization in American history, yielding $2 billion for taxpayers.”

‘Here at home, too,’ wrote Cox, an admirer of Ayn Rand, ‘we have come to recognize that “as government expands, liberty contracts.”’

So it was no surprise that President Bush’s decision to name Cox, now 54, to succeed 73-year-old William Donaldson—a former Yale dean, under Secretary of State, and Wall Street executive who had dismayed the White House and the GOP congressional majority by often siding with the two Democrats on the SEC against the two other Republicans (“In Republican and business circles,” wrote Stephen Labaton of The New York Times, “Donaldson has been viewed as the David Souter of the Securities and Exchange Commission”)—would trigger a chorus of gripes. Would Cox sell off—or sell out—the SEC, the way he did the helium reserve? Cox as chairman “would be disastrous for investors,” said Joan Claybrook, president of Public Citizen, a Naderite advocacy group. “His strongly anti-investor track record shows he has little interest in protecting the millions of Americans who are counting on Securities investments for their retirement money. The Bush administration needs to select someone else,” she said, to run the commission that regulates financial markets and the companies that issue the stocks, bonds, and mutual funds that investors purchase. Barbara Roper of the Consumer Federation of America was also concerned about Cox. “I expect he will be extremely activist,” she said, “and will rework the agency in his own image.”

The establishment media issued stern warnings. “The investing public simply will not stand for any backsliding to the bad old days of regulatory laissez-faire, and Mr. Cox would be foolish to go there,” said an editorial in The New York Times. “His reputation as a deregulator and his record on corporate governance raise doubts about the SEC’s direction,” remarked The Washington Post, whose editors were especially piqued about Cox’s opposition to a 2004 proposal by the Financial Accounting Standards Board to force companies to count their employee stock options as expenses on their profit-and-loss statements at the time the options were issued—a change that was strongly opposed by prominent high-technology firms but eventually enacted. “The main issue is Mr. Cox’s willingness to stand up for investors and against business lobbies,” said the Post. “Stock-option expensing was a test of his mettle. He failed it.” The BBC reported that Cox’s appointment to the commission was “raising doubts over whether the finance watchdog will stick to its tough stance on corporate misconduct.” And Business Week ran a column by Robert Kuttner headlined, “Cox’s SEC: Investors Beware.”

Over his first year and a half in office, however, Chris Cox has not been the chairman that Claybrook and the media feared. He has not gone soft on Wall Street bandits, kowtowed to swaggering CEOs, or pursued a scorched-earth campaign against regulations, not even the more extreme parts of the Sarbanes-Oxley rules that many corporate leaders detest. Instead, Cox has taken a methodical, consensus-driven approach to the SEC’s work, seeking to forge unanimous 5–0 voting blocs within the commission. Last summer, 12 months into the Cox regime, AFL-CIO associate counsel Damon Silvers told Dow Jones News Service: “While he hasn’t done everything I would do, he’s done pretty well.” David Yermack, a finance professor at New York University’s Stern School of Business, says, “I really had low expectations for Cox,” but he’s been “a pleasant surprise.… He’s really embraced the shareholder reform agenda.” Now, Yermack thinks that Cox—whom he once deemed “a Republican tool of business”—should be considered for Treasury secretary.

In many ways, Cox’s model is President Clinton’s SEC chairman, Arthur Levitt, a Democrat who is cited favorably in the second paragraph of Cox’s official biography, the only such official to get a nod. Levitt, who formerly chaired the American Stock Exchange, focused on making the SEC an “investor’s advocate” while trying to keep good relations with both Congress and the business community. It is not surprising, then, that for many free-market conservatives, Cox has been a disappointment. “He’s losing the opportunity of a lifetime,” says Fred Smith, president of the Competitive Enterprise Institute. “It’s frustrating.”

In many ways, Cox’s model is President Clinton’s SEC chairman, Arthur Levitt, a Democrat who is cited favorably in the second paragraph of Cox’s official biography, the only such official to get a nod.

But many who know Cox from his days in the House aren’t surprised by his performance. He was never an activist. Cox was always cerebral and punctilious, sometimes to the point of annoying his Republican colleagues. “He had probably a greater intellectual interest in his work than most members of Congress,” says Dick Armey, the former Republican House majority leader and economics professor. “He would get into the details of legislation and pick it apart.” In Congress, Cox stood out not only for his conservatism but also for his geniality and bipartisanship. He worked especially closely with three Democrats: Senator Chris Dodd on tort reform in 1995, representative Barney Frank on privatizing the helium reserve in 1997, and Senator Ron Wyden on Internet taxes in 1998. With the change in congressional control, Dodd is now chairman of the Senate Banking Committee, Frank heads the House Financial Services Committee, and Wyden is a key member of the Senate Finance Committee—all good people for Cox to have friendly relations with. He also chaired a prominent House committee investigating Chinese espionage, which in May 1999 produced a 700-page report that, however controversial, reflected bipartisan unanimity. (“Without a single sentence of minority or dissenting views,” Cox said at the time.)

Cox brought these traits to the SEC—and, to a large degree, they have helped him avoid the acrimonious debates that plagued Donaldson and the vicious press attacks that drove out Bush’s first chairman, Harvey Pitt. “I think Cox saw as his mission the restoration of a sense of harmony,” says Levitt. But harmony for what? So far, Cox has done little on two important issues that Donaldson left him—forcing mutual fund boards to be led by outsiders and expanding the power of organized shareholders (often unions) to choose corporate directors. Advocates of free markets had expected Cox to toss out both initiatives and to move quickly to trim the power of Sarbanes-Oxley. He hasn’t. “I guess I would counsel patience,” says a senior SEC official who is known for being very market-friendly.

Others say that Cox has squandered a precious chance to shift the course of the SEC by clearly defining its mission. As one academic critic puts it, “the purpose of SEC regulation is to promote efficient, transparent financial markets and accurate pricing of financial instruments. That may sound obvious, but it is quite different from the purpose espoused by [Cox], which is to protect investors and promote investor confidence.” The SEC’s website says that the commission’s goal is “to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation.” The very next paragraph reads: “As more and more first-time investors turn to the markets to help secure their futures, pay for homes, and send children to college, our investor protection mission is more compelling than ever.” The problem with “investor protection” as the primary mission is that the phrase is so broad that it offers a hunting license for practically any action—for example, mandating that chairmen of mutual funds be outsiders—with only the most amorphous justification. (A hallmark of the Donaldson administration was promulgating rules under precisely this credo, with little or no empirical evidence to back them up.) But on the other hand, Cox himself has, at other times, defined the SEC mission in the opposite order: “to promote capital formation and to protect the rights of investors.” Which is it?

So far, neither. Like most chairmen, Cox has found his tenure shaped by events beyond his immediate control. “When it comes to regulation,” observed a Bloomberg News article last November, “Cox’s agenda has been set by the federal courts.”

John Shad, Reagan’s first SEC chairman, took office as a conspicuous deregulator but wound up dealing with fallout from the Ivan Boesky insider-trading scandal. Shad’s successor, David Ruder, now professor emeritus at Northwestern University Law School, describes how on Friday, October 16, 1987, he drafted a memo setting his agenda for the coming months and placed it in his desk drawer over the weekend. The document remained there for “about a year” before he next looked at it. His focus had shifted abruptly on the next business day, “Black Monday,” October 19, when the Dow Jones Industrial Average fell by 508 points, losing nearly one quarter of its value. Harvey Pitt’s own market-based strategy came unraveled with the Enron and WorldCom debacles. “A successful chairman,” Ruder says in hindsight, “is one who responds well to events that overtake the commission.” Levitt agrees. “You’re subjected to the push and pull of so many factors,” he says.

One of those factors is the lawyer-led bureaucracy of the SEC itself. Every secretary or chairman in the executive branch is seen by the permanent staff as a caretaker, but the power of the SEC’s bureaucratic culture is among the strongest in government. “This place has largely been staff-driven for a long time,” an adviser to Cox told me. Whatever its mission, the SEC has a deeply ingrained streak that doesn’t change much from chairman to chairman. Or, as Levitt puts it, “to a very great extent, the commission molds the chairman.”

‘This place has largely been staff-driven for a long time,’ said a Cox adviser. Whatever its mission, the SEC has a deeply ingrained streak that doesn’t change much from chairman to chairman.

One of Cox’s closest friends is Arthur Laffer, whose famous curve drawn on a napkin made him the godfather of supply-side economics. Laffer staunchly defends Cox against conservatives criticizing his inactivity. The chairman, says Laffer, “has got a whole staff there that [has] been appointed by previous people.” Well, not exactly. Shortly after Cox took office, The Washington Post reported that senior turnover at the commission gave him “an unusual opportunity” to appoint several key lieutenants. Donaldson had already appointed Linda Thomsen to the second most powerful position at the commission, chief of the Division of Enforcement. Would Cox replace her? No. Thomsen stayed. The decision set the tone for Cox’s chairmanship. He would strive to avoid controversy. “In his job, it makes no sense for him to be a bull in a china shop,” says Laffer.

Cox had other distractions early on, and probably delayed placing his own appointees for too long. “It’s been very restful,” said Joel Seligman, president of the University of Rochester and author of a history of the SEC, describing Cox’s first year. Seligman did point out that Cox found he had a serious illness shortly after taking office. He was diagnosed with thymoma, a rare form of cancer, and underwent surgery in January 2006 to remove a tumor on his thymus gland. (He’s now healthy.) In addition, “he had to spend the first few months really focused on administrative issues,” says Cynthia Glassman, a former SEC commissioner who stepped down last summer and is now an under secretary in the Commerce Department. Among other things, Cox was sidetracked wading through a mess of budget problems that Donaldson had left him. (Representative Frank Wolf, who chaired the appropriations subcommittee that had oversight of the SEC at the time, criticized Donaldson’s spending, saying, “the SEC polices other people’s books, yet they themselves have huge overruns. I am very disappointed.”) As for Cox, “he understood the institutional culture of this agency,” says an adviser of his boss. “But was there an elaborate agenda ahead of time? No.”

Like Pitt and Shad, Cox came to office at a difficult time for a reformer seeking to reduce regulatory baggage. The late 1990s were Wall Street’s golden age, when Americans seemed perfectly content to watch CEOs pocket lavish compensation packages, provided their stocks kept rising. “During my years the business community enjoyed a very good reputation in the Congress and in the society at large,” says Levitt. Not so today. The radioactive fallout from Enron, the Richard Grasso affair (involving a whopping pay package for the head of the New York Stock Exchange), and the scandal of late trading by favored mutual fund clients has still not dissipated, no matter how much legislation has been passed or how many crooked executives have done a perp walk. In his early days, Cox’s administration had to deal with a new scandal—over backdating executive stock options. Small wonder, then, that there was a solid consensus for requiring more extensive disclosure on executive pay—Cox’s first major initiative, proposed by the SEC in January 2006 and adopted in July. “It looks much more like something Arthur Levitt might have done,” says Yermack. At any rate, it is hardly the sort of early achievement one would expect from a follower of Reagan and Rand—unless, of course, Cox is smoothing the way for more adventurous measures. Late last year, the commission tweaked its new disclosure rules, allowing businesses to stretch the reporting of CEO stock option grants over several years, rather than reporting the full estimated value of the options at the time they are awarded, since CEOs often cannot exercise those options immediately. “The object is to report accurate numbers,” Cox said in a statement. “Artificially inflating executive pay, or reporting ‘phantom’ pay, is just as misleading as routinely underreporting it.” Critics mocked the change as an early “Christmas present” to corporate executives.

Another area where Cox wants to make his mark is technology. In December, the SEC approved distributing electronic proxy materials over the Internet, but Cox’s broader project has been advancing extensible business reporting language (XBRL), which he likes to call “interactive data.” XBRL helps reduce the cost and difficulty of processing financial information. “I’m doing everything I can to drag the SEC into the 21st century,” Cox told me. Investors, for example, have a tough time today comparing returns on equity across different companies in a sector. “If interactive data becomes the norm,” says Cox, “it would be duck soup.”

James Freeman, who moved from Cox’s congressional office to become the SEC’s “investor advocate,” says XBRL “is about giving people real-time access to the information they want—directly from the source.” Interactive data may not seem terribly contentious, he adds, but “that doesn’t mean it’s not significant.” In addition, Cox is proud of what his official biography calls “the agency’s initiative, first begun under former chairman Arthur Levitt, to provide important investor information in plain English.”

Well, yes, but there are more controversial issues under consideration. Here are four:

Sarbanes-Oxley. There is strong sentiment, in business and financial circles and even among Democrats in Congress, to reduce some of the sting of the Sarbanes-Oxley Act, specifically Section 404, which requires that corporate managers and outside auditors describe in detail and certify a company’s internal controls over its financial reporting. The implementation of Section 404 has been especially time-consuming and expensive for small businesses, and its costs—as well as others associated with the 2002 law—have been cited as reasons for the steady gains over U.S. capital markets by exchanges in London and Hong Kong, especially. The Committee on Capital Markets Regulation, an independent academic and business group, pointed out in December that, “as measured by value of IPOs [initial public offerings], the U.S. share declined from 50 percent in 2000 to 5 percent in 2005.”

Right now, however, the area where Cox wants to make his mark is technology. In December, the SEC approved distributing electronic proxy materials over the Internet, and Cox is pushing for broad use of XBRL, or ‘interactive data.’

Many free-market advocates urged Cox to move quickly on lightening the load of Section 404, but he demurred, charting a much slower course, working again as a deliberator rather than as a crusader. In November, Cox sent a letter to the Public Company Accounting Oversight Board (PCAOB), established under Sarbanes-Oxley, recommending a more pliable application of 404’s internal-control provisions. When the letter became public, Lynn turner, who had been the SEC’s chief accountant under Arthur Levitt, sent out an email blast to his famously broad mailing list claiming that Cox’s approach was “highly inconsistent” with Sarbanes-Oxley and not in the “best interests” of investors. Cox’s letter, said Turner, “does seem to impinge on the independence of the PCAOB and its process, as the PCAOB was working on their own proposal, now apparently superseded by the SEC requesting a different approach.”

But, true to his operating style, Cox had greased the skids. In its December open meeting, the SEC voted, 5–0, to propose the new guidelines the chairman had sought on Section 404 compliance. Corporate managers would have increased latitude in assessing the health of their internal controls. As Commissioner Paul Atkins, a Republican, said at the time, the proposal aimed to restore a proper balance between outside auditors and management. Still, in order to secure a unanimous vote, and to gain the backing of the accounting oversight board, Cox had to agree to changes that were not as sweeping as Atkins—or he himself, for that matter—had initially hoped.

Later that month, the PCAOB (fondly called “peekaboo” in some quarters) followed suit. “I have been working very closely with Chairman Mark Olson,” Cox told me just before Christmas. “We’ve been working shoulder-to-shoulder on this for months.” While the negotiations proved a bit turbulent, it seems improbable that Cox bullied the PCAOB into following the SEC’s lead. In the end, for example, Cox was forced to scrap his idea of holding small companies to a less stringent auditing standard than larger ones.

Mutual Fund Chairmen. “Bullying,” in fact, may be the best word to describe Chairman William Donaldson’s approach to passing a rule stipulating that the chairman and three-quarters of the directors of a mutual fund be independent of the management of that fund. In 2004, Donaldson, again teaming up against his fellow Republicans, Atkins and Glassman, pushed through the measure. The U.S. Chamber of Commerce, partly because its members feared that the rule would establish a precedent that could be applied to other businesses, filed a federal lawsuit to block the move. In 2005, an appeals court in Washington, D.C., ruled that, while the SEC did have the authority to impose such a regulation, it had not performed a proper cost-benefit analysis and considered alternative ideas. Without complying with the court’s demands, Donaldson, literally on the eve of his departure in June 2005, pushed the mutual fund measure through a second time on the same 3–2 vote. Once again, the D.C. appellate court struck down the rule.

“This sort of got thrown back to us because of Donaldson’s 23rd-hour shenanigans,” says an adviser to Cox. True, but Cox could have simply torpedoed the measure as soon as the court rejected it a second time. Instead, he brought it once more before the commission, which voted, 5–0, in December to extend the “comment period” on Donaldson’s original proposal. Cox has not stated his own position on the independent-chairman requirement, but it’s doubtful that he favors it.

If Cox is correct in wanting to build consensus before acting, he has not relied enough on the SEC chairman’s ability to command an audience to promote his views, to spread the free-market gospel even if he can’t put it into law.

Every mutual fund, under a law enacted in 1940, is structured as a separate corporation with its own board. The board hires a management, or advisory, firm to run the fund. The reality is that the management firm—Fidelity, for instance—instigates the formation of the fund and its board in the first place, and investors think of such a fund as a Fidelity product. Fidelity’s reputation, not the reputation of independent board members, rides with the fund. If investors don’t like the performance, they switch to another fund. The notion that an independent board should go out and hire a new manager in such a case seems unnecessary, at best. Besides, research shows that funds with independent chairmen perform no better—and, in many cases, worse—than funds with chairmen who are part of management. But Cox wouldn’t kill the proposal outright. “We’re actually going to let the professional analysis drive this one,” he says. “I have made it clear…that the SEC will do everything within its power to obey the court’s commands.”

Shareholder Access. There’s another appellate decision hanging over Cox’s SEC. In September, the U.S. Court of Appeals for the Second Circuit made an important, and disturbing, ruling in a suit filed by the pension plan of the American Federation of State, County and Municipal Employees (AFSCME) against the giant insurance company AIG. The union pension plan had sponsored a proposal that would allow any shareholder owning more than 3 percent of AIG’s stock to list its own nominees for board seats along with the choices of the company. “Before this decision,” writes Peter Wallison, a resident fellow at the American Enterprise Institute who served in the Reagan White House with Cox, “the SEC had ruled that any matter relating to an election of directors could be excluded from a company’s proxy statement, but the court refused to enforce this policy because it determined that the SEC had been inconsistent in the past.”

“Shareholder access”—which, more accurately, means giving large institutional owners of companies, including big unions, more power in board elections—has been a rallying cry for corporate reformers, including Donaldson himself, who floated the idea in 2003. As John Bogle, founder of the mutual fund titan Vanguard, argues in The Battle for the Soul of Capitalism, “If enough shareholders believe that their elected representatives—the directors—are not observing their duty of stewardship, they ought to be able to elect those who will do so. And they ought to have the ability to do so without onerous restrictions.”

The Wall Street Journal editorial page delivers the obvious riposte: “Shareholders who feel a company is underperforming already have the ultimate ‘vote,’ which is to sell their stock.” For that matter, notes the Journal, the shareholder-access plan envisioned by Donaldson would have favored institutions like pension funds over smaller investors. (This is the reality of “shareholder democracy” in many European countries, too.)

The Second Circuit provided the SEC with a golden opportunity to restate its old position: letting companies keep outside nominees off the ballot. But at its meeting on December 13, the commission punted. The issue was put off and still had not been resolved as we went to press.

The consequences of inaction, however, may be serious. As Wallison wrote on The American’s website,  “Delay hands the ball to the shareholder activists, since without an SEC position, the rule—at least for companies in the Second Circuit—is that they must include such an amendment in their proxy material. Companies outside the court’s immediate jurisdiction, however, are likely to feel that they should also follow the court precedent. Failure to do so—especially without the imprimatur of the SEC—will simply embroil them in litigation. The prospect that annual shareholder meetings in 2007 will become politicized by contests between shareholder activists and corporate managements has become very real. The failure of the SEC to act is difficult to understand.”

When I spoke to Cox a few days after the meeting, he sounded torn over just how far shareholder power should extend. On the one hand, he told me, “It simply isn’t feasible for thousands of investors…to collectively manage a business enterprise.” On the other hand, he said, “It is very dangerous to the system to sever the relationship between the directors and the shareholders. It’s a matter of property rights.” But he understands he can’t duck the matter: “There’s a court decision out there that’s forcing us to act.”

Hedge Funds. Yermack calls these funds, some 9,000 of them managing $1.3 trillion at last count, “the 800-pound gorilla in the room.” Hedge funds, which have broad latitude to invest where they want and to make highly limited public disclosures, have lately been wracked by high-profile scandals and liquidations, including the collapse last year of Greenwich-based Amaranth Advisors following some infelicitous trading on natural-gas futures.

But Cox has not gone soft on Wall Street bandits, kowtowed to swaggering CEOs, or pursued a scorched-earth campaign against regulations.

Representative Barney Frank has supported a bill that would explicitly make the industry fair game for SEC regulation. Some Republicans may agree. “We want more transparency,” says Senator Charles Grassley, the ranking Republican on the Senate Finance Committee, who, along with his colleague Senator Arlen Specter, has sparred with Cox over whether the SEC was aggressive enough in investigating the Pequot Capital Management hedge fund, which was under scrutiny for allegedly making profitable trades ahead of mergers.

In June, the D.C. appellate court rejected a 2004 SEC rule—adopted by another of those 3–2 votes under Donaldson—that required hedge funds with 15 or more clients to register with the commission and face heightened scrutiny. Because the term “clients” was ambiguously defined, the court derided the rule as arbitrary.

As we went to press, the SEC had not voted on a revised version of the Donaldson-era regulation—perhaps, as in the case of the AFSCME v. AIG revisions, because Cox can’t find unanimity. The commission did, however, propose reaffirming its authority to enforce antifraud laws against hedge funds that engage in malfeasance. It also unanimously proposed raising to $2.5 million from $1 million the total investable assets (not including residential real estate) that an investor must have in order to invest in a hedge fund. Such constraints are needed, says Cox, to prevent “small, unsophisticated, retail investors” from buying stakes in hedge funds and then getting clobbered by market vagaries. Again, this may appear a particularly anomalous action, coming from an admirer of Ayn Rand.

The reality, however, is that hedge funds are already in the political crosshairs. “It’s really to protect the marketplace against Congress,” says a senior SEC official of the proposed investment parameters. In other words, by taking preemptive action on hedge funds, the SEC may forestall a potentially more aggressive, more burdensome legislative response. It’s the Cox method at work. Many congressional Democrats enjoy close ties with the SEC enforcement staff. “Lawyers tend to be very Democratic,” says the senior SEC official. “The ones at the SEC in particular are.”

Whatever their politics, attorneys generally view the world far differently from economists, and “this place is all lawyers and accountants.” (Cynthia Glassman is one of the few economists ever to serve as an SEC commissioner.) An editorial that recently appeared in The Economist hit close to the mark: Were it to “replace some of the SEC’s vast army of lawyers with economists,” the commission could strike a more equitable balance between promoting market efficiency and carrying out enforcement duties.

Cox grasps the lawyer-economist dichotomy. “I intentionally recruited an economist to run the Division of Market Regulation,” he says, referring to Erik Sirri, a finance professor at Babson College who previously served as the SEC’s chief economist—under Levitt. Citing his personal experience of attending business and law school concurrently, Cox says with a laugh, “It taught me at an early age what people in business think of lawyers.”

In his reluctance to take bold steps, Cox is simply reflecting the intense battle of ideas over the proper function of the SEC. Many advocates of free markets would prefer to streamline the agency, revamp its more inefficient policies, and concentrate more on capital formation rather than the vague goal of “investor confidence.” On the other side of the debate, anticorporate forces, believing that business leaders willingly deceive naïve investors, would broaden the SEC’s reach and sharpen its talons. The chief intra-agency tension, says a senior SEC official, is between those who view the SEC primarily as a regulatory body and those who view it primarily as an enforcement vehicle.

Perhaps most disappointing is that, even if Cox is correct in wanting to build a strong consensus before acting, he has not relied enough on the SEC chairman’s ability to command an audience to promote his views. “Arthur Levitt really used the bully pulpit,” says Yermack approvingly. Cox has delivered a few notable speeches, but they haven’t received much attention. The truth is that, while Cox is genial and persuasive in a small group, he isn’t a great speaker and often seems uncomfortable even in television interviews.

Levitt himself, the longest-serving SEC chairman in history, is happy with the current regime. “Chris Cox,” he says, “has been a very professional, measured, intelligent, and sensitive chairman.” Such admiration may be heartwarming to Cox, but it may also be an indication that the new chairman has not been aggressive enough in pursuing free-market ideals. “Aggressive,” however, is not a word usually associated with Chris Cox. He has spent a year and a half temporizing, perhaps to good effect. But he now has important decisions on his plate—on Sarbanes-Oxley, mutual funds, shareholder access, hedge funds, and more. The time for waiting is just about over.




Illustration by Tim O’Brien

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