Christopher Cox

During his tenure, Cox led the Commission to implement new executive compensation rules. Since the early 1990s, support for reform had been growing, urged by the U.S. Financial Accounting Standards Board and others. Relying in part on FASB's recommendations for improved presentation of compensation information, the Cox reforms made it possible for users of financial statements to readily understand how public company executives are compensated. Newly required information included the lump-sum cost of retirement benefits and explanations of why specific stock option grants were approved.[33] The New York Times observed that the Commission "largely stood its ground amid pressure from compensation specialists, investor advocates, and industry groups." With more than 20,000 comment letters, Cox said, "No issue in the history of the SEC has generated such interest."[34]

One of his first initiatives was launching a plain English effort, to eliminate legalese in investor communications in favor of clear language that let investors focus on what was important, the better to hold a company's performance up to the light of day. Not only the executive compensation rules,[35][36][37] but also disclosure rules for investment advisors[38] and mutual funds—where more than half of U.S. households had their retirement and college savings—were subjected to the plain English requirements.[39] Under Cox the SEC wrote new rules requiring the $10.6 trillion mutual fund industry to make their prospectuses easier for investors to read, understand, and access.[40]

Cox defended the 2002 Sarbanes-Oxley Act and resisted efforts to repeal it or scale it back legislatively.[41][42][43] The greatest source of complaint about the law during his tenure was its Section 404, which produced compliance expenses far higher than the SEC under his predecessor had predicted.[44] Working with the Public Company Accounting Oversight Board, the SEC under Cox replaced the original auditing standard for Section 404 with a streamlined, more cost-effective version,[45] and also provided new guidance for management intended to reduce unnecessary costs.[46] At Cox's direction the agency undertook a nationwide Small Business Cost-Benefit Study[47] to determine whether, as intended, the new auditing standard and management guidance had made compliance less expensive and better focused the 404 process on control elements that truly matter for companies of all sizes.[48]

In June 2007 the Commission voted unanimously to repeal the so-called "uptick rule" or "tick test."[49] The action was not controversial at the time: it was taken after an extensive multi-year study by the Office of Economic Analysis, begun in 2003 under Chairman Bill Donaldson.[50] The study found that the rule—which had never applied on NASDAQ or to ECNs and other trading systems—had been rendered ineffective on the NYSE due to decimalization (that is, the reduction of the "tick" increment to a penny, as compared to the 1/8 or 12½¢ that was in effect when the rule was adopted in 1938).[51] Its repeal later became the subject of much debate, with some advocating its reinstatement. On July 15, 2008, Cox told a U.S. House hearing that the Commission was studying the potential institution of "a price test that could work with an increment of a nickel or dime" or some more meaningful amount.[52]

Technological modernization of the SEC was a Cox priority throughout his tenure. He introduced new technology for investor disclosure,[53] compliance analytics,[54] nationwide investigative work sharing,[55] and management of funds recovered for investors.[56] In August 2008 he rolled out the future replacement of the SEC's forms-based disclosure database, called EDGAR, with a new interactive disclosure system using computer-tagged data in the eXtensible Business Reporting Language (XBRL).[57] The new system was designed to let future investors easily search, sort, and recombine information to generate reports and analysis from hundreds of thousands of companies and millions of forms.[58] Under Cox the SEC oversaw the creation of a taxonomy of over 11,000 XBRL data tags that catalog every element of U.S. Generally Accepted Accounting Principles.[59] In 2008 the Commission issued rules requiring all publicly traded companies and mutual funds in the United States to tag their financial information.[60]

Another Cox technology initiative liberalized the proxy rules to allow investors and companies to use Electronic Shareholder Forums—virtual meeting places on the Internet to promote shareholder initiatives, conduct straw polls, apprise a company's directors of critical shareholder concerns, and inform shareholders of management's and directors' views.[61]

In 2006 the SEC launched a war against Internet financial spam, shutting down trading in companies that touted their stock by clogging investors’ in-boxes. Investor complaints about the practice fell from more than 220,000 per month in December 2006 to 70,000 per month in February 2007; Internet software and services company Symantec credited the SEC with cutting financial spam by 30 percent.[62]

These technological initiatives were widely supported, with one observer noting that Cox "earned virtually universal plaudits for efforts to modernize technology, transparency, and understandability of corporate reports, and to provide for apples-to-apples comparisons (for the first time ever) of corporate executive compensation."[63]

The particular needs of senior investors, whose ranks are growing rapidly, was a special Cox focus. In April 2006, the SEC held its first “Seniors Summit”, working with AARP, the Financial Industry Regulatory Authority, the North American Securities Administrators Association, and several state regulators; the conferences are now held annually.[64] A nationwide sweep examination conducted by the SEC and authorities in seven states found that "free lunch" investment seminars, which draw large numbers of retirees, routinely involved significant fraud.[65][66] Many were advised to put their retirement funds into equity-indexed annuities, where they could get stock market returns while keeping their money “safe”. But neither these investments, nor the sales agents, were registered with state or federal securities regulators—and investors were frequently unaware that it would be impossible to get their money back for as much as 15 years without paying a stiff penalty.[67] The SEC enacted rules in 2008 to protect seniors and other investors from fraudulent and abusive practices in annuities sales.[68]

During Cox's tenure the SEC significantly expanded its international activity. Between 2005 and 2008, Cox signed supervisory arrangements covering enforcement and regulatory cooperation with regulators in the United Kingdom, France, the Netherlands, Belgium, Portugal, Australia, Germany, Bulgaria, and Norway.[69] As Chairman of the International Organization of Securities Commissions' Technical Committee, he led international efforts to converge U.S. GAAP and International Financial Reporting Standards. In December 2007, the SEC adopted rules to permit foreign issuers to use IFRS without reconciliation to U.S. GAAP. And in November 2008, the SEC issued a roadmap – with clear milestones along the way — that would lead to a Commission decision as early as 2014 on whether or not U.S. public companies should be required to use IFRS.[70] Cox also initiated a mutual recognition process for foreign regulators, based on an assessment of whether the securities regulatory system in another country produces comparably high-quality results for investors, including in the area of enforcement.[71] In August 2008 he executed an arrangement[72] with the Australian Securities and Investments Commission under which the SEC could approve exemptions allowing Australian-registered securities exchanges to operate in the U.S. without having also to register with the SEC, and U.S. exchanges would have the same privilege in Australia.[73] As of 2008, the SEC was in mutual recognition discussions with regulators in Canada,[74] and also in preliminary discussions with the Committee of European Securities Regulators.[75]

International enforcement also stepped up considerably under Cox.[76] During 2008 the SEC made 556 requests of foreign regulators for assistance with SEC investigations, many of which were connected to potential wrongdoing in the subprime market.[77] Among the significant international cases the Commission brought during this period were the highly publicized 2008 charges against Hong Kong-based insider trading in Dow Jones prior to its acquisition by News Corporation.[78] Under Cox the SEC also brought the largest number of cases in its history charging corporations and their officers with foreign bribery under the Foreign Corrupt Practices Act and imposed record penalties for these cases.[79]

Overall, enforcement was Cox's stated priority beginning in 2005[80] and throughout his chairmanship.[81] He moved quickly to settle the debate over whether it was legitimate to impose penalties on corporations, adopting a policy that made clear the SEC "isn't turning out to be the corporate-friendly place that many in the boardroom set were hoping for."[82] Within the SEC budget, as of 2008, he had increased the share devoted to enforcement to its highest level in 20 years.[83] Nonetheless, the SEC's overall appropriation was held steady during two of his budget years, first by a Republican and then a Democratic Congress, and it was increased by only 2% in a third year.[84] These sub-inflation agency budgets, combined with merit pay increases for staff, caused the total enforcement personnel to decline.[85] Critics attacked the underfunding of the SEC and blamed Cox,[86] though Congress[87] and the administration[88] clearly shared the responsibility. When the agency budget was finally increased in fiscal 2008, he increased enforcement personnel by 4%.[83]

Beginning early in his chairmanship he focused the agency's enforcement efforts on stock option backdating, an illicit practice that had been exposed after the 2002 Sarbanes-Oxley Act changed the rules regarding the reporting of stock option grants.[89] Under Cox the SEC investigated more than 160 stock option backdating cases,[90] aided by the fact that the reporting forms for stock option disclosure were among the first to be mandated in “interactive data” format.[91] Some of these cases were noteworthy for their size: in December 2007 the agency won $468 million in a settlement for stock option backdating against the former Chairman and CEO of UnitedHealth Group.[92]

Cox also aggressively used the agency's “Fair Funds” authority to distribute funds recovered from securities law violators directly to injured investors.[93] By February 2008 the SEC had returned more than $3.5 billion to wronged investors, including more than $2 billion in 2007 alone.[94] To expedite the return of the funds, cut red tape and lower costs, Cox created a new Office of Collections and Distributions.[95] A few weeks later, in May 2008, the new Office began sending more than $800 million in Fair Funds to harmed investors in American International Group, Inc. (AIG), which settled SEC charges of financial fraud.[96] In 2006 the Commission obtained a $350 million penalty from Fannie Mae after accusing it of accounting fraud; the penalty was one of the largest in Commission history.[97] The following year the Commission charged Freddie Mac with accounting fraud and recovered a $50 million penalty.[98]

As the 2008 credit crunch spread to municipal finance, the auction rate securities market froze, leaving investors without access to their cash.[99] The SEC immediately investigated the largest firms in the market and entered into settlements that were the largest in the history of the SEC, amounting to up to $30 billion to injured investors.[100]

Cox also targeted municipal securities fraud. In April 2008 the SEC charged five former San Diego city officials with securities fraud involving billions in undisclosed pension liabilities that had placed the city and taxpayers in serious financial jeopardy.[101] Throughout his chairmanship he railed against the inadequacy of disclosure to investors in municipal securities, which the SEC does not regulate,[102] and asked Congress for explicit authority for the agency to do so.[103] In December 2008, the SEC under his leadership authorized the creation of a free, Internet-accessible repository for municipal finance disclosure.[104] "With liquidity problems of municipal auction rate securities and rating downgrades of municipal bond insurers contributing to the current credit crisis, the disclosure and transparency of the municipal markets have never been more critical," he said.[105]

In late December 2008, following the confession by New York investment advisor Bernard Madoff and the filing of SEC charges against him alleging a $50 billion fraud, Cox stated that he was "gravely concerned" that "specific and credible evidence" provided to the agency over a period of at least 10 years had not previously been referred to the Commission for commencement of a formal investigation. He ordered an internal investigation by the agency's Inspector General.[106] The report found that substantive allegations concerning Madoff were first brought to the SEC in 1992.[107]

Cox, Hank Paulson, and Ben Bernanke watch as President George W. Bush delivers a statement on the economy in 2008

Under his leadership, the SEC on September 17 and 18, 2008, imposed a variety of both permanent and emergency restrictions on short selling in response to the liquidity crisis.[108] Abusive naked short selling, in which the seller intentionally fails to deliver the shares sold short in time for settlement, was banned outright, an exception for options market makers that had been in place for several years was eliminated,[109] and a new anti-fraud provision, Rule 10b-21, was adopted to give specific enforcement authority in such cases.[110] In September 2008, short selling of 799 financial stocks was temporarily curtailed[108] in response to rumors accompanied by heightened short selling activity in the shares of major financial institutions.

On September 26, 2008, Cox ended the 2004 program for voluntary regulation of investment bank holding companies, begun under SEC Chairman William Donaldson and then-Director of Market Regulation (later SEC Commissioner) Annette Nazareth. The program "was fundamentally flawed from the beginning, because investment banks could opt in or out of supervision voluntarily," Cox said.[111] A critical report by the SEC inspector general that evaluated the program in light of the Bear Stearns near-failure in March 2008 found that while "Bear Stearns was compliant with the capital and liquidity requirements" at the time of its acquisition, "its collapse raises serious questions about the adequacy of these requirements." However, according to the Inspector General, his report "did not include a determination of the cause of Bear Stearns' collapse" or determine "whether any of these issues directly contributed to Bear Stearns' collapse." On that subject, the report stated, "we have no evidence linking these significant deficiencies with the cause of Bear Stearns' collapse."[112][113] Cox criticized the oversight program on the ground that because of its voluntary nature and the SEC's limited statutory authority, the agency could not force changes in the hundreds of unregulated subsidiaries of large investment banks such as Goldman Sachs, Morgan Stanley, Merrill Lynch, Lehman Brothers and Bear Stearns as bank regulators could do with bank holding companies. In testimony before Congress on several occasions in 2008, he asked for statutory authority to regulate investment bank holding companies.[114]

In addition to the fact that the Gramm-Leach-Bliley Act did not give the SEC the authority to regulate large investment bank holding companies, Cox noted that investors were vulnerable to other regulatory gaps such as the fact that the $60 trillion market for credit default swaps was then completely unregulated. "Neither the SEC nor any regulator has authority even to require minimum disclosure", he said.[111] In testimony and public statements he urged Congress to enact remedial legislation.[115]

Cox said that during the buildup of the credit crisis, when the credit rating agencies were still unregulated, they gave top credit ratings to financial instruments which packaged risky loans and spread the negative impacts of the credit crisis more broadly throughout the markets.[116] Following the first-time SEC registration of the credit rating agencies in September 2007 under newly enacted legislative authority, he ordered a 10-month examination of the three major rating agencies that uncovered significant weaknesses in their ratings practices for mortgage-backed securities and that called into question the impartiality of their ratings. The results were reported to Congress in July 2008.[117] The SEC immediately commenced a rulemaking which concluded on December 3, 2008 with approval of a series of measures to regulate the conflicts of interests, disclosures, internal policies, and business practices of credit rating agencies. The regulations were intended to ensure that firms provide more meaningful ratings and greater disclosure to investors concerning collateralized debt obligations and residential mortgage-backed securities.[118]

In an interview with The Washington Post in late December 2008, Cox said, "What we have done in this current turmoil is stay calm, which has been our greatest contribution—not being impulsive, not changing the rules willy-nilly, but going through a very professional and orderly process that takes into account unintended consequences and gives ample notice to market participants." Cox added that the Commission's decision to impose a three-week ban on short selling of financial company stocks was taken reluctantly, but that the view at the time, including from Treasury Secretary Henry M. Paulson and Federal Reserve chairman Ben Bernanke, was that "if we did not act and act at that instant, these financial institutions could fail as a result and there would be nothing left to save."[119] In a December 2008 interview with Reuters, he explained that the SEC's Office of Economic Analysis was still evaluating data from the temporary ban, and that preliminary findings pointed to several unintended market consequences and side effects. "While the actual effects of this temporary action will not be fully understood for many more months, if not years ... knowing what we know now, I believe on balance the Commission would not do it again."[120]

Cox stepped down as Chairman of the SEC at the end of the Bush administration, on January 20, 2009.