The Stock Cop
The critics were sure that new SEC head CHRISTOPHER COX would be a disaster for investors. So far they've been wrong.
(FORTUNE Magazine) – When Christopher Cox stepped to the podium to address the staff of the U.S. Securities and Exchange Commission in D.C. on Aug. 4, his first task was a preemptive image makeover. Cox had been sworn in as SEC chairman just the day before, but much of the press had already decided what kind of a chairman he would be: His Reagan White House pedigree, his 17 years as a Congressman from the hotbed of conservatism known as Orange County, Calif., his authorship of a law that made it harder investors to file securities lawsuits--all revealed him as a fox about to be handed the keys to the henhouse. As the Wall Street Journal opined when Cox was nominated in June, "Mr. Cox's appointment is a victory for the business lobby."
Inside the SEC's auditorium, Cox looked out over a crowd of hundreds that included many in-house skeptics. He grinned his white, toothy grin. At 53, he still has the air of a well-scrubbed, mischievous schoolboy. His tone was genial, his manner almost Reaganesque. And then he delivered a rhetorical punch to the solar plexus. The assumption that he'd be a shill for American business, he said, was built on thin air: "Such predictions often have as much factual basis as a WorldCom prospectus." Companies that pit their interest against those of their investors, he vowed, "will find themselves confronted by a relentless and powerful adversary in the Securities and Exchange Commission."
Since then, Cox has embraced an aggressive vision of the SEC "as principally a law-enforcement agency," as Alan Beller, director of the SEC's division of corporation finance, puts it. Says Cox: "It had never occurred to me that being a Republican required that you couldn't be for law and order."
Cox's agenda so far can be seen as classically conservative: tough on enforcing the existing law but reluctant to impose new regulation. He can be critical of the thicket of current provisions, noting in an early December speech, "The accounting scandals that our nation and the world have now mostly weathered were made possible in part by the sheer complexity of the rules." But Cox is not seeking to turn back the clock. He surprised some pundits by announcing, over his first few months, that he wouldn't unwind tough initiatives--such as rules requiring hedge-fund registration, independent chairmen at mutual funds, and that companies treat stock options as an expense--that had been adopted under Cox's activist predecessor, William Donaldson.
In other words, Cox has already confounded expectations. "Chris Cox as chairman of the SEC is a lot closer to Bill Donaldson than he is to Chris Cox the Congressman on a number of issues," says liberal Democratic Congressman Barney Frank. An adroit politician who made a brief, unsuccessful run for Speaker of the House in 1998, the new SEC chairman presents as if born in gray flannel, with the retro good looks of a square-jawed astronaut out of The Right Stuff. Yet he is not always what he seems. His family history is marked by unspeakable tragedy--and miraculous recovery. He is driven enough to have acquired two degrees from Harvard University, yet irreverent enough to issue a gag press release on April Fool's Day. He avoided the more noxious precincts of Washington partisanship, and partly as a result has seen his name floated as a candidate for everything from national intelligence czar to Supreme Court Justice. What connects many of those strands is his training as a securities lawyer and his philosophical cast of mind. So how did he make the leap from Congress--where it was hard to mistake him for an investor-oriented populist--to his current stance as the nation's new top financial cop? Simple: Chris Cox has a new client.
That's the message on the wall of his tenth-floor office in the SEC's sun-washed new Washington headquarters, where Cox has assembled a makeshift shrine. It consists of a framed check made out to his grandfather alongside a plaque depicting the notorious Samuel Insull, whose empire of utility companies collapsed in 1929, taking with it the money of countless investors, including Cox's grandfather. Insull's chicanery helped inspire the creation of the federal regulatory apparatus, including the SEC, that sprang up during the Depression. But the lesson here isn't historical as much as it is personal. Cox's grandfather lost $6,000--or $70,000 in today's dollars--and the check was intended to compensate for the loss. It's for $3.36. Cox's message: Investors, I'm on your side.
Cox is hardly the first SEC chairman to be greeted with the expectation that he'd coddle big business. Bill Donaldson and Arthur Levitt, among Cox's recent predecessors, had both worked for investment banks and were widely expected to favor the industry. "Wall Street is ecstatic that a compadre will be running the SEC," Institutional Investor said of Levitt when he first assumed the post. But Donaldson and Levitt distinguished themselves as investor advocates.
With Cox's tenure only just begun, it's obviously too early for an accounting of his legacy, but as former SEC chief accountant Don Nicolaisen says, "He's done a lot to alleviate those concerns." (Nicolaisen, who says he was planning to depart even before Cox arrived, stepped down in early November.) Cox has retained Linda Thomsen, who was promoted to director of enforcement just before the aggressive previous regime departed, and has begun establishing himself as a reliable vote in favor of enforcement actions. With his support, the agency has continued its trend of big cases, most recently combining with the office of New York State attorney general Eliot Spitzer to extract $180 million from hedge fund Millennium Partners for improper mutual fund trading. Cox has also been working to craft a clear standard for penalizing companies that have committed wrongdoing. This was a contentious issue under his predecessor, with Republican commissioners Paul Atkins and Cynthia Glassman breaking with the chairman and voting against proposed penalties.
"I'm a very strong proponent of consistency and clarity in rule-making," explains Cox, during a wide-ranging discussion in his office. "After all, even a bad plan well executed is better than no plan at all." Cox says that crafting consistent policies will help fix the breach among the commission's five members. (Under Donaldson, the commissioner sometimes acted as the swing vote, siding with the two Democrats.) Sounding very much the lawyer, he talks of getting the commissioners beyond "our personal predilections" to focus on the "statutory basis" and the "source of [our] authority." His professorial instincts appear again when, elaborating on the risks of unclear legal standards, he invokes Hammurabi, the Babylonian King renowned as the first to establish a legal code: "It was a great moment in history for the simple reason that at that instant, the law ceased being arbitrary."
Cox's parents would be proud. He was raised in St. Paul, where his father ran the family printing business. Cox's parents shared an excitement about education and ideas, and a tendency to question everything. Cox and his four sisters vied with one another for supremacy in knowledge and family games. (Years later, three of the kids--including Chris--would win $5,000 or more at various times as contestants on the TV game show Password.) Cox's mother died last August, and in his eulogy, Cox recalled her drilling her kids with flash cards. He recounted that she had shown him how to write cursively in first grade, before it was taught in class, causing his teacher to penalize him because he turned in assignments that weren't printed. "Mom didn't care," Cox said. "She encouraged it, and she was proud of me for using what I'd learned. She'd given me an early lesson not only about penmanship but about little bureaucracies, and about overcoming the tyranny of rules for rules' sake."
Even today, he is teased for his habit of reading geometry and physics books for fun. When he was 9, his parents bought him the 16-volume Golden Book Encyclopedia. As Cox put it in his mother's eulogy, "Mom would let me take one volume to bed with me each night, until finally I'd read the whole thing." Cox also played sports, losing his two front teeth to a puck in ice hockey. He surprised his family by winning a talent contest on the piano. Ever the achiever, he also held down a paper route.
But his idyllic childhood was marred by a family tragedy. One Easter Sunday when the family was preparing to go to church, his dad pulled the station wagon out of the driveway and didn't see Cox's younger sister, Lolly. She was struck by the car and killed. It was beyond devastating, but Cox's parents kept their grief to themselves. Says Cox of his father: "He and my mother were both incredibly strong about that. I have a son and a daughter who are about the same age apart as I was with my sister Lolly. [Cox also has another son.] My daughter actually looks a little bit like my sister did--and as I would hold her at that age, I would just for the first time fully appreciate what it must've been like for my parents."
That sort of resilience would replicate itself in Cox's own life more than a decade later. By this time he had sped through the University of Southern California in three years, then simultaneously gotten a Harvard law degree and MBA. At 25 he was ensconced at a prestigious clerkship with a federal appeals judge in Hawaii. It was August of 1978, and Cox and a friend decided to explore the rain forest on the island of Molokai. They were inching through mud at about five miles per hour in a rented jeeplike contraption when a wheel caught and the vehicle overturned. Cox's friend was thrown clear, but Cox was trapped underneath, with the weight of the jeep on him. His back was broken, a quadriceps muscle was severed, and he was paralyzed from the waist down.
Cox lay in agony for hours, trying to dig himself out with his face and shoulders, while his friend went looking for help (which wasn't close at hand in a rain forest). Eventually Cox was airlifted to a hospital in Oahu, where at three in the morning, sedated, he was told there were two options. He could have surgery right then, but if he didn't he'd need to wait two weeks, since by the next day infection might well have taken root in his body, and a surgeon couldn't operate until it was gone. The only surgeon present was a young resident who'd been on duty for nearly 24 hours. Cox decided to wait.
At the hospital he was completely immobilized to avoid any chance of further damage to his spine. "Every six hours they would rotate me," he would later say, "like a barbecued pig on a spit." The doctors didn't know if he would walk again. While he waited for surgery, Cox divided his time between playing poker with his buddies and working. Colleagues brought him briefs from the court, and he wrote legal memos during the times when attendants had rotated him onto his left side.
Finally the doctors operated, and after a few more days, Cox was overjoyed to discover he could wiggle a toe. He eventually regained the ability to walk and, after six months, shed the ungainly harness of steel bars and leather straps that he had been forced to wear. Today he says of the experience, "It was instant maturation." In truth, according to his friends, it was a lot more: Cox, who still has two metal screws in his back, has been in pain every day for the past 27 years. To this day he can't sit for extended periods of time. (He has a special desk that allows him to work while standing.) Cox brushes off the notion that he suffers. "My left side--from my neck to my toes--feels like my hand is stuck into a socket," he shrugs. "It's something you can easily live with."
Cox's brush with paraplegia didn't slow his career. He became a partner at law firm Latham & Watkins in Newport Beach, Calif., and in 1984 began an unusual side business: He and his father founded a company that published daily translations of the Communist newspaper Pravda. For Cox, who had studied Russian in college and remained fascinated by the Soviet Union, it was a chance to show Americans just what the Kremlin was saying. In 1986 he landed a job as senior associate counsel at the White House, where he worked on a range of projects, including Supreme Court nominations successful (Antonin Scalia and Anthony Kennedy) and unsuccessful (Robert Bork). Two years later, with the Reagan administration winding down, he decided to run for Congress. With campaign appearances from Bork and Iran-contra figure Oliver North, he pulled off a victory.
When Cox arrived at the Capitol in 1989, says Robert Sutcliffe, a friend since law school and his first chief of staff, he was shocked to discover that Representatives routinely didn't read the legislation they voted on. Cox eventually got used to the idea, but it never tempered how he approached his job. He not only read bills but personally drafted the templates for policy letters to his constituents. This tendency to do his homework gave him authority among fellow Representatives, says former House Majority Leader Dick Armey: "You're not going to argue with Chris, because he knows more about [the issue at hand] than you do." Cox earned a reputation as a generally high-minded sort who could work with Democrats, even as he rose in the Republican leadership under intensely partisan former Speaker Newt Gingrich. "He's a very thoughtful, bright guy," says Massachusetts Democrat Frank. "Some people don't understand what debate is for. They get up and make speeches that the people who already agree with them will cheer. Chris was one of the few who would make arguments that would try to persuade people."
Cox showed an ability to cobble together majorities. He authored the tort reform legislation known as the Private Securities Litigation Reform Act (PSLRA), the only law passed over a veto by President Clinton. He co-wrote the legislation that kept the Internet free of taxation. And he was a prime mover in the evolving laws to reduce inheritance taxes. (Some have criticized the PSLRA as anti-investor for creating hurdles--such as requiring plaintiffs to provide much more detail for a case to survive dismissal--in securities class actions. Others have hailed it for the very same reason: that reducing litigation against companies benefits shareholders. Cox put it this way at his confirmation hearing: "I view that legislation today as I did then.... It's a vital part of the regime to protect shareholders.")
Cox ultimately spent more than a decade as head of the Republican policy committee, which placed him fifth in the party leadership. He pondered--then decided against --a run for Senate, and vied briefly to be Speaker of the House after Gingrich stepped down. His wonkish strengths weren't enough to win him the post. Observes Congressman Frank: "This place is a lot like high school: It's okay to be very smart as long as it doesn't show all the time. He wins on merit, but he doesn't win on personality. It's just that he's reserved and a little less instinctive and a little more intellectual than the norm here."
In 2001, President Bush announced plans to nominate Cox as a federal appeals judge in California, only to pull his name when one of the state's Senators, Democrat Barbara Boxer, made it known she would exercise the veto right that home-state Senators have over such nominations.
Cox's years in Congress, says his friend Sutcliffe, have only made him more wary of the limits of government: "He's sometimes been disappointed to see just how much of a mess government can make." Says Cox: "I think that's true. But I would be careful about applying that statement to the SEC or to the police department or to the U.S. Marines. There's a difference between government owning or controlling industry, which I think is a horrible idea, and maintaining the rule of law. I lean libertarian on First Amendment issues--on intellectual freedom, on personal lifestyle--but I am not the sort of libertarian who thinks that we could get by without armies and navies and cops on the beat."
Cox is well aware of his reputation as a strait-laced policy geek, so last year he decided to play an April Fool's prank that exploited that image. His congressional office distributed a deadpan press release that he and his sister Kathy drafted, announcing that he and "embattled pop star Michael Jackson" had "reached a groundbreaking agreement on a new bill to curb indecency on the public airwaves." The release skirted good taste in at least one spot, noting that "Michael thinks it's disgusting that his sister's Super Bowl scandal has only made her a bigger celebrity ... while his work with young people at Neverland has been turned into a PR liability." It combined faux policy details--a plan for an "indecency user fee" comparable with emissions trading credits--with ludicrous ones: "Chairman Cox acknowledged Jackson was hard to understand clearly though the surgical mask he was wearing. 'But you could see from his occasional thumbs-up, or sometimes a peace sign, that he's fully engaged in our policy discussion.' " Cox's reputation for earnestness was such that, his sister says, one newspaper (which she declines to name) thought Cox was serious and was ready to print an editorial deploring the proposal until the paper called Cox for comment and discovered it was a joke.
It's too much to extrapolate from an April Fool's gag to a view of Cox's future as SEC chairman, but it's a reminder not to make assumptions. Referring to the interest that Cox has publicly expressed in improving disclosure of executive compensation, the SEC's Beller says, "He doesn't want to put burdens on companies that make no sense or that don't get to the goal of better disclosure. But he is more than willing to put appropriate burdens on companies that will lead to better disclosure."
Cox has also focused on technology. He supported a plan to make proxy statements available online and to let shareholders cast votes for directors and proxy motions over the Internet. In addition, he has been singing the praises of XBRL, a technological standard that would make corporate financial statements interactive. XBRL could, theoretically, make it easier for investors to zero in on key data and, say, link that data to programs that automatically crunch the numbers for them.
While Cox ponders a broader agenda, he faces a mountain of challenges within the SEC itself. He has improved the formerly fractious climate among the commissioners. Says commissioner Atkins, who publicly clashed with Donaldson: Cox "is a very straightforward fellow who really, I think, wants to try to build consensus and bring people together." But good feelings don't guarantee that Atkins will vote with his new chairman.
Cox has also yet to find leaders for three key SEC divisions, and the agency's general counsel recently announced that he is stepping down, while corporation finance chief Beller is also expected to leave before long. Neither departure is seen as a reflection on Cox, but they mean two more key positions to fill.
Even when Cox completes his team, he will still have to contend with a vexing environment. He faces the same pressures to protect investors that Bill Donaldson encountered, but corporations are no longer chastened by the wave of business scandals. They're agitating for a lighter regulatory hand.
Can Cox simultaneously bring down the hammer of enforcement while trying to take a less intrusive approach to rule making? One former high-ranking SEC official suggests that if an SEC chairman adopts a softer regulatory tone, it undercuts whatever explicitly tough messages he might send on the enforcement side. It's a line, he says, that few chairmen can successfully walk. But Cox has shown he is capable of surprises.