by Bill Carlino

Washington - With his confirmation as Securities and Exchange Commission chairman imminent, veteran financier William H. Donaldson will take the reins at an agency short on morale and funding and with a lengthy to-do list.

Donaldson, the 71-year-old co-founder of Donaldson Lufkin & Jenrette and former head of the New York Stock Exchange, is charged with the task of steering an agency bruised by rampant turnover, inadequate budgets and failing levels of public confidence in its ability to stem the tide of corporate scandals.

Upon his confirmation, which is expected sometime this month after lawmakers reconvene, one of Donaldson’s priorities will be to appoint a replacement for William Webster, who resigned as chairman of the Public Company Accounting Oversight Board - mandated under Sarbanes-Oxley - just weeks after his appointment by former SEC chair Harvey Pitt.

"It’s as if he’s coming in during the middle of the play," said Joel Seligman, dean of law at Washington University in St. Louis and an SEC historian. "There is a blizzard of major issues that will have to be decided and Mr. Donaldson will have to be very fast on his feet."

Pitt’s own rocky 15-month tenure at the helm of the regulator ended with his resignation on election night. Three days later, SEC chief accountant Robert Herdman, who was hand-picked by Pitt, announced that he was also resigning.

Pitt, whose reign as SEC chair was marred by a series of self-induced implosions that culminated in a commission bitterly divided along partisan lines over Webster’s appointment, will remain until Donaldson is confirmed.

President George W. Bush nominated Donaldson last month following wide speculation over who would succeed Pitt as the SEC’s 27th chairman. The roster of candidates ranged from former New York mayor Rudy Giuliani to Andersen prosecutor Michael Chertoff.

Donaldson will also find an agency that is severely under-funded, despite President Bush’s commitment to seek a "substantial increase" in agency coffers next year - with the promise of over $800 million, from its present level of just below $500 million. However, with new rules set to go into effect under Sarbanes-Oxley, the SEC will be wading into relatively uncharted regulatory waters with fiscal constraints.

"Right now, wounds are deep at the commission," said Lynn Turner, former chief accountant at the SEC and now a professor of accounting at Colorado State University. "The commission has never gone through a period like this in its history, where Democratic and Republican commissioners are as polarized as they are now. The SEC was always apolitical. It has to get back to that and not go looking to the White House for answers and approval."

That not-so-veiled reference was a jab at Pitt’s cavalcade of partisan blunders, many of which stemmed from his former career as a private securities lawyer, where he represented the Big Five accounting firms and the American Institute of CPAs.

Pitt never freed himself from the stigma of remaining beholden to his former client roster. As a result, he was never perceived as an effective regulator, despite his oft-repeated claims of independence and a rise in the number of cases that his agency investigated.

He also didn’t help his case by meeting with the heads of companies currently under SEC probes; championing his post to be elevated to Cabinet-level status; and first supporting, then retreating, in his selection of reform-minded TIAA-CREF chair John Biggs as chairman of the PCAOB.

Pitt’s 180-degree turn on Biggs resulted in a fractious 3-2 vote among the five commissioners in support of former FBI and CIA head Webster.

Donaldson, who co-founded DLJ in 1959, sports an impressive resume that includes a stint as chairman and chief executive of Aetna, founder of Yale University’s Graduate School of Management and a stint as Under Secretary of State under Henry Kissinger. He currently is chairman of Donaldson Enterprises, which he founded in 1981.

"[Donaldson] certainly has in his head what it takes to do the job," said Roman Weil, a professor of accounting at the University of Chicago. "He’s an affable guy, not a fire-breather. He has a background in academia, which may better prepare him for Washington than his business background. But there’s a lot of uncertainty. He may be great, he may be terrible. But he’s not in anyone’s hip pocket."

But Donaldson arrives at the agency with baggage of his own.

While head of the NYSE he dueled with then-SEC chair Richard Breeden over accounting standards for foreign companies. That included a pitched battle with the agency regarding hidden reserves at car manufacturer Daimler-Benz (now DaimlerChrysler). He also opposed the conversion of stock prices to the decimal system, comparing it to converting America to the metric system. In reality what it did was trim broker’s profits by reducing the spread. Also during his tenure as chairman of Aetna, the company was forced into a restatement of its financials.

"He clearly has an extraordinary record of achievement, but many times it’s less the background and more the individual," said Seligman. "That position demands that you work to master the often complex statutes of enforcement."

"It’s difficult to comprehend how people react when they enter the public domain," said Turner. "Some people make the adjustment and some people don’t. When Arthur Levitt came in as SEC chairman from the American Stock Exchange he was one of the strongest opponents in making changes to audit committees. So when someone new comes in it’s almost impossible to figure out what side of the fence he’ll be on. At this point, I don’t even think Bill Donaldson knows."

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