(The news featured below is a selection from the news covered in the Federal Securities Report Letter, which is distributed to subscribers of the Federal Securities Law Reports.)

Senate Committee Hears from SEC Chair Nominee

The President's nominee to replace Harvey Pitt as head of the Securities and Exchange Commission, William Donaldson, received the support of the Senate Banking Committee during a recent confirmation hearing. While the committee members offered Mr. Donaldson support, the reaction of the committee had changes since the confirmation of Chairman Harvey Pitt, in light of several corporate scandals and the passage of the Sarbanes-Oxley Act. Mr. Donaldson said he supports requiring companies to expense options, and that hedge funds, which have enjoyed a good deal of freedom from SEC oversight, may need to be examined.

Sen. Paul Sarbanes said that the SEC needs to quickly find a new chair of the Public Company Accounting Oversight Board, as well as to work to enforce the law he put together last year. In another important area, Sen. Mike Enzi, who served as an accountant before entering the Senate, noted that the SEC has still not named a private sector board to set accounting standards. Sen. Enzi told Mr. Donaldson that Congress intended for the Financial Accounting Standards Board to be this body, as outlined in Section 108 of the Sarbanes-Oxley Act, and he urged Mr. Donaldson to do this upon confirmation. Sen. Enzi also criticized the SEC for going beyond what the Sarbanes-Oxley Act says in some of its rulemaking. Congress intended, Sen. Enzi believes, for the Public Company Accounting and Oversight Board to be the "front-line" regulator of the accounting industry, not the SEC. The SEC, however, has approved a final rule that restricts what sort of non-audit services accounting firms can provide to clients, a determination that Sen. Enzi believe should have been made by the PCAOB.

During questioning from Sen. Charles E. Schumer, Mr. Donaldson said that the potential balkanization of the securities laws, via aggressive state blue sky laws, poses a serious concern. He said that he will work with the state attorneys general, and possible with Congress, if needed, because he believes that federal guidelines need to be preeminent. Sen. Schumer also questioned Mr. Donaldson carefully on reports that the nominee had criticized SEC Regulation FD, which calls for companies to stop using favored analysts and to provide the same information to all. Mr. Donaldson said that he believes the regulation is working better than he originally thought and he has no plans to try to change it. When asked about derivatives, Mr. Donaldson said they need to remain a focus of the SEC's attention. He also noted that hedge funds are now opening up to smaller investors, instead of the wealthy, sophisticated investors of the past, and this may require the SEC to consider regulation.

On the controversial topic of whether or not companies should expense options, Mr. Donaldson said that he believes they should, although "the devil is in the details." The FASB is working on a report on the matter, and he indicated that FASB may be a better author of options rules than the SEC.