This is a partial transcript from Your World with Neil Cavuto, December 18, 2003, that was edited for clarity.

Watch Your World w/Cavuto weekdays at 4 p.m. and 1 a.m. ET.

NEIL CAVUTO, HOST: New changes in management just one of the many things my next guest wants to implement on Wall Street. And he did so big time today.

I'm talking about William Donaldson (search), the chairman of the Securities and Exchange Commission (search). No sooner did he become the SEC chairman then he had all the hell to deal with.

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Mr. Chairman, good to see you.

WILLIAM DONALDSON, SEC CHAIRMAN: Neil, nice to see you.

CAVUTO: The Alliance Capital (search) deal is striking in a variety of ways. First of all, the $250 million that they guaranteed to give back to investors, they cut back their fees, essentially, by 20 percent over the next few years. How did you do that?

DONALDSON: Well, we — the $250 million fine and penalty and so forth was — represents, as you say, restitution for the damages done to the investors and the Alliance funds. As far as the fee reduction, that was not part of our settlement. We believe that fees and — we are taking a hard look at the total fees that the mutual fund investors pay. But as far as a fee, setting of fees...

(CROSSTALK)

CAVUTO: You don't think that's...

DONALDSON: We don't think that is...

CAVUTO: What is to blame the Alliance folks and other mutual fund folks to get a mixed read then from Eliot Spitzer (search) in New York and you at the SEC, different policing methods? He going after the fees, you not?

DONALDSON: Yes. Well, I think that we are in two different areas. We are the SEC. We have a responsibility for regulating mutual funds, setting down the rules. We think that fees are a matter of — that should be determined by the marketplace. We think that fees should be disclosed in a way that investors understand what they are paying, what they are paying in costs and expenses and so forth.

And then we think the market ought to provide the competition to get those fees down. If people are going to pay what they want to pay for the services they perceive they are getting, we think the market is what should determine the fees.

CAVUTO: Are you in the same opinion — many in Eliot Spitzer's office, including Mr. Spitzer himself, has said the market has let people down, that you have to police it better. He criticized your mutual fund enforcement chief as not doing that. And it has led to a lot of bad blood back and forth between you and Mr. Spitzer.

Is it bad?

DONALDSON: Well, no. There is no bad blood. We simply have a difference of opinion on this. A united opinion, I might add, by all of the five SEC commissioners. We felt that the market timing incidents were — by the way, the $250 million is the largest fine that has ever been given.

CAVUTO: But so how does that make you feel, Mr. Chairman, when Spitzer or his folks come out and say, you are not tough enough, you're not fast enough, that you are not doing your job, so he will?

DONALDSON: It's not a matter of toughness. It is a matter of us assessing what the penalties should be, given the moneys that the investors lost, because of this market timing. And in terms of using regulation of fees and setting fees, this is not an industry that should have — the size...

CAVUTO: Does he ever run this by you, though, when he announces these things?

DONALDSON: Well, we agreed to disagree.

CAVUTO: Right.

DONALDSON: We agreed to not put fee reduction — by the way, the fines are going to the people that were injured. The fee reductions will go to other people. We don't think that is particularly proper.

CAVUTO: So, again, I don't want to belabor this point, chairman, but, you know, there are a lot of people say, oh, look Eliot Spitzer, he might want to run for governor in New York. Do you think any of that comes into his role?

DONALDSON: Oh, I think that Eliot Spitzer is doing a good job.

CAVUTO: He doesn't bug you at all?

DONALDSON: I think that we are working very well with him, and I think that we should, because we represent different agencies, different approaches, different responsibilities. I think we should disagree, and there should be nothing...

CAVUTO: Yes, because if I'm a mutual fund company or someone who has committed a crime, I don't know which cop is on first.

DONALDSON: Well, you know that the rules for looking at fees, displaying of fees, making them so people understand them, that is the SEC's responsibility. And we — as we move toward that, we will do it by rulemaking that will apply not just to Appliance but will apply to all mutual funds. That is our job.

CAVUTO: What about the switches at the Big Board today? They've got a new CEO coming in.

DONALDSON: Right.

CAVUTO: Is John Thain the man for that job? And is $4 million the number for that job?

DONALDSON: Well, I think that John Thain is an excellent choice. He has a distinguished career. He is a very intelligent person, a man of highest integrity, has been involved for many years. And the issues of trading and markets and so forth, that was his responsibility.

So I think he's a very good person for the job. I commend the — John Reed and the stock exchange board for having picked him.

CAVUTO: John Reed has indicated he doesn't want to stay on.

DONALDSON: Right.

CAVUTO: But he has talked, and you, of course, have been advocating about a separate role for the chairman and the CEO. Some were even saying going farther, Mr. Chairman, and that is splitting the NYSE essentially in two, between its money, business and its regulatory business. You held off on that. Why?

DONALDSON: Well, first of all, I think that the splitting of the top jobs was an excellent decision on the part of John Reed and the board; i.e., we now have two people. We have a CEO, who is responsible for the marketplace, and they will have — John will continue to be the non-executive chairman, and will be replaced at some point.

They have set up a structure where the lines of authority do separate the marketplace from the regulatory aspects. And again, this can be done in a number of different ways and along a spectrum.

You could take regulation and put it out in space, or you could do as the stock exchange has done, which is to make sure the — via the independent board, via the lines of authority to that board, that the entire regulatory mechanism is presided over by a director of regulations, a regulation committee, and ultimately the independent board. So the accusations that regulations being used to foster the marketplace won't be there.

CAVUTO: Are you surprised, chairman, that through all the allegations, mutual fund in-flows are still strong, in fact approaching record territory? And the boards and the markets are strong.

DONALDSON: Right. I think that the — fundamentally, people are interested in investing their savings. I think we have a favorable economic environment. I think it is very encouraging.

I think that one of the problems that we face in this country is that you have $7 trillion out there in mutual funds, you have 6,000 or 7,000 mutual funds. A few funds or fund groups that have done things that are horribly wrong doesn't mean the whole industry is wrong.

CAVUTO: All right. William Donaldson, thank you very much. Good seeing you. The chairman of the Securities and Exchange Commission.

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