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The White House said it plans to make an announcement later Wednesday on the nation's top stock market regulator.
Donaldson, who will turn 74 on Thursday, was considered one of the most active chairmen in the history of the agency. He oversaw implementation of the 2002 Sarbanes-Oxley Act (search), which Congress passed in response to a wave of scandals. The law restructured and tightened regulations governing American corporations to make them more accountable to shareholders.
"When I assumed the Chairmanship of the Securities and Exchange Commission roughly two and one-half years ago, public confidence was severely undermined, reflecting the corporate and financial scandals that had shaken the nation," Donaldson said in a statement issued by the SEC. "Thanks to the dedicated efforts of the many professionals who serve at the SEC, this period has represented an extraordinarily active and effective time for the Agency."
"I have been honored to serve as Chairman. Although there will always be more work to be done to preserve and enhance the integrity and strength of our nation's corporations and markets, I believe the time has come for me to step down and return to the private sector and my family."
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Donaldson moved quickly to oversee various SEC investigations into corporate wrongdoing on Wall Street, but during his tenure he also came under fire for pursuing what some business interests saw as an overly aggressive regulatory agenda.
"He was a strong enforcer and an independent — a free spirit, if there is such a thing for a regulator," said Paul R. Brown, professor of accounting at the New York University Stern School of Business (search).
"His array of activities have been impressive and good for investors, but they have not been the traditional conservative Republican-based positions," Brown said.
"This is a presidential appointment and, sure, it could go either way," Brown said. "But I do think the administration clearly has recognized that Donaldson hasn't come down on the side of his Republican colleagues."
Donaldson became the 27th chairman of the SEC on Feb. 18, 2003. The former chairman of the New York Stock Exchange (search) succeeded Harvey Pitt, who resigned in November 2002 amid controversy over his handling of the establishment of a national accounting oversight board.
His resignation will precede by just weeks the expected departure later this summer of SEC Commissioner Harvey Goldschmid (search), who plans to step down in July or August.
Donaldson is co-founder of Donaldson, Lufkin & Jenrette (search), a household name among investment banking firms. He was chairman and chief executive officer of the New York Stock Exchange in the early 1990s.
A native of Buffalo, Donaldson's first job on Wall Street was at the old brokerage G.H. Walker & Co., run by former President George H.W. Bush's uncle Herbert Walker. Donaldson was a classmate of the former president's brother, Jonathan, at Yale University.
Donaldson was a founder of Yale University's Graduate School of Management and served as(search) its first dean. He served during 1975 as counsel to U.S. Vice President Nelson Rockefeller. Before that, he was U.S. undersecretary of state under Secretary Henry Kissinger from 1973 until 1975.
During a 14-month stint in 2000 and 2001 as head of health-care insurance giant Aetna Inc., Donaldson was named in a shareholder lawsuit against the company alleging that investors were misled about the true cost of a company restructuring.
Donaldson told the committee last week that the lawsuit arose from a corporate "hiccup" that was properly handled.
Donaldson last month won SEC approval for a controversial plan to overhaul stock trading. The plan won approval over the objections of fellow Republican commissioners with Donaldson siding with the two Democrats on the commission.
Under the proposal, known as the "trade-through" rule, stock brokers will be required to accept the best quoted price for any transaction, no matter which market it came from.
The trade-through rule isn't due to take effect until 2006 and most observers said the SEC would likely revisit the issue should Bush appoint a more pro-business official to take Donaldson's post.
Reuters and The Associated Press contributed to this report.