Their growing resistance marks the two commissioners' latest break with Mr. Donaldson, who has allied himself with the agency's two Democratic commissioners on several key votes to form a majority on the five-member commission. It comes amid a broader backlash against the SEC and Mr. Donaldson by business groups who say he has supported onerous and unnecessary regulations. The SEC recently was sued by the U.S. Chamber of Commerce over its rule requiring more independence on mutual-fund boards, and has come under fire in some quarters for demanding that hedge-fund advisers be registered.

The debate also comes against a backdrop of speculation about the SEC's future. Some insiders believe Mr. Donaldson might decide to leave his post soon, possibly creating a shift in the balance of power. Mr. Donaldson has been a strong advocate for new regulation and stiff fines, and many business leaders would like the White House to appoint a less regulation-minded chairman. Mr. Atkins is mentioned as one potential successor. (Mr. Donaldson has said he will stay on the job as long as it pleases the president and he continues to get things accomplished.)

The issue of fines has been coming to a head as the size of the SEC's fines has increased. Overall penalties have soared, rising 17% to $2.68 billion in fiscal year 2004, ended Sept. 30, from $2.29 billion a year earlier. In fiscal year 2002, the total was $1.39 billion.

The year-earlier period included the largest fine ever imposed by the agency against an operating company: the $750 million payment levied against bankrupt WorldCom Inc. Before that, the SEC's biggest fine against an operating company had been just $10 million.

SEC officials said the commission has been prompted to start imposing large penalties on companies and individuals amid several of the worst financial frauds in history and because of the Sarbanes-Oxley corporate-reform bill passed in 2002. That law gave the SEC the ability to return fines to aggrieved investors. Previously, such fines went to the U.S. Treasury, while investors got only the disgorgement of ill-gotten gains.

Ms. Glassman spoke against the trend at length in a private commission meeting last month, according to several attendees. Her argument was that fines are paid with money that belongs to shareholders, many of whom already suffered a blow to their investment because of the fraud. While they get the fines back in the form of restitution, she said, the actual compensation often amounts to just pennies on the dollar. Meanwhile, companies must take a charge against earnings to cover the expense, damaging shareholder value and depriving executives of the chance to invest that money elsewhere.

Ms. Glassman and Mr. Atkins have also raised concerns that when a company has a new set of shareholders, those new investors are forced to pay former shareholders -- but don't share in the restitution.

"The question becomes, 'When it is appropriate to benefit certain groups of innocent shareholders at the expense of others?' " said Richard Sauer, a former SEC enforcement official and now a partner at Vinson & Elkins law firm in Washington.

Both Ms. Glassman and Mr. Atkins have maintained that the SEC should instead concentrate on fining individuals involved in fraud, freeing companies to use their money to benefit shareholders in the long run.

The two commissioners have voted in favor of some fines, such as the one levied against WorldCom when it was in bankruptcy proceedings. People familiar with the matter said that Mr. Atkins has approved fines in cases in which he thinks people got hurt because a company didn't spend enough time or money putting procedures in place to prevent problems. But his opposition to the fines has grown over time, these people said.

Ms. Glassman declined to discuss her votes. People familiar with the debate said she has been more consistent in her opposition to fines, though she has voted to approve penalties for companies involved in the recent mutual-fund scandal, in large part because the money comes from investment advisers and goes back to mutual-fund shareholders.

Mr. Donaldson and others, including SEC Enforcement Director Stephen Cutler, have taken a sharply different view. They argue that while going after individuals is essential, corporate fines deter fraud and help the SEC prod companies to cooperate with investigations. Mr. Donaldson and others within the agency think companies are less likely to engage in bad behavior if they know they face financial pain.

"Getting a fine assessed causes reputational damage to the company, to the management that was there, and I think it has an impact on some shareholders and some potential investors who would say, 'I'm not sure I want to be in a company that engaged in that behavior,' " said Commissioner Roel Campos, a Democrat.

Mr. Campos said the SEC is careful not to impose such a large fine that it jeopardizes a company's ability to keep operating. He said the agency also takes a company's cooperation into consideration.

In a speech earlier this year, Mr. Cutler said the SEC considers several factors in determining whether to fine a company, such as how bad the fraud was, what types of controls existed to prevent it and the level of the company's cooperation in the SEC's investigation. He said fines serve a useful purpose by providing "a powerful incentive for companies in the same or similar industries to take steps to prevent and address comparable misconduct within their own walls." One fine, he said, "has the potential to effect change on an enormous scale."

Opposition to SEC fines isn't necessarily falling along partisan lines. Richard Breeden, a former SEC Chairman appointed by President George H.W. Bush, said fines "grab the attention of boards of directors and are a barometer for the public to understand the seriousness with which the Commission takes these issues." Michael G. Oxley, who chairs the House Financial Services Committee, praised the SEC's recent settlement with Royal Dutch/Shell Group, saying the $120 million fine assessed against the company "is another example of a company having to pay a high price to learn a valuable lesson."

Some critics take the view that the SEC is too lenient. In several recent cases, the agency has notably avoided any penalties against companies, or imposed only small ones. Many of those cases involved companies that cooperated with investigations. Last month, for instance, the SEC settled charges with Dutch retailer Royal Ahold NV for accounting irregularities but didn't fine the company, in large part because of its cooperation.

Write to Deborah Solomon at deborah.solomon@wsj.com¹