VideoArthur Levitt, the dapper, 67-year-old chairman of the Securities and Exchange Commission, likes to present himself as the investor's best friend. Then again, you'd expect as much of any SEC chairman. But Levitt's fans contend that in this case, the self-characterization is right on the money.
They note, for example, that Levitt has forced state and local politicians to stop demanding campaign contributions in return for municipal bond business, which adds to the cost of underwriting tax-exempt bonds. He's threatening to crack down on accountants who manage their consulting business in ways that compromise the integrity of corporate audits. And he's demanding that companies adopt tough new accounting standards for derivatives, helping show how much risk such instruments pose. All to the benefit of investors.
"The chairman takes seriously his responsibility to protect shareholders," says Edmund Jenkins, who last summer was appointed chairman of the Financial Accounting Standards Board, with Levitt's blessing. For that reason, supporters are confident that Congress will approve Levitt for a second five-year term now that President Clinton has renominated him. Levitt failed to respond to CFO's requests for an interview, although he answered a few questions via E-mail shortly before this issue went to press; a spokesman cited scheduling conflicts.
But in light of Republican control of Congress, Levitt's inability to make time for an interview might also reflect a certain wariness about how his renomination hearings will proceed. Powerful GOP members like Sen. Phil Gramm of Texas and Rep. Richard Baker of Louisiana contend that Levitt's efforts on behalf of investors have gone too far,hampering the ability of corporations and others to raise capital. Given such concerns, critics on Capitol Hill may vote to deny Levitt a second term.
Although Levitt is the only incumbent chairman of the SEC ever to be nominated for a second term, rejection is unlikely. Republican Sen. Alphonse D'Amato of New York, who chairs the Senate committee that will hold the hearings, says that he expects quick approval.
Whether Levitt deserves a second term is another matter. And the answer isn't as clear as either his supporters or his opponents suggest. Levitt's track record is inconsistent, and his agenda is something of a puzzle. Where, for example, does the SEC chairman stand on the fundamental issue of technology's role in financial market reform? "A good question," says James Angel, finance professor at the Georgetown University School of Business, in Washington, D.C.
Indeed, look more closely at those investor-oriented actions cited by Levitt's biggest fans and you'll see that some served Wall Street's interests, too. For one thing, political contributions to municipal bond issuers came directly out of underwriters' pockets, and the brokers may or may not be passing along the savings to investors. It's impossible to tell, because the secondary market for municipal bonds is extremely thin, with price quotes for the same issue all over the map.
Also, brokers have as much of an interest as investors do in trustworthy corporate audits. Without them, investors would have ample reason to doubt whether the research that brokers often provide in return for their buy and sell orders is worth anything. And while requiring more disclosure of companies' holdings of derivatives, Levitt let the six largest securities dealers set the voluntary standards for oversight of their derivatives affiliates.
"That's like asking Microsoft to set the standards for computer operating systems," says an SEC observer.
Policing the Exchanges
Not that Levitt hasn't taken stands that served investors' interests at the expense of the financial middlemen. Consider, for instance, his decision to overhaul the board of the National Association of Securities Dealers (NASD) in the wake of allegations of collusion among brokers on price spreads. In essence, Levitt decided that the board was not sufficiently independent of NASD members to take actions that serve investors' interests, so he added new representatives from outside the industry. That served to more clearly separate the NASD's two roles as market operator and regulator, effectively acknowledging that the conflict of interest facing the NASD had been an obstacle to fundamental change.
Still, proponents of financial market reform contend that Levitt did not go far enough to resolve the NASD's conflict. And other U.S. markets share such a conflict to one degree or another, including the most powerful of all, the New York Stock Exchange (NYSE). As the battle over price collusion among NASD members showed, such a conflict invites regulatory policies designed to gain and retain business even when, in a deregulated environment, that business might be better off elsewhere. And despite assertions to the contrary by the NYSE's supporters, the exchange may be little better at policing itself than the NASD was, if recent, unprecedented allegations of illegal trading by floor brokers are proved. Yet Levitt has shown little inclination to challenge the NYSE's power.
Sure, Levitt has convinced the exchange to revise its much-maligned Rule 500, which makes it virtually impossible for a company to delist its shares from the exchange. To delist from the NYSE at present, two-thirds of a company's outstanding shares must vote in favor and fewer than 10 percent against, which effectively locks in listed companies. Junius Peake, a finance professor at the University of Northern Colorado and former NASD vice chairman, cites the rule as an instance of "anticompetitive behavior" that threatens to make the exchange a "high-cost provider."
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