The TSC Streetside Chat: SEC Chairman Arthur Levitt

Arthur Levitt, 69, is the longest-serving chairman in the 66-year history of the Securities and Exchange Commission. His nearly eight-year tenure has coincided with the most dramatic bull market in history and with an explosion in the number of individual investors, whose causes he has championed. During the course of his career, Levitt has traded cattle, published a newspaper and chaired the American Stock Exchange.

At the SEC he recently spearheaded a fair disclosure rule that stopped companies from leaking important information to analysts and other Wall Street insiders ahead of the public and pushed through regulation to limit lucrative consulting work for accountants who audit the same clients' financial statements. A rule adopted last month, requiring stock exchanges, alternative electronic markets and Nasdaq market makers to disclose the prices at which they execute customers' orders, could lead to the most substantial cost savings for individual investors since the advent of discount commission rates. Still pending are proposals to require mutual funds to disclose after-tax returns, as well as fees and expenses in standard, dollar terms.

Levitt traveled to Alaska last summer on his 25th Outward Bound expedition and plans another to the Grand Canyon this summer. A National Geographic-caliber photographer, Levitt has two grown daughters, and dotes on his grandchildren and his two Labrador retrievers. Levitt shared his thoughts with TheStreet.com contributor Anne Smith.

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TSC: Do you think the playing field is a bit more level for individual investors now?

Levitt: There clearly has been a transition in the fulcrum of market influence from institutions to the individual, and you see that in almost every aspect of market activity. And our goal in the past eight years has been to give investors a break that would be at least comparable with those of institutions, and in some cases superior, using something that every one of my predecessors used before me -- disclosure.

TSC: Speaking of disclosure, opponents of Regulation FD, which stops companies from leaking important information to analysts and other Wall Street insiders, said it would make the market more volatile if companies clammed up altogether. Has that happened?

Levitt: No, it has not. The people who opposed fair disclosure, which I think is one of the most significant rules passed by the commission, said that it would chill the information going to investors. And if the people who said that heard the level of questioning that I got at town meetings, they would stop underestimating the intelligence of America's investors. America's investors have more information today than ever before, and they're well able to evaluate that and make their own judgments. The notion that information has to be filtered through a sell-side analyst whose overwhelming inclination is to favor the corporate client of his firm is, I think, ludicrous.

TSC: You've noted that individual investors have become incredibly sophisticated.

Levitt: The last town meeting that we had, which was in Atlanta, we had a series of very sophisticated questions like: When are you going to approve the montage? Montage is a trading system applied for by the NASD, a subject of intense controversy. Another dealt with loan loss reserves for banks, another battle royal. And another individual investor asked about payment for order flow [when market makers pay brokers to send orders their way], and what it does to the price that we're buying securities at. "The notion that information has to be filtered through a sell-side analyst whose overwhelming inclination is to favor the corporate client of his firm is, I think, ludicrous."

TSC: Until lately, anyway, the markets have been very kind to investors during your tenure.

Levitt: Yes, and to regulators.

TSC: What will happen when gains aren't so easy to come by?

Levitt: In my experience, the most successful investors are the most cost-conscious investors in good markets and in bad markets. What will happen to this country in a down market is a deterioration of public confidence in the systems and the people who run those systems. That's almost axiomatic ¿ a reaction against the business community. And it's terribly important that the empowerment of the individual investor not be allowed to diminish, because that's the basic support level that is essential to a more negative kind of market environment.

TSC: What do you think the SEC should do to continue to empower the individual investor?

Levitt: I think the investor education program is critically important. The symbolism of the chairman of this agency caring enough about the individual investor to come to them is something that I hope continues. We've done some 43 town meetings. And I think that we need to encourage competition that is both fierce and fair in the markets. That is probably the best structural protection investors can get. "In my experience, the most successful investors are the most cost-conscious investors in good markets and in bad markets."

TSC: The SEC has taken on some high-profile cyber fraud cases. What will the SEC's focus be going forward?

Levitt: The goal of the commission has never been to eliminate all fraud but rather to focus on those areas of bad behavior that represent a more general kind of threat to the public. And clearly cyber fraud is the arena where we're seeing more scamming than ever before. I¿m under no illusions that we can eliminate it. But by devoting the resources to it that we have and determining to bring these cases very, very quickly, we hope to catalyze the process of investor understanding of the dangers that the Net offers and [to encourage them] to protect themselves with a cynical view to anything that they see. There's going to be more Internet fraud, and we're going to be bringing more cases, and we're going to bring them faster than we ever have before.

TSC: How do you balance investor protection with privacy concerns when it comes to the Internet?

Levitt: I think all law enforcement agencies have to deal with privacy issues. Now, how do we surveil the Net? We have to surveil it with being mindful of the fact that there are techniques that we can't use. We can't go into a chat room unannounced. And there are a number of things of that kind that infringe on privacy and that we're very careful about.

TSC: You're not a big fan of chat rooms, are you?

Levitt: If investors are foolish enough to place credibility in chat room information, which is nothing more than graffiti, as far as I'm concerned, they probably should lose their money, and we can't protect against that. "When barbers and dentists are talking about audit rules, we've raised it to a level where the politicians should be paying attention."

TSC: And yet critics have said you let some of the chat room manipulators off easy, with fairly generous settlements -- the teenager in New Jersey, for instance, who made more than $200,000?

Levitt: Well, that particular case involved a minor. We felt that if we took that to court, the overwhelming likelihood would be that the judge would notice the kid's age and trivialize the offense. So what we did was to evaluate the instances in which his trading was so obviously bogus, where he would put in a buy order before posting 200 fictitious pieces of information and then sell a day or two later. We had him on that.

But in some instances it wasn't as clear-cut. Where it wasn't that clear-cut, we gave him the benefit of the doubt because we made a calculated judgment: We'd rather win on a settlement than lose in court. And that's an unfortunate byproduct of dealing with fraud by kids. His classmates deified him. His parents thought there was nothing that he did wrong. I think that it was outrageous. But, again, I support the decision to get it settled, get it widely publicized rather than two years later have some judge throw it out. I went on 60 Minutes with this kid purposely to make the point that his behavior was outrageous. Were he my son, I would not be as happy about it as his parents were. And I've spoken about this kid very extensively in ways that I would not like to be spoken of.

TSC: You spent a lot of time working Capitol Hill. Was it tough working with a Republican majority?

Levitt: I testified before the Congress the first time in 1959 before the House Ways and Means Committee when I was in the cattle business. And I've testified before Congress many times before I came to this job. I owned the congressional newspaper, and I formed and headed the American Business Conference, which was a research and lobbying group for high-growth companies, which brought me into continuing contact with people I dealt with here. I was not intimidated by them. Many businesspeople coming to Washington don't understand the process and either become too confrontational or they avoid bringing problems directly to the attention of the oversight committees that we were involved with.

Also, this commission built the most powerful constituency in America in the individual investor. Our town meetings routinely drew thousands of people. I would regularly take the member who represented the community that we had a town meeting in. We had 2,000 people in Columbus. A guy like [U.S. Rep.] Mike Oxley [R., Ohio] -- he could never get 2,000 people to one of his own town meetings. [Representatives] Anna Eshoo [D., Calif.] in Silicon Valley, Heather Wilson [R., N.M.] in Albuquerque, [Senators] Chris Dodd [D., Conn.] and Joe Lieberman [D., Conn.] in New Haven -- they saw firsthand the power represented in these town meetings to educate investors in ways to protect themselves.

But sometimes, take the example of the accounting issue [where the commission recently required accountants to cut back on consulting work for clients whose financial reports they audit], the tension between the overseers and the agency is palpable. The thing that supports the agency is the extent of investor interest in these issues. This issue with the accountants was a pure investor issue. Not only did my dentist mention it to me, my barber did as well. When barbers and dentists are talking about audit rules, we've raised it to a level where the politicians should be paying attention. It was disclosure to investors, and we had overwhelming congressional opposition to this. "The accounting profession has been primitive in their unwillingness to embrace public-interest considerations."

TSC: Were you surprised at the acrimoniousness of the debate?

Levitt: No. My history with the accountants from the first day I came here suggested that they had a fortress mentality. And that's one of the failures of the profession. Almost every other organized industry in America speaks about, if not thinks about, the public interest. It's just smart. The accounting profession has been primitive in their unwillingness to embrace public-interest considerations.

TSC: What are your plans?

Levitt: Don't know.

TSC: Will you stay on under a Bush administration?

Levitt: Whether I stay or go is not a function of who's the president. I have never worked with a more dedicated group of people in my life, and I dearly hate to leave these associations. On the other hand, I've done it for nearly eight years. If you were to observe that I would likely go no matter who is president, you wouldn't be incorrect.