We won't see the likes of Arthur Levitt Jr. anytime soon. The outgoing chairman of the Securities & Exchange Commission took on Wall Street, Corporate America, and Congress in his quest to become the investor's champion. As the '90s bull market drew in millions of newbie investors, Levitt's SEC championed lower fees, fuller disclosure, and crackdowns on insider games and Internet fraud.
No one expects the next SEC chief to match Levitt's populist rhetoric or activist regulation. President George W. Bush's pick, expected by the end of January, won't set out to make enemies on Wall Street. After all, the securities industry was the GOP's No. 1 source of campaign funds in 2000, giving Republicans $22.2 million. In return, the financial industry wants one of its own to head the SEC. But even if Bush spurns them, the new top cop is going to be friendlier than the old one.
Still, there's plenty a Bushite regulator can do to improve markets without risking excommunication from the Grand Old Party. What's crucial is that the new SEC chair focus on serving the end users of financial markets: the companies that depend on the markets to raise capital and the investors who provide it. Those constituents' needs often get lost as the SEC is besieged by pleas from the middlemen--exchanges, brokers, and investment banks--who want markets structured to preserve and increase their slice of the action.
BIG SQUEEZE. The stakes will be especially high in 2001. With markets slowing, the middlemen will push harder than ever to squeeze revenue out of issuers and investors. And on Capitol Hill, Senate Banking Committee Chairman Phil Gramm (R-Tex.) is promising a top-to-bottom study of U.S. securities laws, starting with the 1933 and '34 acts that resurrected America's markets after the 1929 crash. More than ever, the next SEC chief will pick whose interests get priority.
Levitt's focus, right to the end, was first and foremost on the investor. At his last "investors' town hall," in Philadelphia on Jan. 16, he laid out his causes: "plain English" prospectuses and disclosure forms, better information about brokers' incentives to push products, stricter rules to make "growth" or "value" mutual funds stick to their promised investment style, and tools to make it easier to calculate mutual funds' fees. "It is your knowledge, your skepticism, your enduring vigilance," Levitt declared, "that will do more for the underlying health of our markets than any other force." And, he pointed out, there's still plenty for the SEC to do on investors' behalf (table).
Unfortunately, Levitt wasn't nearly as concerned about the users of capital, Corporate America. His SEC tried to streamline registration of stock and bond issues. But its effort--dubbed "the aircraft carrier"--laid on so many new rules that it sank under its own weight. To cut the cost of capital formation, a new SEC chief could revive the useful parts of that proposal.
A GOP-led SEC also will want to take a look at accounting rules--especially merger accounting, which Levitt tightened. "We need new accounting to measure and foster the New Economy," says Brian T. Borders, president of the Association of Publicly Traded Companies. And Regulation Fair Disclosure, a three-month-old rule that Levitt designed to stamp out "selective disclosure" of company data to Wall Street analysts, provides too many companies with an easy excuse to choke off information. The next SEC chief must tune up the fair disclosure regs.
Who could best ensure that the SEC doesn't fall captive to middlemen? Advocates for the leading Wall Streeter on Bush's list, PaineWebber Inc. CEO Donald B. Marron, say he's an independent thinker who could rise above his industry ties--just as Levitt, a former American Stock Exchange chairman, did. But former SEC General Counsel James R. Doty, another candidate, has a leg up in his record of representing stock-issuing companies as a securities lawyer at Houston's Baker & Botts LLP.
The Bush team isn't tipping its hand. But as he chooses, W. needs to remember that the best capital markets in the world exist not to benefit Wall Street but to serve issuers and investors. It's those constituents a GOP-led SEC should keep its eye on.