Guess Who's Gunning For The SecMichael Schroeder
As federal agencies go, the Securities & Exchange Commission is a blue chip. For 61 years, the regulator has managed to keep U.S. markets the safest in the world. As those markets have grown during the past decade, Congress has tried to keep pace by tripling the SEC's budget. Even detractors agree it has been money well spent.
You would think the SEC would be the last place targeted by reg-slashers on Capitol Hill. And you would be wrong. House Republicans have launched an all-out war on securities regulation. SEC Chairman Arthur Levitt Jr., regarded as one of President Clinton's most probusiness appointees, has discarded his Wall Street pinstripes for a flak jacket. And critics fret that a battle has begun that could weaken investor protections and provoke a major financial scandal.
GOP lawmakers plan to slash transaction fees paid by corporations, scale back corporate-takeover disclosure requirements, and loosen restrictions on the lending practices of brokerage firms. "These folks are seizing the day. They want to be revolutionaries," says Stuart J. Kaswell, general counsel of the Securities Industry Assn.
The latest salvo came on July 27, when Representative Jack Fields (R-Tex.) introduced legislation that would fundamentally change the SEC's mission. No longer would the commission's only guiding principle be investor protection. The legislation would direct the SEC to justify the benefit from any securities regulation against its cost to business. It also would ease rules in order to help companies raise capital. "Now is the time for a look at major reform," says Fields, chairman of the House subcommittee overseeing the industry.
Fields's bill caps an attack coordinated by several House leaders. In June, Representative Thomas J. Bliley Jr. (R-Va.), chairman of the Commerce Committee, moved to freeze the SEC's budget for five years and halve SEC fees on companies selling stocks and bonds. On July 17, Daniel Frisa (R-N.Y.) was deputized by Bliley to launch a "top-to-bottom" review of SEC operations. The goal: "cutting out all regulatory deadwood."
Then there's the GOP litigation reform legislation moving through Congress, which is expected to reach President Clinton's desk this fall. In addition to stamping out frivolous lawsuits, the measure would make it much tougher for investors to sue companies who have given misleading forecasts. Many SEC regulators feel the protections are too sweeping and will increase its enforcement burden.
This anti-SEC whirlwind is smiled upon by securities firms, smaller public companies, and venture capitalists--all big GOP donors. Unlike execs from big companies, who have a greater tolerance for the SEC, they see the agency as an impediment to capital formation. "An overhaul of securities laws is long overdue," says Christopher J. Murphy III, CEO of 1st Source Corp., a South Bend (Ind.) bank holding company.
Nobody is more worried--or perplexed--than SEC Chairman Levitt, former head of the American Stock Exchange. After all, he was expecting plaudits from Republicans for a raft of proposals right out of the GOP playbook. In June, Levitt unveiled plans to reduce the time and expense of raising capital for small business. Instead of cheering, Fields introduced his sweeping reforms without alerting the agency ahead of time--disregarding a standard courtesy. Levitt was left to issue a terse statement pledging SEC cooperation.
Insiders see the ferocity of the GOP's attacks on securities regulation as not only a backlash against regulation but also against the SEC chairman himself. Republicans haven't forgotten that Levitt raised $3.5 million for Clinton's campaign. And the securities industry fumed over Levitt's high-profile attacks on the commission system for brokers, which Levitt charged was responsible for widespread sales abuses. "It was viewed as grandstanding," says a business lobbyist.
UNKIND CUT. The Clinton Administration hasn't helped Levitt's cause, either. The White House, preoccupied with big battles over the budget and foreign policy, has failed to nominate anyone to fill the three openings on the five-person commission. The SEC had to approve an emergency rule change to allow the two sitting commissioners, Levitt and Steven M.H. Wallman, to constitute a quorum so they can conduct business. Many securities lawyers believe SEC actions with only two commissioners could be grounds for a court challenge.
Fields's legislation takes a swipe at the Administration by proposing to permanently cut the commission to three members. Fields says the SEC has rarely operated with a full complement of commissioners and the cut could save $2 million a year in staff costs.
Like any bureaucracy, the SEC--with a staff of 2,784 employees and a yearly budget of $300 million--certainly could be streamlined. But even in the business community, many think this is no time for big cuts to the agency. The SEC is still relatively small. And last year, it raised total fees of $593 million, most of it gravy for the U.S. Treasury.
More important, the SEC's responsibilities have increased as markets expanded. "I don't think a case has been made for wholesale changes to securities regulation," says Richard Y. Roberts, who left the commission earlier this month. Fields and his fellow reg-busters insist they're only interested in cutting costly red tape, not the SEC's policing powers. But if business is unfettered too much, the door will be left open for fleecing of investors, critics fear. "Nothing will damage markets more than converting the federal agency responsible for assuring [the markets' safety and fairness] into a cheerleader for Wall Street," scowls Representative John D. Dingell (D-Mich.).
The momentum, though, clearly is on Fields's side. He hopes to hold hearings in September aimed at passing legislation in the House by yearend. And the securities industry has a friend in Banking Committee Chairman Alphonse M. D'Amato (R-N.Y.), who could guide the effort through the Senate. Meanwhile, Levitt, who expected an approving GOP, is headed for the trenches. It could be a long siege.