When Arthur Levitt became chairman of the U.S. Securities and Exchange
Commission in 1993, he could look back on 16 years of Wall Street
experience and know how arcane the world of investments might appear
to the average investor. He set out to dispel the myth of the investment
broker as being all-wise, and made it his special mission to educate
the consumer. Levitt established the SEC's Office of Investor Education
and Assistance and implemented a series of town hall meetings focused
on investor education. In the following interview with Minneapolis
Fed President Gary Stern, Levitt says, "If there is any legacy that
I would wish to leave to this institution, it is that this commission
respected the interests of the individual investor."
Levitt also talks about the effects of the Gramm-Leach-Bliley financial
modernization legislation and the impact of a globalized electronic
market on regulatory structure. Although acknowledging increased
fraud as a result of the Internet, Levitt says, "If I had a magic
wand, would I wipe out the Internet to protect investors from that
fraud? No way." He adds, "The balance of benefits from the Internet
vastly outweighs the negatives of the mischief that can be created."
STERN: Prior to passage of Gramm-Leach-Bliley, you and others
raised questions about the proposed regulatory structure that would result
from financial modernization. Did the eventual legislation address your
LEVITT: Yes, it did. My primary concern was preserving
the principles of functional regulation for securities activities.
I think that the act successfully addresses that by striking a
good balance between removing, among other things, the banks'
blanket exception from broker-dealer registration while letting
banks continue to engage in certain traditional bank securities
activities directly. I was concerned with that part of the legislation
that tried to define the roles of financial regulators. I think
the act does this by recognizing each regulator's area of expertise.
We're currently working with other regulators to draft a memorandum
of understanding that would put meat on the bones so that we can
coordinate our oversight responsibilities. We also called for
the creation of a new type of holding company, an investment bank
holding company, that would have the commission as its umbrella
supervisor, and the act incorporates the investment bank holding
company concept. We're considering rulemaking at this point to
flesh out these new investment bank holding companies so that
U.S. broker-dealers that opt into this model can compete overseas
effectively without being subject to banklike rules that really
do not fit their business models.
You know, I'm often asked the question about how you put aside
issues of turf and come to grips with joint regulation of financial
structures. And I've often thought that the fact that [Fed Chairman]
Greenspan and [former Treasury Secretary] Rubin and I have known
one another for 40 years has made for better policymaking than
might otherwise exist. There was never a question in our minds
as to whether we could rely on a commitment made by one another.
There was never the need to go through the kind of "getting to
know you" that often takes up most of the term of an incumbent
agency head. Now, does that lead to success? I hope so, but it
hasn't always been that way. The recent relationships certainly
have made for better policy decisions.
Back to Gramm-Leach-Bliley. Lastly, I'd add that the act addresses
my concerns about the mutual fund area. In particular, it addresses
the conflicts of interest that may arise when banks advise or
affiliate with mutual funds. We intend to go through rulemaking
to implement the provisions of the act. The act recognizes the
traditional jurisdiction of the commission and the bank regulatory
STERN: You refer to the term "investment bank holding
company." Is that what we in the banking business would call the
financial holding company that's created by the act? In light
of, for example, Schwab's purchase of U.S. Trust, do you expect
the difference between banking and securities firms to persist
over time, or is that something thatif we're sitting around
talking about it 10 years from nowwon't be a distinction
LEVITT: Investment bank holding companies are similar
to financial holding companies. Without getting into too much
detail, the investment bank holding company structure permits
U.S. broker-dealers to have the commissionrather than one
of the bank regulating agenciesas their global consolidated
supervisor. As for your second question, it's my personal feeling
that the distinction will endure. While the financial services
industry is quickly moving forward toward the integration of its
securities, insurance and banking sectors, I strongly believe
that you will continue to find a growing cadre of specialists
who provide specialized services. I don't see a gigantic consolidation
of banks and brokerages that will eliminate the kind of entrepreneurial
spirit that has contributed to making our capital markets some
of the strongest in the world. I think for every PaineWebber that
may be acquired by someone, there will be a new specialty kind
of brokerage firm that grows up that will be the PaineWebber of
STERN: I remember, back in May 1975, all the predictions
that we were going to wind up with a handful of major brokerage
firms and that would be it. Obviously, like a lot of extreme predictions
it turned out to be dead wrong.
LEVITT: I do not expect that.
STERN: Let me ask you about functional regulation, which
you've touched upon. How uncomfortable should we in the banking
regulatory business be with functional regulation, given that
as you already mentioned, your perspectives and purposes are different
from a bank regulator's? And yet we have to defer to you in those
LEVITT: Like so many things in government, the best regulators,
the best administrators, are ones who respect the utility of the
word "balance." And it's a mistake to assume that a bank regulator
is not interested in eliminating fraud just as much as a securities
regulator. It's also a mistake to think that the commission is
not concerned with the financial riskiness of brokerage firms.
So the lines are not that rigid, and I think through the years
the philosophic gaps between us have diminished. With the proliferation
of banks getting into the securities and mutual fund business,
all of us will recognize that some of those same principles will
be maintained in both environments. In fact, I believe they must
be maintained in both environments.
STERN: Let me focus a little more explicitly on the SEC.
Both the SEC and the Fed were created after economic crises to
respond to particular needs, but over time both organizations
have evolved to meet changing needs and have constantly had to
reassess their roles and functions. Generally speaking, do you
foresee changes in the core responsibilities of the SEC in the
coming five or 10 years and if so, of what type?
LEVITT: I think every commission has to be mindful of
the environment in which it operates. It's not merely the political
environment, which very often is a constraining factor on any
government agency, but it's also both the economic environment
and the systemic environment. Now, when I say the systemic environment,
I am referring specifically to the dramatic changes we are experiencing
in the area of market structure. And to respond to those changes,
this agency in the past two years has been compelled to be more
proactive in terms of market structure than any commission in
history. I think that's likely to continue.
STERN: By market structure what do you mean precisely?
LEVITT: How we integrate electronic markets with existing
agency markets. I believe we're moving inexorably toward a globalized
electronic marketnot within the next decade but within the
next five years. How does our regulation encourage that rather
than so discourage participants and investors that our preeminence
in that arena diminishes or evaporates? What kinds of self-regulating
structures are adequate to this new electronic environment? What
kinds of regulatory entities are necessary to protect very different
kinds of players engaged in the markets of the future?
STERN: I assume those are types of issues you're grappling
with right now.
LEVITT: Yes, and we will continue to grapple with these
issues even more in the future. The securities acts of 1933, '34
and '40 have been among the most remarkably resilient acts in
the history of our country in that they have subjected themselves
to amendment and adaptation to allow our markets to do as well
as they've done. That process of change has been very dramatic
in the past two years and will continue to be even more dramatic
over the course of the next two or three years, because for the
first time there is credible international competition. And I
think it's the obligation of future commissions to see to it that
we don't lose our edge.
STERN: How should consumers feel about the evolution
you're describing, from the kind of markets we've known to a global
LEVITT: I think the evolution will create more opportunities
for investors, greater amounts of diversity, more sources of information
and more competition. The commission, through its change in the
order-handling rules and through a number of initiatives, addresses
this issue and drives home the point that this commission is motivated
above and beyond everything else by a concern for the individual
investor. If there is any legacy that I hope to leave a successor,
it's the firm commitment to primacy of the individual investor
in terms of every policy we embrace and every decision we make.
STERN: Do you think the information disclosed by banks
and bank holding companies allows the investors to accurately
price their equity and debt, and if not, what additional types
of disclosure would you recommend?
LEVITT: I would say that, by and large, bank disclosure
has improved through the years and will continue to improve. I
think this poses unique challenges to regulators and raises both
systemic and risk management concerns. Now as you probably know,
we're working with other financial regulators and a private sector
advisory committee on public disclosure chaired by Walter Shipley
[recently retired chairman and chief executive officer of the
Chase Manhattan Corp.] to analyze the types of information that
financial firms publicly disclose. It's the goal of this committee
to develop best practices to improve market discipline through
public disclosure. I guess it's too early for me to comment on
an issue that's currently being analyzed by the various financial
regulators and Walter Shipley's committee.
STERN: Even so, would you care to embellish your comments
LEVITT: I think that banks have come a long way. They
are far more transparent today than ever before. Would I like
to see greater transparency? Sure. We are working with the Fed
and the Comptroller's Office to support Walter Shipley's committee,
and I understand the goal of the committee is to develop options
for improving public disclosure by both banking and securities
STERN: Again, speaking specifically about banks and bank
holding companies, do you think that investors in holding company
debt and equity provide at least some market discipline on these
firms and if so, why? And if not, why not?
LEVITT: Whether the market forces can adequately assess
a particular bank's risk profile is something that regulators
continue to talk about. Some would say that the market can assess
the risk profile of a particular firm if there's enough public
information available. Others argue that share price is only loosely
related to a firm's riskiness and, in fact, may really reflect
the liquidity of the firm's shares rather than the firm's riskiness.
They point to interest rates and Internet stocks to show that
factors other than an entity's risk profile may predominate in
an investor's evaluation of market price. The commission is looking
at these issues through participation in a joint disclosure project,
which may issue a report by the end of year on what may be the
proper forms of risk disclosure.
STERN: Is there something unique about regulating an
e-trade Internet site compared to the traditional brokerage operation?
LEVITT: Yes. I think the unique part of it deals with
public perception. I have some concern that the typical user of
an electronic site having read about, seen movies about, watched
television shows about the power of the trader, fancies himself
or herself a trader. To do things with the stroke of a key, and
to feel that they couldn't do it any other way, is dangerous in
my judgment, because these people lack the discipline, the resources
and the temperament of a professional trader. I worry about individuals
feeling that they've got the power of a trader. It's largely a
job of investor education. Is there more fraud as a result of
the Internet? You bet. If I had a magic wand, would I wipe out
the Internet to protect investors from that fraud? No way. I think
the balance of benefits from the Internet vastly outweighs the
negatives of the mischief that can be created. No government agency
has the resources to adequately protect investors from their own
foolishness. But we are, I think, effectively using our Web site,
holding town meetings all over America and using other educational
devices to inform the public about the risks inherent in the Internet.
There are a few significant differences, and the issues that
arise include suitability. Traditional brokers are required to
know their customers and only make recommendations that are suitable
to their customers' personal situations. Online brokerages, for
the most part, are not giving advice, so in most cases suitability
principles do not apply. The commission is monitoring the situation
to see if marketing techniques used by online trading firms trigger
those suitability requirements.
STERN: Are there in fact more people trading?
STERN: And foreigners as well?
STERN: Is the SEC concerned about the proliferation of
volatile high-tech stocks, and is there a corollary in history
to an industry that issued a large number of IPOs in a short period
LEVITT: I think there have been aberrations as long as
we've had markets. Biotechs, oil stocks at different points in
time and others that I could mention created those aberrations,
and investors who weren't cautious paid the price. I have no doubt
that those investors who are more emotional than intellectual
at this point in the market's development will pay a similar,
or perhaps even a greater, price. I'm not particularly worried
about volatility in our markets. I think volatility is part of
market euphoria and has its own measure of discipline imposed
upon those who are mindless of risks. Investors who don't understand
that risk and reward have an inexorable relationship will pay
a price, and the longer the market bull run exists the higher
the price that will be paid.
I think, again, investor education has been a major initiative
of this commission to leverage our resources. I believe it's an
aspect of the commission that will endure. It is a vital component.
In the past, it's been commission action in partnership with self-regulating
organizations and private rights of action that have created a
triad of protection for investors. I think we've added something
that's more powerful than any of the three in terms of investor
education: the ability of investors to protect themselves. The
three-legged stool has become a four-legged stool.
STERN: Let me pursue the education issue one step further.
You created the SEC's Office of Investor Education and Assistance.
Please describe how this idea developed and what you hope it will
LEVITT: My own experience as a retail broker, as the
manager of a very large cadre of retail brokers around the world,
has taught me that many investors are reluctant to ask tough questions
for fear of seeming stupid in the hands of an adviser whom they
credit with almost godlike wisdom. Combined with that is my feeling
that this agency lacks the resources to totally protect investors.
So we initiated a program in Cherry Hill, N.J., seven years ago,
which was attended by 35 people who asked me questions about investing
for about three and a half hours. And that triggered a regular
national program where within the past year we attracted 1,000
people in Albuquerque, 1,000 in Chicago and nearly 8,000 people
in Los Angeles, where individuals came out and asked questions
about investments, how to choose a broker, what commissions to
paya whole galaxy of what might seem to be obvious questions.
But the level of interest in these meetings suggests to me that
policymakers and political leaders have not adequately assessed
the passion that lies out there about investments and investor
concerns. So the program has grown. We now have a hotline; investors
call the commission and ask questions directly. All the commissioners
of the SEC get on this hotline and answer questions posed by investors.
It's really a hands-on grass roots kind of program. My experience
in the private sector taught me that the generally held view is
that the Washington bureaucrats sit in their offices and do very
little to reach the man and woman in the street, and we were determined
to bring Pennsylvania Avenue to Main Street. It's very much what
the New York Stock Exchange did when it brought Wall Street to
Main Street. We're getting out and speaking from the hustings.
We're identifying with political leaders in communities and with
the media in those communities who jointly sponsor these events
and turn out vast numbers of people vitally interested in how
to better protect themselves.
STERN: It sounds like there's been a democratization
of investment just as there's been a democratization of credit,
and that is mostly good news but it has some downside, too, because
some people are taking risks that perhaps they didn't intend to
LEVITT: I think in this kind of market environment greater
risks are being taken and the need to protect the interests of
that individual investor becomes more compelling, because I believe
they represent the foundation of our markets. SEC initiatives
on accounting issues, on market structure issues, on educating
investors, on disclosure are all premised on the notion that without
public confidencefor the first time in the history of our
marketswe stand the risk of losing our pre-eminence to other
markets growing in different parts of the world. If there's any
legacy that I would wish to leave to this institution, it is that
this commission respected the interests of the individual investor.
STERN: Among many other topics, you have recently been
particularly involved with two issues, namely auditor independence
and selective disclosure. Let's talk about the first one. What
do you see as the reasons for taking steps to promote greater
independence in the auditing profession?
LEVITT: For decades, trust in the judgment of the public
accountant has helped lay the foundation for our capital markets.
And that trust is dependent on the fact and appearance of the
auditor's independence from the clientwithout confidence
in an auditor's objectivity and fairness, how can an investor
know whether to trust the numbers? Our financial markets simply
cannot work without access to strong, high-quality financial reporting.
What we've seen in recent years is the accounting profession
undergoing tremendous changemore dual-career families, increasing
mobility among professionals, greater employment by audit clients
of their auditors' partners, staff and spouses. And we felt the
time had come to re-examine the financial and employment relationship
At the same time, consolidation, product line expansion and
globalization have been fundamentally altering firm structures
and revenues. Many of the biggest accounting firms have become
multidisciplinary professional service organizations. As a result,
you can see how the debate over the role of the auditorand
the inherent pressures of practicing within a firm offering clients
a range of nonaudit serviceshas become more pressing.
The commission believes that these developments now call for
a significant and comprehensive re-examination of the rules that
govern independence. And I think it's so important that at a time
when more Americans' economic futures are tied to the underlying
health and resiliency of our capital markets, the commission and
the profession work together to ensure that the auditor independence
requirements are both effective and fair.
STERN: And selective disclosure? Many say that looking
out for the individual investor has been a hallmark of your seven-year
tenure. How will the recently passed Regulation FD further this
LEVITT: As I travel around the country visiting with
investors at our town hall meetings, one of the common refrains
I hear is that folks are tired of feeling that Wall Street insiders
have the upper hand when it comes to getting important information.
Our new ruleRegulation FD, for fair disclosureis simple,
but powerful. It says that when companies release important information,
such as earnings forecasts or the introduction of a new product,
they must tell everyone, not just a select group of analysts or
This rule struck quite a chord among investors. We've received
more than 6,000 comment lettersa recordmostly from
individual investors. People talked about fairness and equity
and said it was about time we did something to level the information
playing field. One investor said that the stock price of a company
he owns fell significantly one day, though no news had been made
public. But several days later the company told the world of a
problem it was having. That's just wrong.
Selective disclosure undermines the integrity of the securities
markets. And if people begin to lose faith in the integrity of
our markets, there will be quite a price to pay. I think our selective
disclosure rule will go a long way toward treating all investors
alike and ensuring that individual investors, in particular, believe
our markets are fair and honest.
STERN: Let me pose one final question, and that has to
do with the role of the Internet, the speed with which investors
can get information and make trades. Against that background,
has the media become more or less important to the market?
LEVITT: More important, much more important, especially
when you think of the amount and quality of information available
to investors. The media is crucial in holding market participantsbrokers,
markets, regulatorsaccountable to a much higher standard.
And while undoubtedly there is a substantial amount of useful
information available on the Internet, the financial press continues
to serve a critical role in synthesizing that information and
making it readily accessible and understandable to the investing
STERN: Thank you, Mr. Levitt.
More About Arthur Levitt
25th chairman of the U.S. Securities and Exchange
Appointed by President Clinton in 1993 and reappointed
to a second five-year term in 1998.
Became the longest serving commission chairman as
of Sept. 9, 1999.
Owned Roll Call, a newspaper that covers
Capitol Hill, prior to joining the commission.
Chairman, New York City Economic Development Corp.,
1989 to 1993.
Chairman, American Stock Exchange, 1978 to 1989.
Spent 16 years on Wall Street.
Graduate Phi Beta Kappa from Williams College.
Served in the U.S. Air Force.