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Arthur Levitt Takes on the Street'


Auditors auditing themselves. Fund boards voting themselves pay raises even as assets decline. Directors acting not just as executives' lapdogs, but like "Chihuahuas." Com-plexes permitting recent alumni to meet independent directors requirements. Soft dollars. Portfolio pumping.

Arthur Levitt, former chairman of the Securities and Exchange Commission and of the American Stock Exchange, socks it to the mutual fund, accounting, investment banking and brokerage industries in Take on the Street, his new book set to come out next month (Pantheon).

The one-time publisher of Roll Call, now a television personality on Bloomberg TV and a director on a number of boards, including Neuberger Berman's, Levitt seems to relish in delivering zingers.

In person at his New York office at leveraged buyout firm The Carlyle Group, where he serves as senior adviser, however, Levitt delivers his opinions in a more quiet, reserved, almost reticent manner.

Levitt sat down with Richard Koreto, executive editor of Financial Planning, Tony Chapelle, senior editor of On Wall Street, and Lee Barney, editor of Mutual Fund Market News, on Sept. 11, after attending morning ceremonies at the World Trade Center, to talk about the state of the industry. Following are his remarks, interspersed with a few excerpts from his book.

What was your personal reaction to Enron, which, as you note in your book, robbed investors of $60 billion?

During my years at the SEC, I saw broad evidence of financial fraud among some of the most prominent companies in America. Every one of the Big Five accounting firms had fraudulent activity of one kind or another. Arthur Andersen was just caught more open-handedly.

I was saddened by the Enron affair because so many innocent people were caught up in it, not just investors, but employees who really believed in the hype and the promotion.

I never imagined a failure on the scale of Enron. The Enron/Andersen audit failure is a perfect example of what I was trying to prevent.

So, I'd use one word to characterize my reaction: Saddened.

If you were still chairman of the SEC, what would you do differently than your successor, Harvey Pitt, particularly to help brokers, say, in the next six months?

I certainly would focus on analysts, just as he's beginning to focus on analysts. And I would focus on governance issues, probably more than I did.

I don't think it's the job of the SEC to determine how brokers are compensated. Nevertheless, without regulating compensation, I'd probably be talking a lot about what can be done in the brokerage industry.

Brokers are vital in the lives of the people they serve in the same way that doctors or lawyers might be.

Do you believe that investors should only go to fee-only advisers?

Yes. The perception of conflict is so great in this environment, where investor confidence must be restored, a commission structure based on volume rather than quality of results just doesn't feel right.

Some of the best brokers I know have reoriented their businesses so that they're based on fees rather than commissions. I hope that brokers understand that by promoting investor interests, I'm really promoting their interests, as well.

What is the key point that you would like readers of Take on the Street to take away, particularly the professional audiences we reach?

I hope that they recognize that their future, their economic livelihood, depends upon public perception.

As far as brokers are concerned, I've been a broker, and I've run a brokerage firm. I have huge respect for brokers.

All of us, I have, made lots of mistakes. In my book, I point out that when I was a broker, I looked at my pad in the morning and said, "I've got to generate $200 to $300 in gross." And I found a way to do that. That wasn't good for my clients, and I recognize that.

The motivations induced by their managers and the companies for whom they work are skewed in the wrong direction; they're skewed by quantitative-based compensation. And I think that's wrong.

Brokers have got to reorient themselves as counselors and advisers, to do what is in the best interest of the customer.

As a former broker yourself, at a brokerage firm that, quite impressively, included Sandy Weill, the current chairman of Citigroup, how would you characterize the profession?

Brokers are individual entrepreneurs - creative, independent, feisty, intelligent risk-takers.

What's your biggest regret from your tenure at the SEC?

After noticing overly aggressive accounting practices by companies, with the approval of their auditors, to meet their earnings forecasts, I considered accounting standards, including expensing options. I also noticed how consulting contracts were turning accounting firms into extensions of management, even cheerleaders at times.