Pitt-Fall Aside, SEC Chair Must Focus on Bottom Line
November 18, 2002
He got the markets running in less than a week after the terrorist attacks of 9/11 and waged the most aggressive reforms in the history of the SEC. In the end, it was his own bravado (wanting to be named to the Cabinet) and impediments to true bottom-line numbers (through his poor choice of chairman of the Public Company Accounting Oversight Board and conflict of interest over his previous work for AOL), that took Chairman Harvey Pitt down.
While the mutual fund industry continues to pride itself on its elusion of problems in a scandal-clad year, perhaps the real reason investors are not up in arms against the fund industry is really because of its quieter role in the capital markets. Fund managers are as guilty as sell-side analysts in not seeing through the shams of Enron et al. But when investors think of Wall Street, it's sharp-minded, pinstriped investment bankers who come to Americans' minds, not mutual fund portfolio managers. Even though they are entrusted with the lion's share of their retirement money, whatever's left of it.
The fund industry has as much to gain or lose as other investment sectors from the selection of the new SEC chairman. An SEC chairman who would serve the industry well would be someone who can carry forth some of the broader missions Harvey Pitt set in motion. Industry critics may be correct to question the usefulness of having fund executives sign off on key financial documents. Certainly, however, one of Mr. Pitt's more daring and important ideas, disclosing proxy votes, would help to maintain the industry's high standing among investors.
Pitt was brave enough to appear before the Securities Industry Association three days after announcing his resignation. In that speech, he echoed the mantra of his predecessor, Arthur Levitt. The two men could not be more different in their priorities or their approach - Pitt a brilliant accounting attorney who nonetheless tripped himself up in his poor judgement on William Webster; Levitt a polished broker who knew how to navigate Capitol Hill, and who put the investor above all else.
Miraculously, though, Pitt's speech sounded as though it were spoken by Levitt: "Even if your employees don't want to do the right thing for the right reason, they should still do the right thing because it's good business," Pitt said.
Arthur Levitt told Mutual Fund Market News that if he were in office today, he would focus on the analysts [MFMN, 9/23/02, 10/14/02]. Judging from what ultimately took Pitt down, a question of accounting integrity, the new SEC chairman's focus should extend one step beyond the analysts. To accounting. That is, the bottom-line numbers meant to portray the profits, or the losses, of American corporations.
A hard-nosed SEC chairman willing to get to the very bottom of the bottom line, who refuses to pander to the profit-seeking motives of mutual fund or other investment management sectors, would serve the industry well.