Talk about market timing. During his record eight-year tenure (1993-2001) as chairman of the Securities and Exchange Commission, Arthur Levitt Jr. presided over the democratization of Wall Street, an unprecedented period in which millions of Americans who had no previous exposure to equities poured their money into stocks and subsequently lost much of it. As SEC chief, Levitt made a priority of educating the public about the powerful forces arrayed against them in the capital markets. Almost two years after leaving office, he’s singing the same song.
In Take on the Street: What Wall Street and Corporate America Don’t Want You to Know, Levitt offers a straightforward, no-nonsense handbook for retail investors fatigued by a two-year bear market and rampant corporate scandal. Of course the book is also Levitt’s attempt to define his legacy. His disquisitions defending past policy decisions can grow tedious, but overall, the book is both a useful investing primer and an engaging memoir about power, politics and money.
A liberal Democrat from a political family, Levitt made protecting the interests of individual investors the governing principle of his tenure. He felt that impulse even during his career on Wall Street, he writes. His brokerage firm partners Sanford Weill (now head of Citigroup) and Hardwick Simmons (currently CEO of the Nasdaq Stock Market) scoffed when Levitt gave a speech titled “Profits and Professionalism” at Columbia University in 1972, in which he admonished Wall Street to end commission-based payment of brokers because it encouraged unsavory practices like account churning. But Levitt didn’t care.
In clean, direct prose Levitt urges individuals to avoid brokers and to be wary of most mutual fund companies, given the myriad conflicts of interest these institutions face. Instead, he counsels mom and pop to stick to low-cost, no-load index funds. For individuals investing more than $50,000, he recommends hiring a certified independent financial adviser.
He supports this advice with a wealth of information (much of it gleaned from shenanigans he witnessed at the SEC) to help readers keep financial services providers honest and do their own homework. This is eat-your-brussels-sprouts investing.
As he looks back on his SEC tenure, Levitt calls Regulation Fair Disclosure his signature achievement. Enacted two years ago, Reg FD prohibits companies from releasing material information to analysts or fund managers without also notifying the public, and its effect has been far-reaching. Levitt also identifies his push for new auditor-independence rules -- though seriously blunted by the accounting industry’s powerful lobby -- as among his most important initiatives. He makes a convincing case that standing up for underrepresented individual investors was the right thing to do, despite critics’ complaints that some of his reforms had unintended consequences that, ironically, have hurt individual investors.
Not surprisingly, perhaps, Levitt is not shy about trumpeting his own political savvy. Reg FD passed despite strenuous industry opposition, he says, because he preempted Wall Street’s lobbying by first persuading thenSenate Banking Committee chairman Phil Gramm to support the bill.
The accounting industry agreed to limited restrictions on auditors’ consulting activities only after Levitt broke with previous SEC practice and allowed his enforcement director to privately brief the Senate Banking Committee -- many of whose members were thought to be in the industry’s pocket -- on several audit-related cases under investigation.
But Levitt also isn’t afraid to admit his mistakes. He concedes that advising the Financial Accounting Standards Board in 1994 to back down on requiring companies to record stock option compensation as an expense “was probably the single biggest mistake of my term in Washington.”
He continues to stump for more investor-friendly reforms. Conflicts between research and investment banking can only be resolved if Wall Street firms separate their research and brokerage operations, he argues. Levitt further suggests that independent rating agencies should pass judgment on proposed equity offerings in the same way that Moody’s Investors Service rates debt, with certain investors prohibited from buying low-grade paper. Sometimes a small investor is his own worst enemy.
