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Arthur Levitt Says There will Always Be Abuses

Arthur Levitt, chairman of the SEC from 1993 to 2000, is best known for leading the most pro-investor commission in history.

Arthur Levitt, chairman of the SEC from 1993 to 2000, is best known for leading the most pro-investor commission in history. A self-proclaimed techie, he has eight Apple computers in his two homes, listens to music on his iPod and buys and sells "just about everything on eBay." "I'm addicted to it, I'm fascinated by the process," he says. Levitt describes eBay as a great lesson in market manipulation. "It's not quite the Big Board but it relies on one ingredient in order to keep it running - public trust," he says.

It's that trust that Levitt would like to see restored in today's marketplace. That's why he has been a proponent of Sarbanes-Oxley and has always put his voice and power behind issues to fight for the investor. Since this interview, Levitt's name has been raised as a possible successor to Dick Grasso, who was ousted from the NYSE after controversy over his $140 million pay package.

Addressing technology executives at the Cornell Club in Manhattan, he discussed Grasso's pay package, the need to restructure corporate boards, Sarbanes-Oxley, and the importance of integrity in the marketplace.

Kerry Massaro, WS&T editor-in-chief, sat down with Levitt after his speech on Sept. 10 to discuss some of the pressing regulations on Wall Street and their technology implications.

(For excerpt from speech go to page 2 and for audience Q&A go to page 3)

WS&T: Upstairs you mentioned that corporate boards have been "seduced", I was wondering what you thought of the NYSE's board structure and if you think it needs to be changed to protect the investor?

Levitt: When I was at the sec I made a major point of that kind to persuade all of the self-regulatory bodies and the accounting oversight bodies and other groups that interfaced with investors to change their governance in order to give non-affiliated non-industry directors the majority vote on the board. The NYSE would argue that the heads of listed companies are considered nonaffiliated. I don't agree with that. I think the majority of directors of the NYSE should be true public interest oriented directors who have affiliations neither with public companies nor with brokerage firms.

WS&T: Such as?

Levitt: a type of individual could be, just giving you an example, David Boren; former U.S. senator who heads University of Oklahoma, John Sexton; President of New York University, Wesley Clark; former general, Donna Schalala; head of university of Miami. A whole host of individuals who have no affiliation with the NYSE.

WS&T: Do you think this will ever happen?

Levitt: Yes. I do. I think if the committee that they've appointed to address these changes does not come up with these recommendations, I would expect the SEC would force it to.

WS&T: In a previous interview that I read you mentioned, "abuses, trickery, accounting hocus-pocus" and from what you've said today, it looks like we haven't seen the end of this. What are some other areas in the financial markets where you see the potential for other abuses-areas where you think the current SEC chairman should focus?

Levitt: I think the one we're seeing right now very, very clearly is mutual funds. How that business is given out, how they account fro performance figures, how they report those figures, what are their obligations, disclosure to investors but clearly if this fraud is systemic that we're seeing, they have a very, very pitiful problem.

WS&T: What do you think might be done to further regulate?

Levitt: I'd suggest a few things might happen. Any mutual fund company that is guilty of the practice of mispricing should have an obligation to appoint to its board a member who is considered a member who will be considered an investor-confidence director to protect and oversee that investors aren't being disadvantaged by the company's practices that are guilty of this rip off.

Secondly I think we should seriously consider advertising results by mutual funds-that they be forced to advertise those results after expenses rather than before because their results in my judgment have been distorted by omitting expenses. Those are two specific things that I think should be done.

WS&T: Firms have even been fined because they haven't been able to retrieve e-mails, according to SEC Rule 17a-4. This rule has huge technology implications. Do you have any suggestions for firms trying to overcome this challenge? What part of the rule do you think they should focus on first?

Levitt: This is a natural tension between companies that are troubled by government being in their corporate bedroom and government anxious to have that trail to enable them to bring cases when they feel abuses have been committed. Management has to recognize governments need for information and try to work out an acceptable plan. Government will want everything and the firms of course will want as little retention as possible, somewhere between the two is the answer.

I don't think we can reconcile it by saying one of them is right and one of them is wrong. It's a compromise.

WS&T: Where do you think the ECNs will fit into the future of the markets? Do you think they will be granted exchange status?

Levitt: Yes, I do. I think there will be various combinations of mergers, so there will be fewer of them. The ones that remain will be stronger.

WS&T: Do you think the NYSE will ever go completely electronic and do away with the auction market?

Levitt: Not in the foreseeable future in my judgment.

WS&T: Another problem that investors are having is with the NYSE's antiquated ITS system. When orders are routed through the ECNs, and there is a better price on the NYSE, the ECN has to route the order to the NYSE. Sometimes this does a disservice to the investor because by the time the order gets to the NYSE, the better price is no longer available.

Levitt: I believe that the job of the SEC's Division of Market Regulation to push the NYSE in every way possible to make sure that their system does not disadvantage the investors that doesn't have to work to prejudice one market over another. And clearly there are aspects of the New York systems that work to the benefit of the New York rather than to the benefit of either to the investors or the market as a whole. And I think it's up the Division of Market Regulation to change that.

WS&T: As you know tomorrow is the anniversary of Sept. 11. Do you think that we've done enough to prepare for another potential catastrophic event? The SEC has provided some guidelines to the clearing industry but really hasn't done much to guide the NYSE and trading firms.

Levitt: There's more to be done. It think we need more redundancy I think individual firms may have done more than market themselves. You can never do enough.

WS&T: Do you think there will be any regulation for the New York Stock Exchange in this regard? If something were to happen to the exchange, the people would be lost, there is no back up for that in an auction market.

Levitt: In a funny way, the markets today are so interchangeable that I could see the NYSE went down the other markets could fill that gap very quickly. To that extent the markets have already created the kind of redundancy that would be necessary if there was a serious disruption.

WS&T: Does that mean you don't think the SEC will step in to further regulate or provide guidelines to the exchanges?

Levitt: I don't know that it's calling for regulation. I think the SEC is obviously interested in that area. They are pushing all market participates to aggressively pursue that area.

WS&T: Looking at the market today, what areas do you think need further market regulation?

Levitt: I won't answer that question. But I will say that an area where the SEC will pay more attention to in the coming months is the area of investment companies. I don't know if it's a question of regulation, but it is a question of interest. It's a question of investigation and oversight but I think you'll see increased scrutiny of our mutual fund industry.

WS&T: What would you like people to remember most about your leadership?

Levitt: Ours was the most pro-investor commission in history.

WS&T: What do you think Donaldson's legacy will be?

Levitt: It's difficult to tell so early in his term. If it ended today I'd say his legacy would be restoration of public confidence and the wisdom and integrity of the SEC as well as the overall integrity of the U.S. markets.

WS&T: With all of the regulations-The Patriot Act, Basel II, SEC 17a-4, do you foresee a new structure at financial firms to bring closer the compliance officers with the heads of technology?

Levitt: It wouldn't surprise me to see an establishment of ethics officers. I expect that much more money will be spent on compliance than ever before. So yes, I think that the structure will change, along with the changing times.

WS&T: According to our internal research, found that 50% of technologist jobs on Wall Street are spent on compliance technology-not on the trading technology, the risk management technology or the market data technology, but on compliance...

Levitt: It's a by-product of what's happening in the market. It's not going to last forever but it'll last until we're out of the eye of the hurricane.

WS&T: Do you think that once the markets rebound that these scandals will be forgotten and we'll become as complacent as we were in the late `90s. Or will we really learn a lesson from all of this?

Levitt: No, Lessons are never endured. There will be different kinds of abuses, but there will always be abuses.

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