As Arthur Levitt's resignation from the chairmanship of the Securities and Exchange Commission took effect earlier this month, assessments of his eight-year legacy varied widely. While some hailed Levitt - the commission's longest serving chairman ever - as an outstanding chairman who established a new standard for the commission's role in shareholder advocacy, others criticized him for both not sufficiently upholding shareholder interests and for going overboard in doing so.
"I think Levitt has been absolutely spectacular," said Don Phillips, a managing director with Morningstar of Chicago. "I don't think there has ever been a better SEC commissioner. I think we'll be hard-pressed and very fortunate to see one as good in our lifetimes."
Perhaps one of Levitt's greatest attributes was that he recognized that the fund industry was fairly well regulated and did not need to be drastically changed, Phillips said.
"I think he rightly recognized that the mutual fund landscape was pretty well lit and [was a] pretty level playing field," he said. "In a sense, he focused on more cosmetic things in the industry as opposed to trying to do real startling, stark change to the fund industry. So in that sense, he was kind of a best of all worlds kind of commissioner."
That did not mean Levitt was not dedication to shareholders, however, and he did represent their interests before the interests of the industry, Phillips said.
Two of Levitt's initiatives adopted later in his tenure set him at odds with some people in the industry, but they were designed to level the playing field for shareholders.
Some people in the industry, feeling that the SEC had overstepped its bounds, were disgruntled by Regulation Fair Disclosure, which was adopted in August. The Investment Company Institute of Washington D.C. felt the rule could have a "chilling" effect on funds' abilities to receive important information from securities issuers. The Association for Investment Management and Research, an industry association, of Charlottesville, Va., decried the regulation after it was adopted.
"What are they trying to defend?" said Phillips. "They are trying to defend the old boy's network, which makes no sense. It's exactly the kind of thing that a really visionary commissioner should be eliminating. ... It takes someone really brave like Levitt to stand up and say, The hell with the old system ... it's unfair. Let's put in something that is more fair to all investors.'"
The last rule adopted under Levitt mandating funds to report after-tax performance in their prospectuses also drew ICI criticism. The rule requires funds to calculate their performance using the highest tax bracket of 38.6 percent. That presents a worst-case scenario for shareholders, the ICI said. The ICI pressed to have a lower tax bracket, but the SEC held firm and adopted the rule using the 38.6 percent.
Levitt stood firmly on the side of investors on issues concerning information disclosure, said Ramy Shaalan, senior funds analyst at Wiesenberger/Thomson Financial of Rockville, Md. Thomson Financial is the publisher of this newsletter.
"The bottom line is, investors will gain more transparency into their funds and as a result will be better able to make more informed decisions," he said. "So I would say by far that's one of his biggest contributions."
Overall, fund investors today are more informed and aware of how a mutual fund operates because of Levitt, said Marianne Smythe, a partner in the law firm of Wilmer, Cutler & Pickering of Washington D.C. She is also a former director and associate director of the SEC's division of investment management.
"I think that during his eight years as chairman, Chairman Levitt achieved something quite important, although not tangible," she said. "And you can't point to it and say it was this rule or that action. It was a combination of things that added up to something. And I think what he achieved was to insist, in the area of mutual funds, that the investors' interests should be taken seriously, but more importantly, that the investors themselves become more involved in their own protection."
As a chairman, Levitt was unique in that he had a very public profile and he went to great lengths to educate investors and make them more discerning in their choices, Smythe said.
"In a broad subjective sense, he educated the American public and that's not an easy thing to do and he assiduously pursued that role," Smythe said. "I think he made a substantial contribution in that way."
But, not everyone will remember Levitt as the supreme shareholder advocate.
"I personally feel that Levitt didn't do anything," said Edward Siedle, president
of Benchmark Financial Services of Lighthouse Point, Fla. and formerly an attorney with the SEC.
"I don't know where he got this reputation as champion of the investor because I haven't seen it happening," he said. "I don't know of anything he did that made the world safer for investors... I think he was extremely ineffective."
Siedle is most critical of Levitt's legacy with respect to the mutual fund industry in the area of soft dollars. Soft dollars refer to the money paid by an investment manager to a brokerage firm or third-party vendor through commission revenue, rather than through direct payments, usually for research. That process is legal, however managers must make sure that they pay the lowest fee possible for those services and they often do not. Levitt and the SEC made improving the soft-dollar policy a priority.
"I think his effort in the soft-dollar area was misdirected and produced no result," said Siedle. "It was just wasted time. We're talking about the commission taking two years studying soft dollars and in the end, what did they do? They recommended some limited disclosure, but it was quite meaningless."
Those changes, made in 1995 required investmnet advisers to disclose, among other things, the 20 brokers to which they direct the largest amounts of commissions, the total commissions and average commission rate paid to each broker, and details on any products or services received through soft dollars.
In fact, Levitt's work on fair disclosure may have increased the need for soft dollar programs, according to Siedle.
"At the end of the day, what has happened is soft dollars have a better name than before," he said. "People were producing proprietary research by talking to management and getting advance disclosure of earnings and things like that. With the new disclosure rules, soft-dollar research is probably going to be far more valuable than research provided by investment banking firms who will no longer be able to get disclosure of financial results in advance."
Although little was accomplished in that area, Levitt is not really at fault, according to Mercer Bullard, president and founder of Fund Democracy of Chevy Chase, Md.
"There's not much that you can really do [with soft dollars] because it's really in the hands of the directors versus the fund management," said Bullard. "There's one thing that [Levitt] could have done, that he tried to do, and the industry shot down and that was to force them to quantify the value of the soft-dollar benefits they were receiving... The industry managed to beat [that] down, claiming it couldn't be quantified, which makes you wonder how they figure out if the commission is fair if they can't even determine the value of the services they're getting, but that was essentially their position. That's not where I would fault [Levitt]."
One area in which Levitt should have been more effective regards pay to play practices, according to Bullard. Pay to play, with respect to the mutual fund industry, refers to situations in which public officials select firms to manage pension funds based on political contributions. In August 1999, the SEC proposed a rule that would have prohibited investment advisers from providing any advisory services to a government client until two years after any contribution was made to any official involved in the selection of the adviser (MFMN 8/4/99). That rule was not adopted.
"[Levitt] invested an enormous amount in [pay to play] personally and proposed the rule in 1999 and it never got done," said Bullard. "The staff invested an enormous amount of time developing that proposal and he really should have worked harder to get it through before he left office. I think that was very unfortunate."
Siedle is also critical of the SEC's new rules about personal trading by money managers.
"The commission did nothing but basically say that mutual fund directors should look more closely at personal trading by money managers," said Siedle. "And the whole problem was that the mutual fund directors were chosen by the money managers, so it really ended up doing nothing. I think in the area of personal trading by money managers, which is a huge problem, his work was a dismal failure."
When Levitt announced that he was stepping down as chairman, Matthew Fink, the president of the ICI said in a statement that Levitt "is the investors' champion... and has succeeded in establishing the overriding importance of investor protection." Still, Fink has been critical, as on the after-tax disclosure issue. And, Fink does not think Levitt stood out from previous chairs.
"I don't think it matters who the SEC chair is," said Fink at an ICI media briefing in New York earlier this month. "I think they are more similar than different. You get personalities and nuances, but you've got to remember, the Investment Company Act, which they enforce as one of their laws on us, is very exact and very detailed and there's not much variation that a particular chairman can do unless he wants to repeal the Investment Company Act. So it tends to be pretty much the same.
"Because mutual funds are middle class, middle income [products, with] 88 million [investors], any SEC chairman will be very concerned about the average investor to mutual funds and the industry will be concerned, but that's always been the case. Someone was asking me, Wasn't Arthur Levitt unusual in rattling the mutual fund industry cage or being proactive?' Well Terry [Glenn, chairman of the ICI] and I go back to the1960s when mutual fund assets were $50 billion and a very famous chairman of the SEC, Manny Cohen, led a four- year drive for the 1970 amendments to the Investment Company Act to improve shareholder protections. So I don't see a major change whoever the chairman is given the nature of this industry, the nature of its regulation and the industry's own commitment to regulation."
