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The Quiet Crusader at the SEC

By Brett D. Fromson
Washington Post Staff Writer
Sunday, September 28, 1997; Page H1

The directors of the Nasdaq Stock Market who were gathered for a meeting at the Four Seasons Hotel one November morning in 1995 were unprepared for the tongue-lashing they received from the chairman of the Securities and Exchange Commission.

The usually conciliatory Arthur Levitt Jr. warned them to stop foot-dragging on SEC-recommended reforms to end collusion by Wall Street dealers, who for years, critics asserted, had been fixing the prices at which stocks are traded so that brokers could profit at the expense of investors.

Implicit was the threat of SEC enforcement actions against the second-largest U.S. stock market and its parent, the National Association of Securities Dealers.

Levitt, a 66-year-old former brokerage executive, rarely hurls lightning bolts at his friends and former colleagues on Wall Street. He describes the role of SEC chairman as "a combination of teacher, guide, counselor, judge, cheerleader, persuader, listener and moral compass."

How Levitt fills that role matters because the SEC chairman, the most powerful securities regulator in the world, is responsible for protecting the millions of Americans who have flooded into the market in recent years. A failure to guard the unsophisticated in this often rough-and-tumble world would result in more financial failures, frauds, rip-offs and manipulations, and would undermine public confidence in the markets.

"We've probably done more to reform the structure of financial markets than any commission in history," Levitt says as he assesses his own performance.

In 1996, the SEC censured the National Association of Securities Dealers (NASD)– the Nasdaq market's self-regulator– for failing to police wrongdoing.

Then the SEC forced new trading rules to promote competition and oversaw the restructuring of the NASD to better insulate the organization from industry pressures.

Levitt also has:

  • Begun a cleanup of the municipal bond business.

  • Prodded Wall Street firms to be more aggressive in removing bad brokers and ending broker compensation practices that create conflicts of interest between brokers and their customers.

  • Advocated the use of "plain English" by publicly held companies and mutual funds in their communications with investors.

    But some regulatory and market observers say Levitt's achievements do not match the rhetoric. They argue that broker compensation practices often are at odds with the interests of customers. Mutual fund fees are too high and badly disclosed. And important information for shareholders remains buried in the footnotes of corporate reports.

    "I don't think the times permit him to be regarded as a great chairman," said Columbia law professor Lou Lowenstein, who serves as one of Levitt's informal advisers. "The politics of the day and the willingness of Congress to trim the independence of the commission have limited him. He has been fighting a rear-guard action."

    Levitt lacks the political mandate of, say, the most influential SEC chairman, William O. Douglas, later a Supreme Court justice. Douglas is credited with establishing the SEC's role as a forceful regulator.

    Douglas brilliantly exploited the wrongdoings discovered after the 1929 stock market crash to end what he saw as "one law for the very powerful or wealthy and another for those of little wealth and power." He took a dim view of the ethics of Wall Street, and likened the SEC to "the shotgun behind the door."

    Levitt's term, in contrast, has come during a bull market. Hardly anyone in Washington or on Wall Street is crying for more aggressive regulation. Investors are getting blissfully richer by the day. A Republican-controlled Congress wants less regulation, not more. And the administration expresses the most interest in international negotiations designed to advance the interests of U.S. firms and markets in competition with those overseas.

    The most important regulatory achievement of Levitt's tenure as SEC chairman– the reformation of the Nasdaq market– resulted from a massive two-year investigation by the SEC's enforcement division. Sleazy practices in the municipal bond market began to change only when Levitt loosed the division on firms that purchased bond underwriting business by making campaign contributions to influential state and local politicians. In both cases, the SEC was nudged by attorneys at the Department of Justice who made it clear they were prepared to move with or without the SEC.

    Such investigations have, however, been more the exception than the rule under Levitt. His agency– widely regarded as understaffed– often has relied on industry blue-ribbon panels that produce guidelines or other voluntary measures to address questionable industry practices.

    On Capitol Hill, Levitt has used his considerable charm and salesmanship to tone down Republican-sponsored securities legislation that threatened longstanding investor-protection rules and regulations. But he largely has been unable to persuade Congress to toughen investor protection laws despite the ever-expanding public participation in the markets.

    "I think that Arthur has done a good job of trying to keep the issues in a bipartisan focus and working with us very closely," said Rep. Michael G. Oxley (R-Ohio), chairman of the House Commerce securities subcommittee. "He's very conscientious. He returns phone calls. He's offered to hold town meetings in the districts of every member of the subcommittee. He takes care of the little things."

    His Father's Son
    For all his charm and easy manner, Levitt can be a bit remote, according to longtime friends and acquaintances. One of his best friends, Roger Berlind, who worked with Levitt on Wall Street before quitting to become a theater producer, explains that "Arthur is always so circumspect in his behavior."

    The SEC chairman is the only son of Arthur Levitt Sr., a somewhat austere but popular politician who for 24 years was New York state comptroller.

    "His father was the single greatest influence on his life," said Marshall Cogan, another of Levitt's former partners who remains a close friend.

    Levitt spoke about his relationship to his father in remarks delivered last March at the tercentenary of Trinity Church, an Episcopal church a few blocks from Wall Street.

    "For some New Yorkers," he said, "there will always be only one Arthur Levitt. No matter what I may achieve in my own life, no matter what esteem I may earn, it will never approach the esteem with which my late father is still remembered in this town."

    Arthur Levitt Jr. was raised in a brownstone in Brooklyn that his parents shared with his mother's parents, orthodox Jews who kept a kosher household. Levitt said his mother worked as a public school teacher so that he could attend private Poly Prep.

    Arthur Levitt Sr. set high standards for his son, who recalls, "My father used to say to me over and over again, because my academic record was less than stellar, 'You gotta gaze into the books. Gaze into the books.' " The son still remembers his father's disappointment when the younger Levitt graduated 22nd in his high school class of 72.

    Levitt attributes his acceptance to Williams College to his extracurricular activities. Once there, he began "gazing into the books," graduated seventh in his class in 1952 and was elected to Phi Beta Kappa.

    After a stint in the Air Force and a stopover in Cincinnati as an advertising salesman for Life magazine, Levitt returned to New York City to help manage his father's first statewide campaign for comptroller. "I was very devoted to him," he recalls.

    Comptroller Levitt steered his son away from politics because it paid badly, telling him that politics was something he wouldn't be able to afford until late in life.

    Making His Fortune
    By 1959, Levitt was earning $12,000 a year– "a pittance," he says– in the marketing department at Time Inc. Political contacts later got him a job at a land and cattle sales company. Levitt sold cattle and ranches– great tax shelters at that time– to rich Easterners.

    In 1963, he recalls, a wealthy friend said to him, "If you can sell cattle, you can sell stock. My son-in-law has started a brokerage company. You ought to be in the business."

    Levitt agreed and joined the firm, Carter Berlind & Weill, the last named partner being Sanford I. Weill, now head of Travelers Group Inc. Within a year, Carter left in a dispute with the others, and the firm was renamed Cogan, Berlind, Weill & Levitt.

    At a time when Wall Street was still dominated by a clubby group of old-line WASP firms, some competitors derisively referred to the firm as "Corned Beef With Lettuce."

    The young outsiders would have the last laugh, however. They became one of the earliest firms to provide stock recommendations and underwritings for institutional investors. The handsome and courtly Levitt helped build the firm's municipal bond underwriting business and was broker to wealthy or well-known customers such as conductor Leonard Bernstein, composer Aaron Copland and social psychologist Kenneth Clark.

    "It was a business of getting to know people and Arthur always had the contacts," said a former executive at the firm, which is known today as Smith Barney & Co. and is a subsidiary of Travelers.

    "He was the best-looking salesman I ever met," says Marshall Cogan. "I have always been taken with his diplomacy in dealing with people. Arthur played a major role in keeping the peace within the firm and keeping the focus on long-term, not short-term, profitability."

    The hard-charging firm acquired a slew of old-line competitors that had seen better days. Levitt, by then number two at the brokerage, left in a dispute with chief executive Weill.

    Becoming SEC Chairman
    Levitt departed a millionaire, rich enough to consider a career in government.

    But despite his financial success, he still felt overshadowed by his famous father, according to sources close to him. He had long been nagged by feelings that his achievements on Wall Street derived in some way from his father's political position. Sources close to Levitt recall that it used to bother him when visitors came by and at the end of a conversation reminded him to say hello to his father.

    Shortly before his father died in 1980, Levitt found the unlikely vehicle that was ultimately to carry him to prominence in Washington. He became head of the American Stock Exchange, a distant third to the New York Stock Exchange and the Nasdaq Stock Market. Levitt used the Amex as a public platform and established the American Business Conference to lobby in Washington for the fast-growing companies the exchange hoped to attract.

    The Amex-American Business Conference combination gave Levitt a profile in Washington, and he added to it in 1986 when he purchased Roll Call, a newspaper covering Capitol Hill.

    Over the years, Levitt has given money to both Republicans and Democrats; he was considered by the Bush White House for the SEC chairmanship, but was passed over for Richard C. Breeden, who had solid Republican credentials.

    After stepping down as head of the American exchange in 1990, Levitt busied himself with his investments but didn't give up the hope of securing a policymaking position.

    In 1993, Levitt was at last tapped for the SEC slot by the newly elected President Clinton. While not an early Clinton backer, Levitt was vice chairman of the Host Committee for the Democratic National Convention in New York City and co-hosted a September 1992 fund-raising dinner in Manhattan that netted the candidate about $5 million.

    Mr. Consensus
    Levitt is an "evolutionary" regulator, not a "revolutionary" one, according to a former top aide at the SEC. He hates making enemies, according to aides and friends. Diplomacy and operating behind the scenes are more his style.

    "He believes in consensus," said Les Silverstone, a former Washington stockbroker who has worked closely with Levitt and his staff on various reform efforts. "The SEC's investigations of the Nasdaq market and of the muni bond market raised a lot of hackles on Wall Street. I remember his chief of staff at the time telling me that Levitt would never play hardball like that again. He didn't like the tumult. And we have not seen massive enforcement investigations since then."

    During the NASD investigation, Levitt recalls, "There were lots of difficult moments. All kinds of concerns were voiced, subtle and some not so subtle. 'You'll kill the market. You'll destroy entrepreneurship in America. And your name will be reviled.' "

    Silverstone gives Levitt credit for speaking out publicly against the interests of his Wall Street peers and positioning himself as the individual investor's best friend. Levitt has held dozens of "town meetings" to allow small investors to voice their concerns. He also has tried to improve public disclosure by companies and mutual funds to their shareholders through the SEC's effort to get documents written in "plain English" rather than legal and financial jargon.

    But the benefits to investors remain unclear. The town meetings often are held in the districts or states of members of Congress who sit on committees that have jurisdiction over the SEC. Levitt also has been criticized for having allowed some of the meetings to be paid for in part by Wall Street firms he oversees.

    The "plain English" effort has been faulted as a superficial attempt to deal with a deep problem. Morningstar Inc., a mutual fund research company, recently told its subscribers that the plain English initiative will not solve the real problem, which is that mutual fund companies don't want to communicate clearly with their shareholders about investment performance, fees, director compensation and potential conflicts of interest.

    Most investors do not realize how closely Levitt works with his old friends on Wall Street. SEC chairmen always have relied on Wall Street's cooperation as a cost-effective way to help regulate the market, and Wall Street executives say he makes unusual efforts for a chairman to keep in touch.

    "I meet with the firms regularly," Levitt said. "I'll call together a group of 12 or 14 heads of firms both small and large in New York, usually, and when I travel, I'll invariably call together a group from the region. I ask, 'What do you think we're doing wrong? How can we be more helpful?' "

    Aides say that Levitt has at times given select groups of industry leaders previews of his important speeches and announcements to get their thoughts before going public. "I think you rarely hear the charge that I don't listen," Levitt says. "I listen a helluva lot."

    In Washington, he hosts regular dinners at the Cosmos Club for his informal network of advisers– executives, academics and financiers involved in the securities markets.

    Levitt spends about one week a month in the New York area, often to chat with the heads of the big investment firms and stock exchanges. He travels extensively to discuss possible regulatory issues with influential financial players. He has, for example, flown to Omaha for lunch with billionaire investor Warren E. Buffett to discuss broker compensation practices.

    Levitt's official travel recently attracted the attention of House committee staff members who report to Rep. David M. McIntosh (R-Ind.). After reviewing Levitt's travel records, they said that Levitt had not always followed federal travel regulations governing civil servants. They questioned his first-class travel and stays at luxury hotels, partly at government expense, because SEC guidelines prohibit first-class travel, no matter who pays. Levitt paid the difference between business-class travel and first-class out of his own pocket.

    Levitt agreed to refrain from flying first class in the future and accused McIntosh of an "outrageous" partisan attack.

    The congressional sniping at Levitt's travel seems not to have dimmed his enthusiasm. "This is the best job I have ever had," he says.

    President Clinton could ask Levitt, whose term expires in nine months, to serve another five-year stint. Levitt says he hasn't decided whether to seek reappointment.

    As for what he might do after the SEC, Levitt says, "I don't know. The media might be one thing, a foundation might be another. Maybe something else will come along.

    "I care about what brings me the greatest sense of achievement. And what's been wonderful about this job is that there are many avenues of having that. I hope that for the years following it, there'll be other ways for me to find satisfaction."

    Staff researcher Richard Drezen contributed to this report.

    © Copyright 1997 The Washington Post Company

    © Copyright 1998 The Washington Post Company

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