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Levitt pushes reforms
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October 18, 1999: 8:58 p.m. ET
SEC chief tells analysts, companies to stop preferential treatment
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NEW YORK (CNNfn) - Arthur Levitt, chairman of the Securities and Exchange Commission, pushed Monday for the end of "preferential disclosure" of earnings information. Emphasizing uniform access to information, he also said the SEC will, if necessary, force options exchanges to link.
Apparently dissatisfied with options exchanges' progress, the SEC's top cop said it will issue an order "in the next few days" requiring them to implement "an effective linkage plan." He called for such links in a September speech. Levitt's remarks Monday came in the prepared text of a speech Monday night to the Economic Club of New York.
The main options markets -- the Chicago Board Options Exchange, the American Stock Exchange, the Pacific Exchange and the Philadelphia Stock Exchange -- now offer multiple listings of each others' most-popular options. But they don't link quotes or trades, so investors aren't guaranteed the best price.
Levitt, often praised for his hands-off approach to regulation, would prefer exchanges to come up with their own plan to link. Still, "if these markets do not take significant steps on their own initiative, we stand ready to act," he said.
More broadly, Levitt pushed for democratic access to information. He told investment banks to reform how their analysts operate, criticizing analysts for acting as stock boosters, not disinterested experts.
Levitt had harsh words for the "gamesmanship" in how companies interact with Wall Street. He criticized the disclosure of "material, nonpublic information" to analysts and important investors. The way Wall Street handles company performance is full of "dysfunctional relationships," he said.
The comments come after he castigated "selective disclosure" over the weekend in a speech to the financial community. Retailer Abercrombie & Fitch Co. came under attack last week for leaking sales figures to a Lazarde Freres analyst.
Falling off the tightrope
On Monday, Levitt said analysts rely too much on companies for help preparing estimates. Analysts also "walk a tightrope" with companies, he said, supposedly providing disinterested analysis but trying not to upset a company if their firm risks losing investment banking business.
"Analysts, all too often, are falling off that tightrope on the side of protecting business relationships at the cost of fair analysis," he said. He told Wall Street investment banks to "reexamine" the practice of tying analysts' pay to how much banking business they help generate.
Levitt referred to a damning memo from an unidentified "leading Wall Street firm's corporate finance department."
It states, "We do not make negative or controversial comments about our clients as a matter of sound business practice. … The philosophy and practical result needs to be 'no negative comments about our clients,' " he said.
No wonder a "sell" recommendation is about as common as a Barbra Streisand concert, he joked.
The SEC is working with the stock markets' regulatory arms to create disclosure policies forcing analysts to reveal if their firms have investment-banking or advisory relationships with companies they cover. Boilerplate or fuzzy disclosures aren't enough, he said.
And Levitt said the SEC may propose rules on how companies release information "within the next few months." The SEC will "act where it can," he said, "to close the gap between those in the so-called 'know' and the rest of us in the public."
But he encouraged companies to make their quarterly conference calls open to all, to post them on the Internet and to invite the media.
Levitt also raised concerns about accounting standards. Too many companies manipulate their earnings to beat analysts' estimates rather than to reflect "the reality of ups and downs of business," he said.
Levitt has asked Jeffrey Garten, dean of the Yale School of Management, to assemble a group of business, academic, accounting and regulatory leaders to review U.S. reporting procedures.
For instance, intangible assets such as software R&D or the value of an Internet customer base are tougher to price than assets like a factory or inventory. He questioned whether their true value "is being reflected in a timely manner in publicly available disclosure."
Levitt said there has been a "gradual erosion" in financial reporting. Accounting firms that have moved into professional services must not give tame audits in return for legal or consulting business, he said.
As the profession has expanded, Levitt said the multibody procedure for accounting standards needs review. Without getting more specific, he said an entirely new self-regulatory approach may be necessary.
Levitt returned to several themes he has raised before, most noticeably in his September speech. The SEC soon will vote on a plan to include the Nasdaq market in the Intermarket Trading System, which connects stock exchanges. He hopes to see ECNs included in the ITS, too, he said.
The SEC is looking at whether fees that ECNs charge to execute trades should be eliminated. Because Nasdaq market makers can't charge such fees, Levitt feels they should be abolished.
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