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Today's Commentary: 07.28.06
The Hubris of Harvey Pitt

It used to be such great fun poking at the hapless Harvey Pitt, former SEC chairman whose tenure lasted from 2001 to 2003. Mr. Pitt as you may recall was a firm believer in not only in himself but also his abilities to bridge the gap between the job he was hired to do and the companies he was obligated to investigate.

Had it not been for his hubris, he may have been able to that job. His ties to the accounting industry may have given him the skills needed to dissect an industry that was at the center of numerous fraud accusations. 

The reasons for Mr. Pitt's tumultuously short stint as chairman included a request that his agency be elevated to Cabinet status and with that, a pay raise for the chairman, an ill-timed meeting with the chairman of Goldman Sachs, which was at the time under SEC investigation, his refusal to cut his ties to the big five accounting companies, and finally, his opposition to John H. Biggs as head of a new accounting oversight board (at the behest of the big five accounting firms) in favor of William Webster.

Pitt's failure to tell his fellow commissionerıs of Webster's involvement with a company facing fraud charges was considered by many to be the final straw. As you may recall, this lack of disclosure involving Webster, who was a former director of US Technologies where there was rampant speculation that his dismissal of the firmıs accountants was related to his knowledge of companyı accounting improprieties made Pitt look all the more appear detached from the S.E.C.'s mission to protect nvestors.

But that was then. Now, Mr. Pitt has taken his ample opinion of himself to task by criticizing the direction of the agency, more specifically, the tenure of his replacement, William Donaldson. Where Pitt failed in his execution of the newly passed Sarbanes-Oxley, Donaldson did not. Donaldson's successor, Christopher Cox, has taken the torch for the agency during a particularly tumultuous time as Wall Street pushes for less regulation and more free market. Investors would be served by longer memories but in its place, the S.E.C. will do quite well as a reminder of what too free a market can do.

Pitt's belief that mutual funds are products and not companies and their oversight boards should remain passively in the background could not lend more evidence to his detachment from the real world and the ultimate job of the S.E.C. Left to its own devices, the mutual fund industry will pander more to the shareholders of record rather than the investors who place their cash in the fund itself. While I believe that the privatization of the fundıs owners, eliminating the public shareholders and Wall Street accountability would best serve mutual fund investors, the fact remains that protection is still a vital part of investor confidence especially for the average investor.

Pitt continues to argue that management should have control over the actually running of the fund suggesting that they have the investorıs best interest at heart. While this may be true, independent boards have been increasingly vocal about fees. A recent independent board chairman at AIM has forced the fund family to relinquish over $20 million in fees. This is the step feared by management, Pitt and Wall Street but welcomed by investors

Pitt's support of lap dog boards further discredits his intuition into how investors should be saved from the claim that the industry can regulate itself. At the insistence of the two largest mutual fund families (Fidelity and Vanguard Group) with an additional challenge levied by the US Commerce Department, the 2004 ruling has been reopened for the public's comments until August 21st.

At the heart of that challenge is the belief that fund management has a much clearer notion of what is best for the shareholders. Unfortunately, the distinction between shareholders who invest in the funds offered and the shareholders who buy stock in the company running the funds is not always clear for managers who job performance relies on satisfying one group at the expense of the other.

Independent boards that act on behalf of the shareholders accomplish this quite nicely. The failure of the S.E.C. to provide empirical evidence that independent boards would perform in such a way and that the costs of such board shifts would be worth the regulatory solution is not reason enough to open what is a clearly effort to help the average investor. 

I do agree with Mr. Pitt over the agency's "over-lawyered" approach to many of the issues facing it these days. Unfortunately, the problem lies not with the rule of law but the insistence of the investment community to circumvent it. The S.E.C. could rely on more economic analysis of the securities industry if the assault to bend the rules was not so wide spread.

While many of the costs of these investor safeguards will come with a cost, the payoff will be in a more trustworthy marketplace where profits are generated because of savvy and skilled investments not the fees garnered from less diligent investors.

BlueMoney Report

The Blue Money Report
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