“That’s like asking Microsoft to set the standards for computer operating systems,” says an SEC observer.
Policing the Exchanges
Not that Levitt hasn’t taken stands that served investors’ interests at the expense of the financial middlemen. Consider, for instance, his decision to overhaul the board of the National Association of Securities Dealers (NASD) in the wake of allegations of collusion among brokers on price spreads. In essence, Levitt decided that the board was not sufficiently independent of NASD members to take actions that serve investors’ interests, so he added new representatives from outside the industry. That served to more clearly separate the NASD’s two roles as market operator and regulator, effectively acknowledging that the conflict of interest facing the NASD had been an obstacle to fundamental change.
Still, proponents of financial market reform contend that Levitt did not go far enough to resolve the NASD’s conflict. And other U.S. markets share such a conflict to one degree or another, including the most powerful of all, the New York Stock Exchange (NYSE). As the battle over price collusion among NASD members showed, such a conflict invites regulatory policies designed to gain and retain business even when, in a deregulated environment, that business might be better off elsewhere. And despite assertions to the contrary by the NYSE’s supporters, the exchange may be little better at policing itself than the NASD was, if recent, unprecedented allegations of illegal trading by floor brokers are proved. Yet Levitt has shown little inclination to challenge the NYSE’s power.
Sure, Levitt has convinced the exchange to revise its much-maligned Rule 500, which makes it virtually impossible for a company to delist its shares from the exchange. To delist from the NYSE at present, two-thirds of a company’s outstanding shares must vote in favor and fewer than 10 percent against, which effectively locks in listed companies. Junius Peake, a finance professor at the University of Northern Colorado and former NASD vice chairman, cites the rule as an instance of “anticompetitive behavior” that threatens to make the exchange a “high-cost provider.”
After prodding from Levitt, the NYSE has proposed easing Rule 500. Under the proposal, a shareholder vote for delisting would require only a simple majority, approval from an audit committee made up of independent directors, and written notice to all shareholders between 45 and 60 days in advance. But congressional critics contend the change does not go far enough, and want Levitt to lean harder on the exchange.
An Underwriting Radical
On the other hand, critics’ arguments that Levitt’s efforts on behalf of investors have hurt issuers don’t square with his stance on changes in the securities underwriting process. During the past two years alone, the SEC chairman has overseen a series of steps that would drastically alter the underwriting process. These include:
- New rules that simplify the registration process and reduce the amount of information companies must disclose in prospectuses for secondary offerings.
- Proposed rules that would exempt large companies from any registration requirement at all for secondary offerings.
- Consideration of looser restrictions on information that companies can provide concerning pending mergers and acquisitions.
- Guidance for companies that want to use the Internet to provide prospectuses for public offerings or to solicit investors in private offerings.