Pitt and fellow Commissioners Isaac Hunt and Cynthia Glassman got earfuls -- both from investors at large and from a group of six panelists. Some of the sharpest criticism of the SEC's performance in the current crisis of confidence in Wall Street came from panelist Damon Silvers. He's an associate general counsel with the AFL-CIO, which is the umbrella organization for some 13 million members of different unions, who are beneficiaries of an estimated $5 trillion in pension assets.
After Silvers spoke at the conference, I reached him by phone at his Washington (D.C.) office and asked him to elaborate on the remarks he made and the questions he asked. Edited excerpts of our discussion follow:
Q: At the Investor Summit, you said that the ball is being dropped on reforming "issue after issue." What are those issues?
A: Well, I'll just do a short list for you.
A: The first is the issues surrounding auditors, and in particular the issue of auditor independence and the creation of a public oversight board. The AFL-CIO put a rule-making petition into the [SEC] in December on auditor independence. As far as we can tell, the commission hasn't really done anything in that area. Everyone knows about the mess that auditor-oversight process turned into at the commission, and clearly it hasn't taken any steps to do the minimum in this area that was outlined by [former SEC Chairman] Arthur Levitt in his testimony in the Senate.
Q: Which was?
A: Creating a body that has a majority of nonaccounting industry people, with full enforcement powers and independent financing.
Q: What else?
A: The commission has missed an opportunity to deal with the problem of analysts' conflicts on Wall Street by failing to really do anything meaningful to regulate the power that investment bankers have developed over the analysts in the major Wall Street firms. The SEC also hasn't acted on the problems related to the independence of boards of directors at public companies.
Q: Such as?
A: Both in requiring meaningful independence of audit committee and compensation committee members and in disclosure. Those are the key issues where the commission has failed to act or has acted in a manner that is inadequate.
Q: Pitt wouldn't agree with that, and it's only fair to note that the reforms are a work in progress. In your view, why has the commission dropped the ball?
A: I wish I knew. The big [firms] in the audit world and the Wall Street firms have obviously been lobbying intensively for months to prevent effective action in these areas. We know that some of those people have met with Chairman Pitt. I believe that he has strongly held views about a number of these issues that predate his arrival as chairman at the SEC.
Q: How much of this is a result of there not being a full commission -- two of the five seats remain vacant.
A: I think that is underappreciated in the coverage of these issues. The Commission is, after all, designed to be a deliberative body. And there are currently only three commissioners, one of whom is clearly planning to depart.
Q: Commissioner Isaac Hunt?
A: Right.... There's a need for more diverse perspectives on the commission. I continue to believe that Chairman Pitt has the potential to do the right thing here. And the addition of commissioners with a more diverse set of views would help steer the SEC in that direction.
Q: So you're not in the group of people who think that Pitt no longer has the credibility to remain at the SEC?
A: There are people who have called for him to resign. Common Cause did so on the day of the Investor Summit.... We are critical of Chairman Pitt's performance here, on many levels, severely critical in fact. However, we're not ready to say that there's no hope here and that he's incapable of doing the right thing. If I believed that, I'm not sure that I would have participated in the summit.
Q: Some suspected the summit was 100% public relations -- nothing substantive. What's your view?
A: It might have been designed to be that way. I don't think that's what it was. I think we had substantial exchanges about a number of important issues -- ones in which, prior to the summit, no one really knew what Chairman Pitt's views were.
Q: Such as?
A: Mutual-fund disclosure and "aiding and abetting" liability. That being said, I think the question now is, "What's the follow-up?"
Q: You mentioned the "aiding and abetting" issue, which is a fairly technical set of legal precedents, but a very interesting one and one that's potentially important to investors. Also, I think that you got from Pitt a commitment to work with you on that.
A: Yes, that's right.
Q: Can you explain please what this "aiding and abetting" issue is?
A: This is really an outrageous situation in our securities law. The Supreme Court said in the early '90s, in a case called Central Bank of Denver, that despite the fact that everybody for decades had proceeded on the basis that the securities laws gave investors the right to sue and recover damages from people and institutions that aided and abetted securities fraud.... The Supreme Court found that there was actually no basis for that kind of claim in the statute.
Therefore, investors -- the people who were actually wronged by securities fraud -- could not sue those who aided and abetted.
A: This is important because the typical securities fraud is a product not just of a company that is the actual institution doing the disclosure but of the people who work with that company.
Q: Such as?
A: Investment banks, lawyers, and accountants. In most situations, the investment banks, the lawyers, and the accountants don't interact directly with the shareholder. They do so through the company. Making aiding and abetting no longer recognizable in the courts as something an investor can recover on, they basically made it impossible for investors to go after those folks.
Q: I see.
A: By the way, if you look at the defenses that have been raised by Arthur Andersen and others in the Enron cases, they all rest on this. They all say, basically, even if we did all of these things, even if we did everything you accuse us of doing, it's just aiding and abetting, and you have no right to sue for it.
Q: So what's the upshot for the individual wronged in the Enron case?
A: You're out of luck. If the aiding and abetting case defense holds in the context of Enron, where Enron is bankrupt, unsecured creditors like the investors who got defrauded are unlikely to get hardly anything.
Q: Given that, do the investors need to look to Congress for a fix?
A: Yes, you have to have a congressional fix here. The SEC can't fix it by itself. But what the SEC can do, which is what I was challenging Chairman Pitt to work with us on, the SEC can send a clear message to Congress that this needs to be fixed, and that would be very important. Barker covers personal finance in his Barker Portfolio column for BusinessWeek. His barker.online column appears every Friday, only on BusinessWeek Online