Had it not been for his hubris, he may have been able to the job he was hired to do.  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 commissioner’s 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 firm’s accountants was related to his knowledge of company’ 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.  His 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. 

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. I have mentioned in the space on previous occasions that the mutual fund industry, left to its own devices will pander more to the shareholders of record than the investors who place their cash in the fund itself.  I have also mentioned that the best solution for shareholders of mutual funds would be the privatization of the fund’s owners by eliminating public shareholders. 

Pitt continues to argue that management should have control over the actually running of the fund suggesting that they have the investor’s 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.

© 2006 Paul Petillo
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