Peace in our time? – Insight: Where next for the SEC?

Peace in our time? - Insight: Where next for the SEC?

After a bruising 12 months the new SEC chairman will take up the post

Wanted: a regulator with an insatiable appetite for politics and tough policy decisions who can negotiate around the potential minefields set by Wall Street and Washington.

Any advertisement for Arthur Levitt’s replacement at the Securities & Exchange Commission could also point out that having a hide as thick as an African rhinoceros might help in the tough days ahead.

The new chairman will take up a post that is at the forefront of changes that could reshape the securities and accounting industry at a time when diplomatic skills will be needed to mend relations between the US corporate regulator and the Big Five accounting firms.

Even before George W Bush moved from Houston to Washington, a fellow Texan and Congressman, Phil Gramm, had begun work on wide-ranging changes to securities law.

Another Texan Republican, James Doty, is the hottest tip to take the nation’s top regulatory position as SEC chairman and the resulting coalition could become a powerful engine for reform of America’s New Deal-era Securities Acts of 1933 and 1934.

Other candidates being mentioned are William Heyman, a former SEC official; two Wall Streeters, Frank Zarb and Donald Marron and Californian Republican, Christopher Cox.

Gramm, the powerful head of the banking committee, has ordered the review as his powerful rival – and democrat appointee – Arthur Levitt announced his resignation.

Washington insiders say the transition power vacuum could leave Gramm with an opportunity to exert his authority before the new head of the SEC takes over.

Gramm, who favours deregulation, has targeted America’s securities acts for reforms that will bring them into line with best-business practice in overseas markets.

Previous failures to overhaul the laws indicate it will be no cakewalk beating powerful opposition in the Congress and entrenched supporters of the existing regime within regulators.

Gramm had some high-profile disputes with Levitt over plans to merge various self-regulatory organisations of US exchanges planning to go public.

But he has also had some noticeable successes as sponsor of the motion that repealed the Glass-Steagall Act of 1933, another Depression-era set of laws that had kept banks, insurance, companies and securities firms out of each other’s business.

Doty’s likely appointment as the new boss of the SEC is consistent with Bush’s apparent strategy of playing it safe with those tested during his father’s presidency.

The SEC’s constitution is constructed to limit the political influence that can be exerted by limiting the number of commissioners from the same political party to three out of the five.

Bush is unlikely to be an exception to the tradition of making partisan appointments to the bodies that set and implement policy.

Doty, a former Rhodes scholar, was the SEC’s chief legal officer during President Bush Snr’s term and has since worked as a partner in the Washington office of the Texas-based law firm Baker Botts. The law firm’s senior partner, James Baker, also served in Bush Snr’s presidency as secretary of the state department and recently returned to national prominence as legal front man for the Republicans during the bitter battle for Florida’s electoral college votes.

Doty would add additional political firepower to the reform process and might be more likely to use the regulator’s broad discretion for changing regulations.

Those powers, which were sparingly used by Levitt, could be a way around the trip-wires likely to be set by Congressional opponents.

The Lone Star mafia can also expect support from America’s biggest exchanges, the New York Stock Exchange and the technology-stock dominated NASDAQ, which have both previously endorsed changes that bring the US in line with best overseas practice.

Advocates for change are concerned that more than six decades of technological change and the internet era have left securities laws behind the times.

Primarily the reforms would streamline the offering procedures for new listings and bring it into line with best overseas practices.

They also want to see the current accounting standards reviewed to make it easier for top shelf foreign companies to seek listings on the leading US markets.

According to regulators, these measures have strong backing from business and the republican administration.

The difficulty will be convincing critics – many of them working for the SEC – that reforms can be introduced without diminishing protection for private investors.

Debra Sheldon, professor of accounting at George Washington University, believes a key test for the new SEC chief will be his handling of policies on what services accountancy firms should be allowed to offer.

Sheldon says: ‘Regulators want to make sure the auditing work is independent. There have been a number of attempts by Congress to make auditing a public rather than private sector job. If there is a big turndown in the economy and a lot of business failures then there could be a lot of public pressure for this issue to be raised again.’

Last year Levitt began a push for accounting firms to split their auditing and consulting businesses. He felt many auditors had become too cosy with their corporate consulting clients and were relaxing their auditing standards.

A heavy political donor, the accounting industry enlisted 46 members of Congress to fight the plan, questioned the SEC’s fairness and its authority to regulate accounting.

In November, the two sides finally settled with the industry accepting strict new ethics rules and limits on the audit business.

The new appointee will arrive at a time of growing tension between the regulator and the Big Five accounting firms following a decision to sanction KPMG for breaching auditor independence rules.

The commission sanctioned but did not fine the firm for compromising its independence in the 1996 audit of Port Systems, a telecoms-equipment maker which was then being run by KPMG BayMark, a firm affiliate specialising in turnaround management.

While the SEC sanction is mainly a formality, the infringement highlighted SEC concerns that accountants performing both audit and consultancy work for the same clients were compromising the integrity of financial information.

But the KPMG sanction may be the first of several enforcement actions the SEC has opened into independence violations by the Big Five firms.

The SEC investigations will continue despite the resignation of Levitt.

But how much of an appetite the Bush Administration will have for pursuing legal actions begun by its predecessors is an open question.

President Bush, who based his election campaign around pro-business and minimal regulation policies, is considered more sympathetic to the views of America’s giant corporations than his predecessor.

But whether the hands-off approach will extend to the accountancy industry remains a sensitive point. The American Institute of Accounting and several leading accountancy firms declined to comment.

– Duncan Hughes is US editor of Sunday Business

For more information on the SEC visit

See for more details on other financial regulators

More information on Arthur Levitt is at www.accountancyage/Practice/1116280 and www.accountancyage/Business/1115018


The problems highlighted by Levitt’s investigations have arisen because consulting in the US can be far more profitable than accounting, writes Duncan Hughes.

Consulting partners who bring in big revenue for a firm often feel they are subsidising the incomes of accounting partners, a recipe for resentment.

Debra Sheldon, professor of accountancy at George Washington University says: ‘The atmosphere between the regulators and the profession is generally positive but anxious. When Levitt was in charge there were clearly a number of concerns about the independence and oversight of the sector. I believe the industry has been responding relatively positively.’

She cites Andersen Consulting’s – recently renamed Accenture – split from Arthur Andersen after a six-year dispute as an example of the industry’s more conciliatory approach.

Another pressure point for the profession and regulators will be accountants’ legal liability for their work.

The issue is again gaining momentum among investors who believe accountants failed to flag problems at many of the dot-com companies that have gone out of business.

‘Going-concern’ clauses, in which auditors raise substantial doubt about a company’s ability to stay in business for at least 12 months, were rare among dotcom companies that shut down or filed for bankruptcy last year.

Levitt brought a personal style to the position that became popular with private investors but which often led to clashes with accountants, lawyers, Congress and financial exchanges.

But he has also shown his successor what can be achieved by compromise.

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