PHOENIX — The broker-dealer exemption rule has been overturned, but investors still should be cautious, warned Arthur S. Levitt Jr., former chairman of the Securities and Exchange Commission.
“While brokers will say they are under NASD oversight, they are not regulated with the consumer in mind,” he told advisers at the Investment Management Consultants Association’s Spring Development Conference here late last month. IMCA is based in Greenwood Village, Colo.
The broker-dealer rule, which exempted brokerage firms that charge asset-based fees from investment advisory regulations under specified conditions, was known informally as the Merrill Lynch rule. It was overturned in March by the U.S. Court of Appeals for the District of Columbia Circuit.
“The Merrill Lynch rule only served to confuse investors,” Mr. Levitt said.
“We need to bind brokers and advisers by similar fiduciary standards; there should be no exceptions,” he said. “Just as you put your health in a doctor’s hands, investors need to do the same with brokers and advisers.”
Mr. Levitt, who served as head of the SEC between 1993 and 2001, is a senior adviser to The Carlyle Group in Washington.
Hedge funds
In addition to his comments on adviser regulation, he predicted that the roughly $6 billion loss recorded last year by the now-defunct Amaranth Advisors LLC, a Greenwich, Conn.-based hedge fund, will be surpassed in the not-too-distant future.
“An event will soon occur to bring about a day of reckoning, and the potential political response will be swift, severe and overstated,” Mr. Levitt said.
He observed that many hedge fund advisers realize that good governance and transparency are competitive advantages, and are registering with the SEC.
“You need to seek out funds that take that commitment seriously,” Mr. Levitt said.
He also advised that their clients, who are clamoring to include hedge funds in investment allocations, do so carefully and with caution, noting that hedge fund “democratization” can translate into investors’ entering areas they don’t understand.
Commit to SOX
Addressing other aspects of regulation, Mr. Levitt said that the benefits of the Sarbanes-Oxley Act of 2002 far outweigh its costs.
“If small companies cannot afford internal controls, then why should the rest of us invest in them?” he asked. “I don’t think that Western civilization will rise or fall if a listing moves from the New York Stock Exchange to Hong Kong or London.”
“Competition is great,” Mr. Levitt added. “If five companies drift from the U.S., so what?”
During the ensuing question-and-answer session, one attendee asked Mr. Levitt about his impressions of the Clinton administration, of which he was a part for eight years, and the current government.
“Bill Clinton was a great president, superb for investors and ran the most pro-investor administration,” he said. “And certainly, what has followed has not been up to the standards of those years.”
On another political note, Mr. Levitt predicted that New York Mayor Michael R. Bloomberg will jump into the presidential race as an independent and potentially shake up the election.
Mr. Levitt is a director of Bloomberg LP in New York, which was founded by Mr. Bloomberg in 1981.