February 2001

Levitt to Investors: Be Assertive

Former Securities and Exchange Commission Chairman Arthur Levitt held his last town meeting last month to warn investors to remain vigilant while investing.

Using an “us-against-them” theme in the speech, held at the Arch Street Meeting House, Levitt told his audience to look before leaping into any investment.

“In a democracy that prizes the initiative and promise of the individual, it’s not enough to talk about your rights, but also your obligations,” said Levitt. “As an investor, you certainly have the right to be treated fairly, to get straight answers to straight questions, to know what you are buying and what you are paying for it. But, as an investor, you also have an obligation to ask questions—many questions—to seek out information and contemplate your own tolerance for risk.”

In one of his last public appearances as chair of the group that monitors publicly traded companies, some expected Levitt to reminisce more about his tenure rather than give a basic lesson in investing. Yet, Levitt’s speech was more low key than prior speeches, refraining from lashing out at brokers, public companies, or accountants as he has done in the past.

Levitt did, however, make sure to impress on the audience that these groups had differing goals than did the average individual investor.

“Today, in Washington, D.C., you’ll hear a lot of talk about the needs of the big brokerage firms, accounting firms, mutual fund complexes, and exchanges,” Levitt said. “Now, many of these issues are indeed important to our markets, but you’ll less often hear about the specific needs and rights of America’s individual investors.”

Levitt also cautioned individual investors to be careful when dealing with investment brokers.

“Your broker could be on his or her way to Hawaii right now because you bought the (securities) product of the month,” Levitt said.

That’s because some brokers get paid more for selling one product over another, such as mutual funds over stocks, or the brokerage firm’s own brand of mutual funds over other funds, Levitt explained. He insisted that investors have the right to consult a broker who works in their best interest and to receive financial advice untainted by salesmanship, as well as an obligation to find out how a broker gets paid.

Investors should also find out how their trading orders are handled, Levitt said. When an individual investor places a buy or sell order, the broker can decide whether to send it to an exchange (such as the New York Stock Exchange or the Nasdaq Stock Market) or to an electronic communications network, or whether to execute the trade with the brokerage firm’s own supply of stocks.

He reminded investors to be wary of mutual-fund performance hype: Some funds that scored huge returns early on by investing in companies that successfully went public have not fared so well over time.

“Research and know what you are investing in,’’ he said.

Levitt noted that the SEC recently adopted new rules aimed at preventing investors from being misled by deceptive names of mutual funds. Now, for instance, funds with “health care’’ in their name are required to invest at least 80 percent of their assets in health-care company stocks.

During his long term as chair, Levitt has earned a reputation for trying to protect and educate millions of investors. He pushed for new regulations last year requiring companies to disclose information to the public at the same time it is given to Wall Street analysts and big investors.