In a wide-ranging early morning address last February to investors at a conference sponsored by the Los Angeles Times, SEC Chairman Arthur Levitt encouraged the crowd to ask their brokers how the rep was paid, and if they'd be better off in a fee account.
Taking a hand-held microphone, Levitt strolled from behind the podium during his Feb. 8 address at the L.A. Convention Center and asked, "Have you ever asked your broker, 'How are you paid?'" A few hands in the crowd went up. "Ask if you have a choice. ... Does it make sense for me to pay by the transaction? Or should I be paying a flat fee regardless of the number of transactions?" Levitt suggested.
By contrast, a front-end load fund puts you at a disadvantage, he said. "It's like being in a 100-yard dash with your competitors having a head start." He also warned investors to look at fund fees, as well as performance, but cautioned against chasing performance.
The weekend show was attended by about 14,000 people over two days.
Levitt also warned the crowd about a "cult on Wall Street of contests--for everything. ... I have a problem with contests for specific products. Ask, 'Is there a contest with this investment that will send you [the broker] on a trip somewhere, but send me to who knows where?'"
Sticking with the compensation issue, Levitt also said investors should ask if their broker, after changing firms, is getting a higher percentage of commissions in the first few months.
Levitt suggested that investors compare the performance of their portfolio periodically to an appropriate index. "How many here know precisely how you've done in 1997?" Levitt asked. About a third of the audience raised their hands. "I'd like to see more of you be able to answer that question," he said.
Levitt encouraged the attendees to become knowledgeable investors and check out their brokers on the CRD system. "How many know what the CRD is?" he asked. Few in the crowd raised their hands. "That's not enough, not enough," Levitt said, adding that the CRD "will let you be the first line of defense" against bad brokers.
In the written text of his prepared speech given to reporters, Levitt promised that the first phase of the Internet-based CRD system would begin in a few months, and that he'd had a preview of it "last week." But he didn't deliver those particular comments to attendees.
At press time in early March, the NASDR had just announced that brokers' disciplinary histories would be available on the Internet beginning later that month.
In response to preselected questions, Levitt admitted the SEC was "not perfect" in responding to investor complaints, but that people should try all regulators if they have a problem and don't get a response. "Write me directly," he said. "Crazy as it sounds, I answer all my mail."
Was he satisfied with Nasdaq reforms? "I'm pleased to say the new Nasdaq has done a phenomenal job. I'm very pleased with the progress made by the NASD. ... The NASD board represents one of the finest boards in America. The obsession of that [NASD] board is investor interests, not industry interests."
What about the nearby Orange County bankruptcy? Levitt was asked.
"I'm not allowed to comment on specific cases, but I can say the Orange County matter is not yet behind us," the chairman said.
Levitt got applause from the crowd when he said he had "no intention of lowering our [accounting] standards" to appease business interests and allow foreign corporations to more easily raise capital in the United States. "This is one tough fight," he said in encouraging attendees to write their elected representatives and tell them "there can be no compromise" on the accounting-standards issue.
