At his debut appearance before the National Press Club on Friday, Harvey Pitt proudly rattled off an impressive list of accomplishments in his first year as chairman of the US' Securities and Exchange Com-mission, from the record number of cases and temporary restraining orders to his increased efforts to throw unfit officers and directors out of corporate boardrooms.
But what he did not say -- instead it was something he mused to a friend about earlier this year after the collapse of Enron -- may be more revealing about the problems Pitt inherited at the SEC. Over breakfast, he expressed relief to his friend that the commission's failure to examine Enron's financial statements in the last few years was a blessing in disguise. His true nightmare, he said, would have been if the agency had actually reviewed the disclosures and never found anything wrong.
Once the star in the constellation of regulatory agencies, the SEC over the last decade has lost some of its luster. Although both Republican and Democratic chairmen forged a laudable series of policy initiatives on behalf of investors, the agency's vital infrastructure has been sorely neglected, starved by politicians of adequate money and manpower. That hobbled its ability to keep up with the markets at the worst possible moment -- just as ordinary Americans plowed huge amounts of their savings into the markets.
"There's a corny old saying that you should be fixing the roof when the sun is shining," said Mary Schapiro, president of the National Association of Securities Dealers Regulatory Policy and Oversight Division, and a former commissioner of the SEC and chairwoman of the Commodity Futures Trading Commission. "There simply were not sufficient resources to make that happen."
Low morale, high turnover, meager resources and relatively weak pay hit the agency hard. Reviews like those of Enron's filings were far less frequent. Investigators said the computer system, which was supposed to make it easier for investors, was virtually unusable by officials to perform even the most basic kinds of examinations.
A huge backlog grew of proposed rules for the exchange and other self-regulatory organizations. Significant delays also occurred with greater frequency for the advisory opinions and "no action" letters that were vital for companies and their lawyers seeking advice on ways to raise capital.
"The 1990s were very hard on the agency," said David Becker, who recently returned to private practice after serving as general counsel to Pitt and his predecessor, Arthur Levitt. "To some extent, the agency got hollowed out, losing lots of experienced people."
Now Congress, prompted by public outrage over heavy losses in their investment and retirement accounts, is preparing to substantially enlarge the agency's budget for the first time in decades. But it is not known how quickly that money will be able to turn the tide at the tradition-bound agency.
Red flags
While Enron's recent annual reports and other filings contained crucial clues for investigators -- vital passages on self-dealing transactions were indecipherable and should have raised red flags -- officials said the commission staff never looked at them because it had been forced to sharply scale back its reviews. In the 1980s, the agency had reviewed all of a single company's major filings once every three years. But by last year, the proliferation of filings during the roaring 1990s, combined with the lack of resources, cut that back to once every seven years.
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