Newsmaker: Harvey Pitt
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JIM LEHRER: Now to the chairman of the Securities and Exchange Commission, Harvey Pitt. He took over the job last August, after more than 20 years as an attorney representing top accounting and Wall Street firms that he is now regulating.
In the last ten months, he has had to deal with some of the largest scandals ever to hit the business world: The collapses of Enron, Arthur Andersen, and Global Crossing; uproars over Wall Street analysts and accounting practices; and a resulting drop in investor confidence that has the stock markets hurting, among other things.
Today, he and his SEC colleagues formally offered some new rules aimed at tightening corporate responsibility and accountability. And Chairman Pitt is with us now for a newsmaker interview.
Mr. Chairman, welcome.
HARVEY PITT: Thank you, Jim.
JIM LEHRER: You want corporate executives to personally vouch for the accuracy of their financial statements. What problem is that designed to correct?
HARVEY PITT: We want to avoid CEO’s and other senior officers saying I was too busy. I was looking at something else. I didn’t really understand. They have to be personally accountable and responsible for the disclosures that they make to investors.
JIM LEHRER: Has this been a wide spread problem, Mr. Chairman?
HARVEY PITT: I don’t know how widespread it is but as you pointed out a second ago we are experiencing a diminution of investor confidence. And I believe that the first and critical way to get investor confidence back is to be able to believe what corporations tell them.
JIM LEHRER: What would you say to the average investor, lay investor who would say hey, way wait a minute have force corporate executives to tell the truth about their finances?
HARVEY PITT: I think most corporate executives do tell the truth. I think the problem is when we have even one incident like an Enron it’s one too many. We can’t afford to have investors and employees lose their life savings because of disclosures that needed to be made with withheld from them.
JIM LEHRER: You don’t know how widespread it was. You just know because of Enron some people were doing it?
HARVEY PITT: We know this has been a problem for the last five to ten years, and that the system needs repair. And we intend to repair it.
JIM LEHRER: If a corporate executive violate this rule, what penalty does he or she face?
HARVEY PITT: Well, first of all it would constitute fraud. That will be both punishable by criminal penalties if the Justice Department brings suit and it will also be punishable by action by the SEC. And one of the things that we’re doing in these actions is we’re where CEO’s don’t fulfill their obligations, we’re seeking to take away their salaries, their bonuses, their stock options and we’re seeking to have the courts say that once they do something that is fraudulent, they can’t be an officer, director of another public company.
JIM LEHRER: In other words, you would get rid of them, you would get them fired?
HARVEY PITT: One bite at the apple is probably too much. But two bites at the apple is not acceptable to us.
JIM LEHRER: And there is another new rule you want, which has to do with when information, changes in the company are made public, you want to make it within two business days and some rules now it can be five days or fifteen days. What practice are you trying to correct there?
HARVEY PITT: We’re trying to correct a practice where companies sit on information. Under the securities laws as they’ve been in effect, companies are required to make quarterly disclosure and annual disclosure. Only as to a limited number of things, current disclosure. The current disclosure isn’t all that current. We’ve revamping the entire system. We want companies to disclose important information when it happens so that investors are not kept in the dark. They know what it going on with their companies on a real time basis.
JIM LEHRER: Has there been here again a lot of withholding of vital information from investors?
HARVEY PITT: Well, again if you look at the situation that has been publicized in the Enron case with liabilities off the balance sheets, under the system that we’re proposing, that would be impossible. We want companies to disclose everything that the companies themselves think is significant, to investors and we want them to do it when it happens, not three or four months or a year later.
JIM LEHRER: Is this also designed to stop this practice in fact there was an indictment today that I reported in the news summary a moment ago, former CEO of a company is accused of telling somebody in advance of some information that he had about his company. Is this designed to stop that as well?
HARVEY PITT: This is designed to prevent that from being possible. Under the current system, there is no affirmative disclosure requirement under the federal securities laws. We’re changing that so that investors will know their companies have an affirmative obligation to tell them everything that is important. This type of behavior should be eliminated or certainly at least significantly reduced.
JIM LEHRER: Which that kind of behavior as an example of somebody I know something, I tell you, you sell your stock and then the stock goes down three days later. And you are clean. That is what you are trying to stop?
HARVEY PITT: That has always been a violation of insider trading laws. It’s hard to find but if companies learn information and are required to disclose it, there isn’t a market for this secret information. Everybody will know it and nobody can take advantage of the ordinary investor.
JIM LEHRER: Mr. Chairman, all the anecdotal information as well as the polls show what you confirm yourself a moment ago is that there is a very sinking lack of credibility on the part of the average investor in the corporate leadership in this country right now. Is it justified?
HARVEY PITT: To some extent unfortunately it is. We’ve seen examples of cheating, of chicanery of fraud, of personal enrichment and not enough concern about investors and employees. So we are now facing the fallout from that. And the only solution is to have an SEC that gets tough on violators, sets new standards of rules, and makes certain that investors are comfortable — that they know what they are supposed to know.
JIM LEHRER: So there is no question in your mind there is a connection between this drop in credibility and the drop of the stock market?
HARVEY PITT: I don’t know if you can show a direct correlation. But I think that there are many people who are now a bit afraid to be in the market. They don’t know if they can trust the CEO’s or CFO’s. They don’t know if they can trust their analysts or brokers. We intend to make certain that they believe they can trust those people. And anyone who breaches that trust is dealt with severely.
JIM LEHRER: Are you talking about a long-range fix or are you talking about — these rulings, for instance, you approved them tentatively today. That means they are out for public comment for 60 days. In 60 days these go into effect and things really are going to change or is it going to take a long time to clean this up?
HARVEY PITT: Well, I think it’s both. These are going to go in effect immediately. We’ve already put out an enormous number of rules. I would say in the first nine months that I’ve been here the agency has had an activity level that is unprecedented as we try to deal with just these crises. So we will put these rules into effect and promptly once the comment period is expired. We want to make sure we’re not doing any harm, and we’re not making anything worse, but I think we’ve thought these rules through pretty carefully and we have a lot of confidence that we’re on the right track. In addition, we have longer-term solutions: This affirmative disclosure regime – a regime in which investors are told about trend information. The kind of information —
JIM LEHRER: Like what? What is that?
HARVEY PITT: Well, what you have now and what we’ve found is sophisticated investors are able to find out information because of their better bargaining position. They get projections; they learn whether the company’s sales are up, whether their inventories are backlogged or what have you. The regular investor doesn’t get that information – never has access to the most important information at all. We are going to change the system so that all of that information is available, not just to the wealthy and the sophisticated, but to the average investor and the employees who invest their funds in retirement accounts.
JIM LEHRER: Now, in reading up in preparation for talking to you tonight – I — everything I read said no matter what the rules are, no matter what you decide to do, the SEC is not equipped in terms of personnel or anything else to enforce these rules. You don’t have enough people. You don’t have them in the right places. I mean, you have a lot of people in Washington; but you don’t have enough in New York. You don’t have enough around the country, et cetera. How do you feel about your resources, your ability to enforce these rules?
HARVEY PITT: Well, I think that we need more resources. And I have been up front both with Congress and the Administration. We’ve gotten very good support for the need, for additional enforcement lawyers, for accountants, for economists and the like to turn this agency into a better functioning entity than it has been in recent time. So we are going after more people. We’ve seen receptivity and I’m hopeful that we’ll have all of the resources we need.
JIM LEHRER: But just as an example, let’s say your rules go into effect. There are thousands of corporations with Chief Financial Officers and Chief Executive Officers. Now they have to swear their financial statements are correct. Do you have enough people to monitor each and every corporation in America to make sure those statements are right?
HARVEY PITT: No, we don’t and I think that we’ll never have enough people to monitor each and every single corporation. But what we do have is a system that is designed to ferret out these who obey the rules and those who violate them. We are going to establish a risk management group that will be looking for profiles of the types of companies that present the greatest risk to investors. This year alone, we started a review of all of the Fortune 500 — something that has been unprecedented at the SEC — to give investors a sense of confidence that we know what is going on with even the largest companies. So we will do the job and we will need help. But we also need to conscript, if you will, corporate executives, their lawyers, their accountants. And that’s why we’re taking such strong action against accountant and lawyers. If they don’t do their job, then it makes our job that much more difficult.
JIM LEHRER: Now, speaking of confidence, as you know, you’ve caught some heat about the fact as I reported in the introduction that you represented a lot of these big companies even before the SEC; now you are the regulator. Are you comfortable with that? Are you, you’ve been criticized for it, that you’ve come — you know — well, how are you doing with that problem?
HARVEY PITT: Well, I’m very comfortable being at the SEC. If you are asking me do I like criticism, of course not but the thing here, Jim, I think is to keep in mind that we are embarked on the most ambitious reform program the SEC has ever undertaken. That means we’re going to take heat from people who don’t want us to do as much as we’re doing and from other people who have other agendas. We’re willing to take the criticism as long as we get the job done. And we are determined to get it done.
JIM LEHRER: One of the specific criticisms was your meeting with the head of KPMG, a company that used to be a client of yours. You met with him in April. Did you find — and you said that was, there was no problem with that. Do you still think there was no problem with having done that?
HARVEY PITT: Well, I said at the time and I would repeat now the meeting was entirely appropriate. The difficulty is that it’s a diversion if people are concerned about what it means. And so I’ve also said it’s very easy to cure that problem. I just won’t have those meetings in the future, because what we are doing is too important to risk having people focus on irrelevant issues.
JIM LEHRER: You have decided not to do that, have those kind of meetings again?
HARVEY PITT: Absolutely.
JIM LEHRER: And is that going to be a downside for you? I mean, do you feel you are being treated unfairly because of this, that you should be able to have these meetings? They were good to have? I’m just trying to get a feel for how you feel about it.
HARVEY PITT: The meetings — every meeting that I have had has been designed for only one purpose — to help me serve public investors. If I don’t know what is going on — if I don’t have any idea about what the latest issues and the problems are, then I’m going to be behind the curve, and I’m not going to be as effective for public investors. By the tame token, if people are in the mood to criticize and they want to suggest that meetings may have ulterior motives, it’s very easy to control that. And that’s exactly what I’m going to do. I want the public to know I have only one client; that’s them.
JIM LEHRER: And those clients should feel, how should they feel about the stock market right now, the financial system, the corporate system? You came from the inside. You are now on the outside. You are in charge of looking back into it. What do you see? What can you tell them?
HARVEY PITT: Well, first of all, I started at the SEC, where I developed a reputation as a fairly aggressive regulator. But I have been in the private sector and I know where the bodies are buried. I think we have the knowledge, we have the experience and the expertise to do the job for public investors and they should have no doubt that we are going to get that job done.
JIM LEHRER: Mr. Chairman, thank you.
HARVEY PITT: Thank you