The Tully Commission, headed by Dan Tully, then Merrill's chief executive officer, detailed bad business practices. Levitt says the most important accomplishment of the commission "was getting industry leaders to acknowledge the existence of conflicts." However, Levitt seems to fail to understand that revolutionary reform wasn't going to happen because of one report by a well-meaning SEC chairman.
A few years after the commission's "best practices" recommendations were made, they were ignored by many of the biggest firms, Levitt acknowledges. The biggest securities firms, for example, continued to pay their reps more for selling proprietary products than outside ones, contrary to the Tully Commission's recommendations. They were not going to change their practices to please Levitt, especially Dean Witter, which, by the late 1990s, was recording 75% of its fund sales in proprietary products.
"Surprisingly," Levitt writes, "Merrill Lynch was also one of the resisters." Levitt complains of the quality of Dean Witter funds, which tended to turn in poor performances. But maybe, just maybe, all of Levitt's best practices weren't the best, after all.
Levitt doesn't mention that Merrill Lynch funds, in the 1990s, had a good reputation; supposedly the best of the wirehouse funds. No matter how expensive proprietary funds usually are, not all proprietary funds are the same. Indeed, some investors are willing to pay more for these funds, even though there are plenty of no-load funds available. That's because effective reps provide advice along with the sale.
Is this is a good deal for the investor? Maybe yes, maybe no. But it's up to her to decide with the aid of full disclosure.
But possibly the greatest example of regulatory problems came soon after Levitt took over at the SEC. There were rumors of a Nasdaq price-fixing scandal. Here Levitt and his minions must take some criticism, too. He concedes the SEC initially ignored the rumors of Nasdaq skullduggery. "At first," he writes, "some of the staff at the Division of Market Regulation, which is the part of the SEC that oversees exchanges, didn't want to believe the allegations."
Levitt here touches on the eternal problem of regulation: The regulators, who sometimes previously worked in the industry or will be involved in it after they leave the government, often are so close to the industry that they virtually become part of it. "We had let ourselves," Levitt continues, "as regulators, get too cozy with the stock market we were supposed to be watching over."
Agreed! And his successor, Harvey Pitt, would take the concept of coziness to even greater heights. When Levitt, summing up the situation, says new rules were later put in to ensure a bid-rigging scandal would never happen again, he means well, but it's an open question whether he, or any other regulator, should make these guarantees. After some of the scandals involving IPOs of high-flying Internet stocks, the problem of rigging the trading markets resurfaced with a vengeance while some of the Nasdaq traders were still on probation.
The reader at some point must wonder why the solution to these breakdowns of market regulation inevitably is, well, a call for more of the same. Let's have more regulators and regulations to correct the problem of prior regulators and regulations!
One even wonders if these "cozy" regulators even understand what is going on. The SEC, in cleaning up the bid-rigging scandal, acted on the study of two academics, not the findings of the SEC's staff.