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Former SEC Chief Harvey Pitt Urges Wall Street to Police Itself More Strictly

As a one-time top government regulator, former Securities & Exchange Commission Chairman Harvey Pitt is unimpressed by the government's ability to regulate ethical business behavior.

Pitt, now the CEO of global business consulting firm Kalorama Partners in Washington, D.C., led the SEC from 2001 to 2003 when it adopted dozens of new rules aimed at preventing future business scandals like those that brought down Enron, WorldCom and other high-profile companies at the turn of the decade. Many of those rules were prompted by Congress' passage of the Sarbanes-Oxley Act of 2001, which Pitt characterizes as "hastily and badly produced legislation." It led, he says, to an increasing reliance on rules to enforce standards of behavior as well as a "pernicious and destructive" competition between various prosecutors to punish wayward behavior. It hasn't stopped the parade of scandals, as evidenced by the kickbacks and other bad behavior of insurance brokers, trading abuses at mutual fund companies, and, most recently conflicts of interest in the pension consulting industry. "We also now have pension funds investing in hedge funds, which is a disaster waiting to happen," Pitt says.

The best solution to bad corporate behavior, Pitt told the SVIA Forum, is not government intervention, and that also applies to attempts to protect the interests of retirement plan investors. Rather, he says, the financial services industry should take proactive measures to clean up its own behavior. Accordingly, he offered several "rules of thumb for success" for corporations in the post-Sarbanes-Oxley world:

• Understand that when scandals tarnish one company, they tarnish everyone in the industry.
• Don't start caring more about your company's profits and your personal paycheck than you do about your customers' success.
• Make good ethics a top-down priority. "You can't set a tone just with procedures and policies," Pitt said. "You need to instill a culture of truth, transparency and fairness at every corporate level. When you learn of a problem, you must follow up and keep records. There's not such thing as a de minimus ethical break; there have to be consequences."
• "Hope for the best but plan for the worst. Bad things happen to good companies."

Asked whether he thought the SEC examination of pension consultants would lead to changes in that industry, Pitt said it would if the industry allows it. If pension consultants, their customers and business partners simply wait to see how the inquiry plays out, he said, the government will respond with legislation and/or regulation that addresses the worst fact patterns uncovered, rather than industry norms. "If you wait," he said, "the government will dictate to you what should be done by your industry." He encouraged the industry to come up with its own best practices, denounce past behavior that didn't measure up, and demonstrate that its best firms have implemented standards and practices that exceed what the government requires.

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