Video - The SEC Is Re-Thinking Disclosure

Arthur Levitt, former chairman of the SEC, speaks about the challenges facing the organization. Levitt, a board member at Bloomberg LP, the parent company of Bloomberg News, speaks with Trish Regan on Bloomberg Television's "Street Smart." (Source: Bloomberg)


On this Study Out is raising some questions about the SEC, its focus, the studies, the way the SEC is distributing corporate filings and new study.  Found that some paying subscribers got a ten second advantage over uses of the SEC's EDGAR system.  Professors at the University of Chicago and the University of Colorado also found evidence that the information was being acted on.  So is the SEC dissemination process really a level playing field for all investors.  Joining me right now Arthur Levitt, the former chairman of the SEC and currently a board member at our parent company, Bloomberg L.P., Chairman Levitt, welcome to Street Smart, so good to have you here.

Okay, it's nice to be here.

Okay.  Is it possible, I mean, what does this study is alleging is that the SEC's information is basically going to paying customers ahead of it going to the public available on EDGAR.  You know, the SEC basically came forward and I can read that statement momentarily but said that you know look we're taking this under consideration, we're looking at this and they didn't really offer any explanation as to whether or not this might be happening.  I think that they're not entirely certain at this point whether it is themselves but in your view, could it happen?

Yes, it could.  We're now living in a world of milliseconds where the margin of error is virtually nil.  I think if the SEC has been so burdened with conforming to (Inaudible 00:01:27) rule making and all the other issues probably the EDGAR System was one of the last things on their mind and it's clear to me that they're rethinking how EDGAR gets out there and how it's distributed to certain people and if there is a disparity clearly in the interest of full disclosure they're going to change that.  I think their response suggests something about being surprised by this certainly not knowing about it and I think they'll take steps to correct it.

Having a ten second advantage what is that worth?

That's a significant advantage in this world.  It's not something that you can just pass by as an insignificant time-lapse, it's meaningful.  I can assure you the commission will do something to work around this.

Let me share with you the SEC's response.  The SEC did say in response to the study quote we have reviewed the working paper and we're taking the issues raised by it seriously.  So back to what you were saying earlier you know we're moving in such a fast world right now, technology is increasing at a rate that you know it is unheard of in some ways.  The SEC is an institution that's been around a long time.  It's not, you know, a technological engine of growth, it's a government entity.  How do they keep up with everybody who's trying to get an edge in this world via technology?  I mean, how do you stay ahead?

Well, I think you have to first assume that the wrongdoers or people who want an edge are always going to be just slightly ahead of the regulators.  When they're way ahead of the regulators in the system is out of kilter.  With things like this will happen and the SEC has a myriad of responsibilities and they have a Congress that has starved them dry.  So, I give them a pass in terms of missing things from time to time.  I don't know the full story behind this but it suggests to me that a timeworn system in terms of how to release EDGAR information.  Just got away from them in terms of where it went and how it went and what the technology was?  I don't know the answer but by their response it suggests to me they take it seriously they're going to correct it and I guess correct it fast, more to come.

I mean that the problem, of course, with all of this is the it contributes to the frustration so many individual investors have with these markets.

Absolutely, the individual will think the big guy, the big company, the institution has every advantage and we, the individual investor, have to take a backseat to everybody else, that's bad.  If we don't have markets that are trustworthy we don't have markets.

It was announced earlier this week that you're going to serve as an adviser to two Bitcoin companies, Chairman Levitt, BitPay and VAURUM.  What are you getting involved right now in a virtual currency?  What kind of potential do you see in this world?

You know, ever since I left the SEC I have become involved with a variety, a broad variety of high tech companies.  A week doesn't go by when I'm not approached by a company that either wants me to invest or advise them, business development so --

So that's good.

I've been approached by half a dozen Bitcoin companies and I didn't understand much about them and the more I learned about them the more fascinated I was.  With the concept and the entrepreneurs that stood behind them, they're totally irreverent they don't wear a tie which really relieves me when I come to Bloomberg I have to wear a tie when I go to Bitcoin I'm without a tie and thoroughly comfortable with my feet up on the desk.  But the technology is very interesting.  It's growing by leaps and bounds, that people are interesting, they are irreverent, they are smart.

Someone anarchist some of them.

Some of them could be, some of them --


-- are libertarian.  I think the reason they approached me was because I think number one.  I think having a former regulator probably looks good but I also believe that a company that has transparency and passes regulatory scrutiny is going to do much better than a company which is fighting regulators.  Absolutely convinced to that so I don't buy the libertarian argument that we don't need any regulation.

Now, I'm with you especially if you're going to look at Bitcoin as a currency, you want to know that there is some regulatory body around.  Chairman Levitt we're talking about Bitcoin earlier you are on the board of two Bitcoin companies --


-- advisor forgive me, two Bitcoin companies.  We're talking about the importance of getting a regulatory environment around this new technology that it's got a lot of potential but some people they don't trust it if they don't have some regulation in place.  How can former regulators like yourself and current regulators work with these companies to make them better?

Well, there are regulators and regulators and by that I mean a really good regulator is one who understands the balance between protecting the public and stifling, and exciting and different new technology.  I happen to think that Ben Lawsky, the New York state regulator has the balance right.  He's put the matter out for study and he has drawn a distinction between Bitcoin companies that deal with the public and the software developers or companies that deal with other commercial activities but not public investors in Bitcoin.  So, I think it's is a fine line, unlike any other new technology there are bad actors and there are good actors and that's the job of regulators to determine what's right and what's overkill.

The blockchain is really the technology that we're talking about.  It's somewhat confusing when you hear about it at first because Bitcoin is the currency but the blockchain is where all the transactions are effectively held, that's what seems to be most revolutionary.

Yes, truly what's fascinating is that blockchain displays every transaction wherever it has taken place and not only does it display a transaction but there are the miners that have to verify every transaction.  There are thousands of people all over the world who are mining Bitcoin in return if they a solve certain mathematical puzzles they get paid with Bitcoin but their job also is to verify transaction so you have two levels of verification and they get paid for that in Bitcoin.

What do you think the overall potential of that is?

What is --

What is the real potential of the blockchain, I mean could we have all kinds of transactions.  I sell you a car and I don't need to give you a title because it's potentially on the blockchain?

You can do it right now.  You can sell a house without a title search using Bitcoin, you can and if you're in Argentina today and your currency is being devalued by the second virtual and you can't send money out of Argentina you can use Bitcoin electronically to transmit it over the web from Argentina to New York or Berlin.  So, for third world countries or countries with uncertain currencies, it's a tremendous opportunity for them and with any new technology there are risks and there are rewards and the greatest problem that Bitcoin has today is its volatility.  Unless they address that volatility, it's going to be difficult getting people to have the trust in the monetary system that is essential to any good monetary system.

Understandably so, Chairman Arthur Levitt, thank you so much.  I hope to see you back here on Street Smart.

Thank you.

Written by Melvin Draupnir on October 30, 2014.