Banks do not engage in "earnings management" any more than other companies do, Securities and Exchange Commission Chairman Arthur Levitt said Friday.
But he suggested the practice could have serious ramifications in banking because it can affect how banks reserve for loan losses.
"Reserves are important to the banks in providing a kind of protection for bad loans," Mr. Levitt said. "We intend to work very closely with banking regulators in terms of providing guidance for banks in connection with the establishment of reserves."
Mr. Levitt's remarks, made to reporters at the Securities Industry Association's annual conference here, came amid an SEC inquiry of accounting practices at SunTrust Banks Inc., Atlanta. The SEC is concerned that the $60.7 billion-asset banking company has maintained excessively high loan-loss reserves to create the impression of smooth earnings.
News of the SunTrust investigation set off alarms in the banking industry, which felt the agency was treading on safety and soundness issues better left to banking regulators. On Friday, Mr. Levitt reassured bankers that the SEC was not singling out the industry as it moves to address earnings management techniques at public companies.
'I wouldn't cite banks any more than I would cite other elements of the economy," Mr. Levitt said.
Extending the olive branch, Mr. Levitt said the SEC would not set any policy on loan-loss reserves on its own: "We don't intend to come down unilaterally with a pronouncement without working very closely with banking regulators."
At the American Institute of Certified Public Accountants' conference in Washington on Friday, banking regulators confirmed that they have been in touch with the SEC over the issue.
Zane D. Blackburn, chief accountant for the Office of the Comptroller of the Currency, said his agency does not want to send bankers a message that conflicts with that of the SEC. But banks do need to be well reserved.
"Reserves are absolutely needed given what's in the portfolio today," he said. "We feel there is inherent loss in the (industry's) portfolio."
Gerald A. Edwards Jr., deputy associate director for regulatory reporting and accounting for the Federal Reserve, said the debate over reserves "can be resolved without sending the wrong message to the industry."
In addressing the SIA on Friday, Mr. Levitt talked about the SEC's relationship with banking and other regulators. He also reminded brokers of the need for integrity in dealing with retail investors and to gird themselves for an increased reliance on technology.
Mr. Levitt acknowledged that banking and securities regulators need to define a "structure to protect investors and maintain the integrity of our markets."
Still, he said his long tenure and relationship with banking regulators was paying off. "The staff meets continually," he said. "We've been able to get things done that any other relationship would not have provided."
Mr. Levitt took a tough stance on bad sales practices among broker- dealers. These include the aggressive bid by brokers to sell their firm's proprietary mutual funds and the payment of incentive compensation to tout a particular company's product.
"The difficulty in eliminating such conflicts can never be an excuse to turn away," he said.
Mr. Levitt also called on Wall Street to recognize the huge popularity of the Internet and its implications. "Technology is allowing the average investor to eliminate or at least minimize the middleman," he warned.
Broker-dealers will have to rely more on income from value-added services than from commissions, he said. Services such as advice or the ability to fine-tune the wealth of information on the Internet must be provided to savvy retail investors, said Mr. Levitt.
"He's right on the money," said James F. Higgins, president and chief operating officer Morgan Stanley Dean Witter.
Full-service firms such as Morgan Stanley can use technology to reach customers that need more hand-holding, Mr. Higgins said.
"We view technology as a value-added service that we use to better serve our clients," he said.