[Senate Hearing 107-]
[From the U.S. Government Printing Office]
S. Hrg. 107- 398
NOMINATION OF HARVEY L. PITT
BANKING,HOUSING,AND URBAN AFFAIRS
UNITED STATES SENATE
ONE HUNDRED SEVENTH CONGRESS
THE NOMINATION OF HARVEY L. PITT, OF WASHINGTON, DC, TO BE A MEMBER OF
THE U.S. SECURITIES AND EXCHANGE COMMISSION
JULY 19, 2001
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COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS
PAUL S. SARBANES, Maryland, Chairman
CHRISTOPHER J. DODD, Connecticut PHIL GRAMM, Texas
TIM JOHNSON, South Dakota RICHARD C. SHELBY, Alabama
JACK REED, Rhode Island ROBERT F. BENNETT, Utah
CHARLES E. SCHUMER, New York WAYNE ALLARD, Colorado
EVAN BAYH, Indiana MICHAEL B. ENZI, Wyoming
ZELL MILLER, Georgia CHUCK HAGEL, Nebraska
THOMAS R. CARPER, Delaware RICK SANTORUM, Pennsylvania
DEBBIE STABENOW, Michigan JIM BUNNING, Kentucky
JON S. CORZINE, New Jersey MIKE CRAPO, Idaho
DANIEL K. AKAKA, Hawaii JOHN ENSIGN, Nevada
Steven B. Harris, Staff Director and Chief Counsel
Wayne A. Abernathy, Republican Staff Director
Dean V. Shahinian, Counsel
Brian J. Gross, Republican Deputy Staff Director and Counsel
Rohit Kumar, Republican Deputy Chief Counsel
George E. Whittle, Editor
C O N T E N T S
THURSDAY, JULY 19, 2001
Opening statement of Chairman Sarbanes........................... 1
Prepared statement........................................... 37
Opening statements, comments, or prepared statements of:
Senator Gramm................................................ 3
Senator Shelby............................................... 4
Senator Corzine.............................................. 4
Prepared statement....................................... 37
Senator Schumer.............................................. 4
Senator Dodd................................................. 6
Senator Enzi................................................. 8
Prepared statement....................................... 38
Senator Miller............................................... 14
Senator Bennett.............................................. 19
Harvey L. Pitt, of Washington, DC, to be a Member of the U.S.
Securities and Exchange Commission............................. 8
Prepared statement........................................... 39
Biographical sketch of nominee............................... 41
Response to written questions of:
Senator Sarbanes......................................... 95
Senator Schumer.......................................... 97
Senator Miller........................................... 98
Senator Crapo............................................ 99
Senator Susan M. Collins................................. 100
Additional Material Supplied for the Record
S. 1189.......................................................... 103
HARVEY L. PITT, OF WASHINGTON, DC
TO BE A MEMBER OF THE
U.S. SECURITIES AND EXCHANGE COMMISSION
THURSDAY, JULY 19, 2001
Committee on Banking, Housing, and Urban Affairs,
The Committee met at 10:10 a.m., in room SD-538 of the
Dirksen Senate Office Building, Senator Paul S. Sarbanes
(Chairman of the Committee) presiding.
OPENING STATEMENT OF CHAIRMAN PAUL S. SARBANES
Chairman Sarbanes. The Committee will come to order.
I am very pleased to welcome Harvey Pitt this morning
before the Committee on Banking, Housing, and Urban Affairs.
The President has nominated Mr. Pitt to be a Member of the
Securities and Exchange Commission to complete, first, the
unexpired term of Paul Carey and then he has also been
nominated for a full term upon the expiration of that term.
The Committee has engaged in that procedure in the past and
it will ensure in this instance that there is a quorum down at
We have talked with the White House and we are anxious to
work with them to try and get a full complement at the SEC. We
are in the situation now where the two Commissioners who are
down there, their terms have actually expired, but they are
serving under a hold-over provision that is in the statute.
We have three vacancies. And of course, now Mr. Pitt will
be filling one of those.
We are anxious, and we have indicated as much to the
Administration, to work with them in trying to bring the SEC up
to full strength. I don't think I have to go into any
explanation why that should be considered an important
objective. I know it is one that Senator Gramm and other
Members of the Committee all share.
The President has also indicated his intention to name Mr.
Pitt as the Chairman of the Commission upon his confirmation as
a Member of the Commission. Under the statute, the President
has that authority. We do not confirm for Chairman. We confirm
The way the Commission is structured, one term expires in
June of each year. If the Member does not serve out the term,
someone appointed to that position fills the unexpired term. So
in June of every year, there is always a vacancy on the SEC,
and at the moment, we have a number of vacancies we are anxious
Mr. Pitt's papers were completed on July 10, so we are
holding this hearing, and I think everyone would agree, very
promptly. Our colleague, Senator Schumer, will be introducing
I just noticed that Mr. Pitt earned his bachelor's degree
from Brooklyn College and his law degree from St. John's
University. We have two Brooklyn boys at the table here this
Mr. Pitt has worked with the securities laws for his entire
professional career. After graduating from law school in 1968,
he went to work at the SEC, rose from Staff Attorney in the
Office of the General Counsel, through a succession of
important positions at the SEC, and eventually was named the
General Counsel of the SEC, the youngest General Counsel in the
In 1978, after a decade at the SEC, he went into private
practice with the law firm of Fried, Frank, Harris, Shriver &
Jacobson, and he has been there ever since. In private
practice, he has represented virtually every segment of the
He has actively published on securities issues, coauthored
two legal treatises on financial services, and coauthored over
300 published articles--it is a very extensive contribution to
Mr. Pitt belongs to several legal, social, and educational
organizations. He has served on the Board of Trustees at
Cardozo Law School, as Chairman of the Practicing Law Institute
Annual Securities Law Institute, as Chairman of the Securities
Regulation Institute of Northwestern University School of Law,
and he has been the President of the SEC Historical Society.
This nomination obviously gives him the opportunity to
write some of that SEC history himself.
The United States securities markets are the envy of the
world. The Chairman of the Commission and his colleagues play a
critical role in promoting the strength and efficiency of these
markets and inspiring trust and confidence among investors. I
believe strongly that protecting investors, ensuring the
fairness and integrity of our securities markets, and
vigorously enforcing the securities laws are primary functions
of the Commission.
Citizens and institutions invest their money in stocks
traded on these markets for a number of reasons. They trust the
accuracy of the income statements and balance sheets that
public companies file. They rely on the certification of
financial statements by accountants. They operate on the
premise that public companies give them fair disclosure, that
they do not make material information available to some
investors before others. They trust market and exchange
professionals to execute their orders fairly, without stepping
ahead or manipulating the market. And they assume that the SEC
and the self-regulatory organizations under its authority are
vigorously enforcing the laws, developing methods to detect and
prosecute violators, and imposing punishment in those cases
where it is warranted.
I think it is fair to say that Mr. Pitt's work, first at
the SEC and subsequently representing clients, in many
instances before the SEC, give him an extraordinary knowledge
of both the Federal securities laws, as well as the various
conducts which could potentially harm investors and markets. We
trust that if confirmed, he will use this knowledge and
experience to better protect investors and to enhance the
quality of the securities markets. I am very pleased to welcome
him to the Committee this morning.
I yield to Senator Gramm.
STATEMENT OF SENATOR PHIL GRAMM
Senator Gramm. Mr. Chairman, let me thank you for holding
this timely hearing. In fact, I think of all the committees of
the Senate, this Committee has one of the best records of
holding timely hearings on the President's nominees, and I want
to personally thank you for your willingness and eagerness to
get people on the job to do the work of the American
We have some 155 nominees now pending in the Senate, and we
have a problem in terms of getting people on the job to do the
work of our Government. But this Committee has not been a
contributor to that problem, and I want to personally thank
It seems to me that we have never had a nominee for
Chairman of the Securities and Exchange Commission better
qualified than Harvey Pitt. He is demonstrably perhaps the
Nation's premier security lawyer.
Furthermore, I don't know a better background to now head
the SEC than having been the General Counsel of the SEC and,
later, General Counsel of the Division of Market Regulation,
and then, having carried out the active prosecution of people
who violated the securities laws, and later in your career
having represented principal interests in cases before the SEC.
I forget what the old song of the 1960's was, but Harvey
Pitt has seen it from both sides.
One of the things that always worries me about nominees is
that they end up being captured by the staff. Now there is
nothing wrong with staff. The SEC has many dedicated, able
Chairman Sarbanes. As do Senators.
Senator Gramm. As do Senators. That is exactly right.
I think I can say this without question about Harvey Pitt,
that there will be no person at the SEC who knows more about
the job of being Chairman than he does.
Many people in the media have tried to speculate, based on
Harvey Pitt's background, about whose guy he is. But I think
that the plain answer is, Harvey Pitt is his own guy. And that
is who we want as Chairman.
Finally, let me say, I notice that people come before our
Committee who are making tremendous financial sacrifices to
serve the country. It is a great testament to the love that
Americans have for their country, that they are willing to give
up successful careers and happy private lives to serve and give
back to the system that has meant so much to them.
Mr. Pitt, I want to thank you for being willing to make
that sacrifice, for being willing to serve the greatest country
in the history of the world. And no part of this country is
more important to working people, blue-collar workers, than
having the most successful securities markets in history.
Your charge is a very important one. I look forward to
working with you in carrying out that charge, and I want to
thank you for your willingness to serve.
Mr. Pitt. Thank you, Senator.
Chairman Sarbanes. Are there any other Members who wish to
make a statement?
COMMENTS OF SENATOR RICHARD C. SHELBY
Senator Shelby. Mr. Chairman, I will be brief. I just want
to say, Mr. Pitt, that I look forward to supporting your
nomination. You are eminently qualified, as Senator Gramm and
others have said. Not only have you been a practicing attorney
at the bar, with numerous publications to your credit, but also
you have been before this Committee many, many times, and you
are an eminent scholar in this area. I look forward to
supporting you here and also on the floor. I believe you will
bring unique qualifications--background and experience--that I
have never seen before the SEC.
Chairman Sarbanes. Senator Corzine.
COMMENTS OF SENATOR JON S. CORZINE
Senator Corzine. Yes, I will be brief. Thank you, Mr.
Chairman, for holding this timely hearing. I think it is
important to have a fully staffed and focused SEC. It is a
pleasure to welcome Mr. Pitt.
I want to underscore and second what Senator Gramm talked
about. It is terrific that you have the willingness to serve
our country in this position.
As our conversation indicated last week, the fair-
mindedness and balance with which you approach this I think is
terrific. The integrity of these markets, the fairness with
which they have to operate, I think is absolutely essential for
the allocation of capital in our capital markets. And I look
forward to your service there.
I would just point out, though, as I think we talked about,
maybe the ultimate test will come when and if, and hopefully,
we won't have to face this, the crisis that often and has
repeatedly occurred in our markets come to pass. And I hope
that we can do everything here to help you make that an easier
process to occur.
Chairman Sarbanes. Thank you very much.
Senator Schumer, we would be happy to have you present Mr.
Pitt to the Committee.
STATEMENT OF SENATOR CHARLES E. SCHUMER
Senator Schumer. Thank you, Mr. Chairman. And I also want
to thank you for giving me the opportunity to introduce a
fellow New Yorker--fellow Brooklynite, as you mentioned.
Chairman Sarbanes. Yes, we noticed that.
Senator Schumer. Whose willingness to accept the nomination
to become the new Chairman of the SEC has produced an outcry of
unanimous support and excitement, even--it is rare that you
would nominate someone to the SEC and the word that would
follow would be excitement, but because of Mr. Pitt's superior
qualifications, it is.
And so, I am pleased to introduce Mr. Harvey Pitt in his
first of many appearances as a potential Member of the SEC,
before the Senate Banking Committee.
I also want to thank you for holding this hearing with such
speed because his confirmation cannot happen soon enough.
It is difficult to decide, my colleagues, which of his
qualifications should be considered most heavily in confirming
his nomination--his experience as the premier securities lawyer
in the United States, his reputation as a fair and honorable
man, his respect for the mission of the SEC, or his innate
intelligence. I would like to think it is his childhood in
Brooklyn at the top of the list.
I think that our paths crossed there in the summer of 1996
when Harvey was selling cookies. That is how he started, and I
was eating them. But, anyway, from cookies to credit
derivatives, his career is an impressive one. The list of his
accomplishments has been well summarized by the Chairman.
I would note that a measure of his success in law is how
prolific he is. The list alone of Mr. Harvey Pitt's publication
weighs about 3.5 pounds.
He has considered and reconsidered, researched and opined
on every facet of the United States securities law. He is
without question the most talented and respected securities
lawyer in the United States today. And I want you to know,
Harvey, that we are honored that you are willing to serve the
U.S. Government and the U.S. investors.
When I came up here with the honor of introducing him, he
said to me, thanks for doing this. And I said, no, no. Thank
you for doing this. Because as Senator Gramm said, to so many
of us, the willingness of talented citizens like Mr. Pitt, to
make sacrifices to work in the public sector is one of the most
amazing things about American democracy.
And Mr. Chairman, at a time when we need excellence in
Government, Mr. Pitt personifies that excellence. His
reputation, deservedly so, has achieved, at least in securities
law, almost god-like proportions. He could well be described as
the Zeus of his field.
The timing could not be better. In recent years, we have
witnessed dramatic changes to the securities markets, as you
have mentioned, Mr. Chairman. Globalization and new technology
are markedly refashioning entire industries and in the process,
creating highly profitable new business models, while entirely
The securities markets are changing before our very eyes.
And the changes are swift and the competition, which is
increasingly international, a real challenge for the SEC, is
I know that Mr. Pitt shares my concern that the United
States retain the preeminent securities markets of the world.
And I join my colleagues in looking forward to his stewardship
of the SEC in the dawning years of the 21st Century.
In short, Mr. Chairman, somewhat like Churchill, he is a
man for his times.
I look forward to his courageous leadership in the years
ahead. I thank you for the honor of introducing him, and I will
now resume my seat as a Member of the Banking Committee to
continue with the rest of the proceedings.
Chairman Sarbanes. Thank you very much, Senator Schumer.
We have been joined by Senator Dodd, who is the Chairman of
the Securities Subcommittee of the Committee. And so, Mr. Pitt,
before I turn to you, I am going to yield to Senator Dodd, who
has a statement.
STATEMENT OF SENATOR CHRISTOPHER J. DODD
Senator Dodd. Thank you very much, Mr. Chairman.
We have another hearing going on this morning and I
apologize for arriving a bit late.
Mr. Pitt, let me welcome you to the Committee and thank you
for your willingness to accept the nomination of the President.
And I congratulate him for submitting your name.
Mr. Chairman, once again, let me commend you for the rapid
fashion in which you have placed this nomination on the agenda
so that we can consider very promptly Harvey Pitt's nomination.
He obviously has a wonderful reputation, as we just heard from
our colleague from New York talk about his credentials. Mr.
Pitt, we are pleased that you are before us.
Mr. Chairman, before I make some brief comments about Mr.
Harvey Pitt, I want to thank Laura Unger. She has been the
Acting Chair of the SEC and a former staff member of our
Committee here for a number of years and has done a very, very
fine job during her tenure. I would just like the record to
reflect that. I know that all of us feel that way about Laura.
She has done a very good job. So, I wanted to mention her, too,
Also a couple of comments, if I could, about your
predecessor, Mr. Arthur Levitt, who I know you know very well.
Arthur Levitt did a remarkably fine job as the Chairman of the
SEC. And all of us up here in the 8 years of his tenure enjoyed
working with him. I know my good friend, Phil Gramm, with whom
I shared either the Chair or Co-Chair, Ranking Member position
on the Securities Subcommittee for more than a decade, I think,
at one time or another, specifically enjoyed his work, as I
know the Chairman did, Dick Shelby, and others.
We all had at various times a lot of contact and
involvement with Arthur Levitt. He did a very, very fine job.
We had very few chairmen, Harvey, over the years, and I
know I am preaching to the choir when I say this because I know
you know him well and have a high regard for him as well. But
he was such an aggressive advocate in creating the best
possible capital markets for the small, individual investors.
Under his tenure, the Commission refocused its efforts on
investor protection. That means both the large institutional
investors, as well as the small retail investors.
One of the things that he did that you and I talked about
the other day when you graciously came by the office was
getting out and communicating with the public at large.
The great news of recent years, of course, has been the
explosion of average citizens becoming involved in the markets.
This is no longer the exclusive domain of just the super-rich.
It has been a terrific revolution that has occurred.
One of the things that Arthur Levitt did was to get out and
talk about this issue with average people, held town meetings.
I know he held them around the country. He held one in my State
that I attended. I think we had several thousand average people
show up to listen and discuss matters before the Securities and
Now, you cannot do this all the time, but the idea that you
would reach out to people and use language beyond the discourse
of an academic or someone who would know the intricacies of
regulation, FD, and so forth.
I was going to use some of the lingo of a securities
lawyer, but I don't want to offend you in any way, Mr. Pitt.
But you know what I am talking about here, talking about in
language that average people can understand.
So, at any rate, I hope that you will continue doing that.
I hope other Members of the Commission will. It has been a very
Let me just add to the kudos that I know have been
expressed about your nomination, obviously, you are
tremendously talented. You have dedicated a professional life
to this industry and to the people who are involved in it.
We tried to read the voluminous amount of material since
the announcement of your nomination, even all of our well-
intended staff could not get through all of the information.
You have really been rather prolific in your discussions and
discourses on the subject matter.
I am very excited about your nomination. I look forward to
working with you as the Chairman of the Subcommittee dealing
with the securities industry.
Last, just again, the point that has been made over and
over again. The reason the world comes to the United States,
the reason that our markets are as popular as they are, is not
always because it is the best rate of return. It has been
because people have such a high degree of confidence in our
markets. People come to this country because they have a great
deal of faith that while they do not have a right to
necessarily win on every investment they make, they know they
are going to be treated fairly.
The transparency of our markets, the soundness of them are
so tremendously valuable. And each steward who assumes the
Chairmanship of the Securities and Exchange Commission bears
the lion's share of burden of sustaining that impression that
has been a continuum over the years. It is a very heavy burden.
And all of us up here can participate with you and try to
continue that image, that reputation we have as a country.
But particularly, it is important for the Chairman.
I know based on your experience and background, that you
care about that and all of us up on this side of the dais want
to help you succeed. And so, I look forward very much to
working with you.
Thank you, Mr. Chairman.
Chairman Sarbanes. Senator Enzi.
COMMENTS OF SENATOR MICHAEL B. ENZI
Senator Enzi. Mr. Chairman, I just want to thank you for
expeditiously holding this hearing, and I would submit a
statement for the record.
Chairman Sarbanes. Very good. Thank you very much. All the
statements will be included in the record.
Mr. Pitt, it is the practice of this Committee to swear in
the nominees. I would ask you to stand.
Do you swear or affirm that the testimony that you are
about to give is the truth, the whole truth, and nothing but
the truth, so help you God?
Mr. Pitt. I do.
Chairman Sarbanes. Do you agree to appear and testify
before any duly-constituted committee of the Senate?
Mr. Pitt. Yes.
Chairman Sarbanes. Thank you very much. We would be very
pleased to hear from you. And if at any point you would like to
introduce members of your family who may be here, we would be
very pleased to acknowledge them.
STATEMENT OF HARVEY L. PITT, OF WASHINGTON, DC
TO BE A MEMBER OF THE
U.S. SECURITIES AND EXCHANGE COMMISSION
Mr. Pitt. Thank you, Mr. Chairman, and I would like to do
that in just one second.
I appear before you today with great respect and humility.
I appreciate all the kind words. Unfortunately, I doubt that
there is anybody who is deserving of those accolades, but I
appreciate the kind words, nonetheless.
I am here to seek your confirmation of President Bush's
nomination of me to be a Member of the SEC. I want to express
my deep gratitude to the President for the honor that he has
accorded me by this nomination, as well as by his intention to
appoint me as Chairman, if I am fortunate enough to be
confirmed by this Committee. This is a remarkable honor for me.
It is daunting and awe-inspiring.
I do want to thank you, Mr. Chairman, Senator Gramm, and
the Members of the Committee for your support, for your kind
words, and for the expeditious scheduling of this hearing. I am
also particularly grateful to Senator Schumer, my fellow
Brooklynite, for his kind introduction of me to the Committee.
With your permission, I would like to point out some of the
members of my family who are here to witness this important
hearing. First, I would like to point to my wife and best
friend, Saree Ruffin Pitt. Next, my father, who is still from
And who has just recently celebrated his 87th birthday.
Without my father, I wouldn't be here in many, many ways.
His friend, Harriet Richter, who is also from Brooklyn.
Senator Schumer has a fair number of constituents here today.
I would also like to point out my four children, who are my
pride and joy: Jonathan, Emily, Robert, and Sally.
Senator Dodd. Is it Robert who we had the test with on
whether you are doing well on television?
Mr. Pitt. Exactly, yes.
My family, if nothing else, is wonderful for keeping me
with a good sense of humility.
I would like to also acknowledge my sister, Elaine Evans,
and her family, my brother-in-law, Charles Evans, and my niece,
Hillary Evans, her husband, Sal Graziano, Seth Evans and Gideon
Evans, all of whom have made the trek to be here today.
And I thank you for giving me that opportunity.
Chairman Sarbanes. We are very pleased to have all of you.
Robert, that spontaneous reaction of yours was pretty good.
We all watched it carefully here.
Senator Gramm. He is certainly sure he has a favorable
Senator Dodd. One day, he may sit on this side of the dais.
Mr. Pitt. Senator Dodd was referring to the fact that in
our meeting, I indicated that Robert had disdained one of my TV
appearances, saying, ``Nobody really is very interested in what
you say. It is boring.''
So, I have taken that to heart and I will try to make my
comments a bit more interesting.
I would like to start by stating that I come before this
Committee with enormous respect for the critical role that
Congress plays and, in particular, this Committee plays, with
respect to the important multiple missions that the SEC has
If I am confirmed, I want to pledge to you sincerely and
honestly that I will work with you and the Administration to
ensure that the Commission is a partner, an independent
partner, to be sure, but not an adversary, in our mutual desire
to maintain our capital markets as the best in the world at
helping our corporations raise needed capital and succeed in a
global, competitive market, and to ensure all American citizens
and everyone else who trades in our markets of the fairness and
the integrity of our marketplace.
I think this is a critical time in the history of the SEC.
And my view is that working together, the SEC and the Congress
and the Administration can fashion an agenda that will make the
next decade of the SEC as remarkably successful as the last
seven decades of the agency's history have been.
I sit here before you as a first-generation American. I
benefited from the many opportunities that this country offers
to people of limited means to achieve a piece of the American
The SEC plays an incredibly important role in overseeing
the markets that enable millions of Americans to fuel that
dream. And as I believe the Chairman has noted, we have seen a
dramatic shift from the time that I first entered this field,
when 70 percent of the trades were institutional, to a point
now where individual investors, either directly or through
financial intermediaries, comprise the overwhelming majority of
Over these past 33 years, working first at the SEC, and
then in the private sector, I have been blessed with wonderful
colleagues. And I have been fortunate to have a broad exposure
to a variety of securities law issues. Nearly a quarter of a
century ago, I was privileged to be appointed General Counsel
of the SEC, and that was an experience that has shaped my
career and my outlook on the Federal securities laws.
So having this opportunity, if this Committee will see fit
to confirm me, would fulfill a lifetime dream and make it a
reality. If I am confirmed, there are several goals that I
First, I would commit myself to pursue vigilant enforcement
of sound rules that protect all investors against fraudulent,
deceptive, and manipulative misconduct. While I am proud of my
past legal practice on behalf of a variety of clients, my
commitment to the public interest and public investors is
genuine, strong, and I assure you, it is all encompassing.
I will be trading some very wonderful clients for the most
wonderful client of all--the American investing public.
Second, I will focus on the agency's mission to nurture a
climate that is conducive to the creation of capital and
encourages it. Many things have changed since the SEC's birth.
We have much more competition, both here and abroad, new
technology, instantaneous communications, and the creation of
vastly more complicated financial instruments. Capital, as we
all know, is the lifeblood of innovation and it fuels
developmental breakthroughs, higher standards of living, more
jobs. I believe the SEC has an important mandate to ensure
efficient, cost-effective, and seamless capital-raising.
Third, to protect American capital markets and their
participants, I think we need to ensure that our markets remain
vigorous and efficient. I would like the SEC, if I am fortunate
enough to be confirmed, to lead a review of the requirements it
administers and the regulations it imposes, to be certain that
they are sound, reasonable, cost-effective, and that they
Our securities laws are, in the main, nearly 70 years old.
They reflect a time and a state of technology that is light-
years away from where we are today. Commission rules have
become far more complex. They are, to some extent, increasingly
becoming the securities equivalent of the Internal Revenue
Code. And I had always thought that I made a decision not to
practice tax law for the benefits of being a securities lawyer.
I believe that the Commission, working with this Committee
and with its counterpart in the House of Representatives, is
obligated to ensure that statutory and regulatory requirements
do not needlessly increase costs or drive transactions
offshore, where, I might add, investments often lack the
protection of laws that the Commission enforces.
Finally, but not least, perhaps most strongly, I believe
that Government is a service industry. To make Government
meaningful, efficient, and competent, agencies like the SEC
have to reflect a commitment to service.
So if I am confirmed, I pledge to you that I will devote my
total and untiring efforts to enhancing the Commission's
responsiveness to all of its constituencies with respect,
professionalism, clarity, and expedition. That is the superb
legacy of the SEC to which I am fully committed. If I am
confirmed, I look forward to working with you and I feel
confident about our ability, working together, with the best
interests of investors, issuers, and the markets in mind, to
meet these challenges.
Chairman Sarbanes, Senator Gramm, and Members of the
Committee, I thank you sincerely for this opportunity. This is
a remarkable day for me as an individual, and I would be
pleased to try to answer any questions that the Committee may
Chairman Sarbanes. Thank you very much for a fine
We will do 5 minute rounds, given the number of Members
that are here, then we will go back for a second round if
I want to get right to an important question, although you
have addressed it to some extent, I think, in your opening
Let me set the stage for it by quoting from Newsday just a
week ago. It published an article in which it asked: ``Does the
small investor want this highly paid defender of big Wall
Street firms heading the SEC?''
It then went on and reported that small investor advocates
are wondering whether you would pursue policies that have the
effect of, ``Favoring industry behemoths while watering down
the investor protection and the corporate accountability
initiatives adopted by Arthur Levitt when he ran the SEC during
The article also quoted a spokesman of the Consumer
Federation of America as saying: ``Harvey Pitt could be great.
He could be a disaster.''
So, you have the whole range of possibilities there.
The Council of Institutional Investors has written to the
Committee and indicated a number of questions they would like
discussed with you. But I think the central thrust of it is
probably their statement that, ``While Pitt's ties to special
interest groups should not automatically disqualify him from
the job, he should undergo careful questioning to ensure those
ties won't impair the SEC's investor protection mission.''
Now, you addressed this in part right at the beginning of
your statement when you went through the several goals you
wanted to discuss. But given the kind of interest in this
discussion that is taking place to some extent out there, I
would like you to address that question more fully, if you
Mr. Pitt. Thank you, Senator. I think it is a fair question
for me to address. But I am not sure that I agree with the
concerns that were expressed in some of the statements you
quoted from. For one thing, I come before this Committee not as
a neophyte or a novice and not without a record that you can
That record started at the SEC. I learned to be a lawyer at
the Securities and Exchange Commission. And in slightly over a
decade at the SEC, I was known as a vigorous enforcer of the
public interest and the laws that the SEC regulates.
In private practice, I have had a degree of success
representing some of the very clients you referred to. But I
believe that my success has been attributable to the fact that
I tell my clients what they need to hear, not what they want to
hear. Sometimes it is unpleasant and I will admit that there
have been occasions when I have been fired for expressing my
views. But in general, I have found that by telling clients
what they need to hear, and having them perform the way the law
expects them to perform and in a way that is sound, pragmatic,
and wise, that is also good for their business.
So investor protection and business interests are really
I have not worked this hard for 33 years, to come before
this Committee, and if I am fortunate enough to be confirmed to
the SEC, to risk my reputation by doing anything other than
what the public interest requires--I recognize that we may
differ at times on what the public interest requires. But my
only influence will be the public interest and not a single
client that I have ever represented.
Chairman Sarbanes. I notice in the report from the Office
of Government Ethics, and also from the ethics attorney at the
SEC, that you are closing out, or upon confirmation, would
close out your connections with the law firm.
I also take it that you would undertake a rather extensive
process, as I read it, of closing out investments in any
enterprise that might have business before the Securities and
Exchange Commission. Is that correct?
Mr. Pitt. It is. And I have actually agreed to go beyond
what the Office of Government Ethics required. They would not
require me to dispose of all of our securities holdings, just
some of them. But I think, because the SEC regulates public
companies, it is better for the public to know that the
Commissioners of the SEC do not have any other financial
interest other than the U.S. public and the U.S. Government.
Chairman Sarbanes. Thank you very much. My time is up.
Senator Gramm. Thank you, Mr. Chairman, and again, thank
you for this hearing.
Listening to our distinguished Chairman read these
questions, there are people in American who think the best
qualification for anything is to have just come in on a turnip
Quite frankly, when somebody is representing America, I
think we deserve the best. And the fact that the most important
economic interests in America have hired you is one of the
reasons that I was interested in putting you on our payroll.
Let me also say, I appreciate your willingness to bend over
backward in dealing with our ethics requirements. But I think
sometimes we ask too much. I think it is important that people
comply with the law, but if I were in your position, I would
not inconvenience myself or discomfort my family. I would not
want anybody to be SEC Chairman who had not known enough about
wealth to accumulate some of it himself.
There are a couple of tough issues I just want to touch on.
First, I want to express a concern and get your views.
I have been very concerned about an effort at the SEC to
build a new, massive glass facility near Union Station. The
rent per square foot would be very substantially above the
current level, I think as much as 50 percent higher, and the
amount of space would be substantially increased over its
Now here is what makes me nervous. This decision was moving
forward when we did not have a single SEC Commissioner whose
term had not expired.
Maybe we need this massive new building. One of the things
I have suggested, and I would like to recommend to you, is that
we have had a move by the Environmental Protection Agency out
of a building which is roughly of a similar size to the new one
that would be built. I am going to recommend that you look at
that building. I don't know whether it is suitable or not. I
have never been in it--I stay away from those people.
I hope that you will review this move, look at space
requirements, look at the payment that would be involved, and
look at the whole process whereby we would make such a
fundamental move when we did not have a single permanent
Commissioner. I would like to get your views on that.
Mr. Pitt. Well, Senator, I am aware that several Members of
this Committee have expressed concern about the prospective
move of the SEC. Obviously, I was not involved with that or
consulted about it. But I think when Members of this Committee
express concern, the SEC's obligation is to come back to you
and to give you complete transparency on what decisions it has
made, why it believes those decisions are appropriate, and make
sure that it has the benefit of the views of the Members of
So while I cannot tell you whether this particular move is
the right move or not, or whether, as you suggest, perhaps a
move to the soon-to-be-vacated Environmental Protection Agency
building is the right move, what I can assure you is that you
are entitled to a full explanation of what the Commission did,
and you are entitled to our making every effort to allay any
concerns that you have legitimately expressed. That is a
commitment that I freely give.
Senator Gramm. You are familiar with staff accounting
bulletins and with the whole process at the SEC. I believe in
the Administrative Procedures Act. I believe in the process of
doing things in the open--where everybody knows what you are
doing and where everybody has an input--ultimately produces
better results, even though you might benefit from short-
circuiting it in the short run. In the long run, process is
I have become concerned recently that, while these staff
accounting bulletins, historically have dealt with very small
tweaking of standards and do not entail a due-process
procedure, increasingly, some of the changes being made are
viewed by the industry as substantial.
Do you support the general principle that if we are going
to have changes in accounting standards, there ought to be
public input, and we ought to have a vote by the Commission on
Now, I understand there is a gray area when making these
small changes. But I am concerned that we are moving into an
area where we are ending due process, which is so important.
When that occurs people come to Congress, instead of using
a due-process procedure.
I would like to get your views on that.
Mr. Pitt. Senator, one of the things I hope I could bring
to this job if I am confirmed is the fact that my background in
the private sector has given me entre to all of the major
constituencies of the SEC, including investor groups.
I believe that Government does its best when its
regulations are perceived as being thoughtful, as being well-
written, clearly understandable, and having taken account of
legitimate concerns that a variety of constituencies may
So, I believe very deeply in the notion of having a
dialogue. That is what I meant when I said in my opening
statement that I do not want to see an SEC that is adversarial,
adversarial to this Committee, adversarial to the
Administration, adversarial to the businesses it regulates, and
certainly not adversarial to the investors it has to protect. I
feel very strongly that having a continuing dialogue and making
sure that we understand the substance of people's views who
have to live with the rules that the SEC will craft is
I will also say that staff accounting bulletins, putting
aside the issue you raised, which I believe is one that has to
be looked at, follow a remarkable tradition of the SEC, which
has been its willingness to provide informal advice to people
to help them expedite transactions.
The concern you raise is that the initial concept of
informal advice may have become, in a sense, an alternative for
rulemaking without the benefits of rulemaking.
I think when the agency adopts rules or it states new
positions, it ought to do so only after it has given the public
an opportunity to be heard and to understand why it is
proposing what it is proposing, unless there is some emergency.
Senator Gramm. Thank you.
Thank you, Mr. Chairman.
Chairman Sarbanes. Senator Miller.
COMMENTS OF SENATOR ZELL MILLER
Senator Miller. First of all, thank you very much for being
willing to serve in the arena.
My question has to do with accounting standards, and
Senator Gramm had a question on it and of course, the SEC plays
a very significant role in accounting standards.
What is your view about the international accounting
standards that are now being developed, I understand, by the
International Standards Board? What do you think about that?
What about their use in the United States? Would you mind
giving us your thoughts? I am just curious about that.
Mr. Pitt. There is a clear need for the SEC to participate
with other nations that have organized securities markets and
sophisticated regulations, to make sure that global competition
is fair and that the United States can compete, not just for
U.S. companies that need to raise capital, but for U.S.
marketplaces that now compete globally.
Our exchanges and over-the-counter markets are now under
serious competition from abroad. One of the best things the
United States has going for it are very important standards for
So the obligation is to figure out a way to allow the SEC
and this country to be part of a community of nations to allow
fair competition and yet, not allow investor protection to be
If I had the answer right now, I would surely share it with
you, but I don't.
That is the tension. But I think that the Commission has to
be a participant in the process. We must try to explain our
standards and try to make it possible for international global
competition to be conducted on a uniform, level playing field.
Senator Miller. Thank you. Let me ask one more question. As
you know, a recent GAO report criticizes the SEC's process of
making accounting interpretations as lacking due process. Do
you have any views on that?
Mr. Pitt. I am familiar with the report. I understand where
some of the criticism comes from. I have not, of course, had
the opportunity to talk with the members of the staff or
Commissioners Unger and Hunt about their views on this.
What I will say is that concerns of this nature are very
troubling to me, whether they are accurate or not. I believe
that the SEC, which demands fairness and full disclosure from
public companies, has to achieve the same standards when it
articulates rules or interpretations and the like.
And if somebody responsibly criticizes the agency, while I
may not agree with the criticism ultimately, what I do think is
important is to allay any concerns, particularly for this
Committee, that there is any validity to it or that the SEC is
impervious to criticism. It has to be a responsive entity.
Senator Miller. Thank you very much. Thank you again for
being willing to serve.
Thank you, Mr. Chairman.
Chairman Sarbanes. Thank you, Senator Miller.
Senator Shelby. Thank you, Mr. Chairman.
Mr. Pitt, I have some concerns regarding the number of
firms that are repeatedly fined or sanctioned for the same type
of infractions at the SEC. I am also concerned that there is
sometimes a significant time lag between when the infraction is
committed and when punishment is ultimately meted out. What are
some of the steps as Chairman, assuming you are confirmed,
which I believe you will be, that you would take as the
Chairman to stop firms from consistently violating the
securities laws of the United States?
Mr. Pitt. Senator Shelby, you raise actually two related
concerns that are of great import to me. I happen to share both
of those as important issues.
First, to my way of thinking, recidivism in the securities
industry is unacceptable and should be subject to zero
tolerance. I believe that the agency should speak clearly, and
make its requirements known, help those who are subject to its
requirements understand them and fulfill them. But if companies
or firms or entities violate the law and violate it again, I
believe that serious sanctions have to be taken to prevent
On the question of the timeframe, that is a very serious
concern of mine. The SEC has a highly regarded and vigorous
enforcement program. But very often, the results are found 5
and 6 years after the events in question. At that point, it is
little more than an historical fact, although it does, of
course, set standards for the future.
I believe that the SEC, has to promote an environment of
real-time disclosure, and has to engage in real-time
enforcement. Those are things that I would, if I were
confirmed, try to promote.
Senator Shelby. If the SEC does not step up to the plate
there, a lot of this is meaningless, is not it, to some extent?
Mr. Pitt. I think the SEC is in many senses the first and
last line of defense for public investors.
Senator Shelby. Absolutely. What are your views regarding
the use of criminal prosecution in cases where firms
consistently violate the securities laws?
Mr. Pitt. Criminal prosecution has an important role to
play in the enforcement of the securities laws. As I said
earlier, the existence of recidivism is a question that bothers
On the other hand, I do want to point out that there are
some large organizations that have a thorough commitment to
good supervision, but may have more than one bad apple. And I
think that the Commission in those cases has an obligation to
assist the industries it regulates to be able to deal with that
problem without making them fearful that they will be
So, I think it requires judgment.
But in my experience, I have worked with the U.S.
attorneys, both on the Government side and the private side,
and I believe very strongly that criminal enforcement is a part
of the SEC's arsenal, an important part.
Senator Shelby. Mr. Pitt, as you well know, for about 20
years, the SEC has advocated the repeal of PUHCA, the Public
Utilities Holding Company Act. As Chairman, would you continue
to advocate repeal of PUHCA?
Mr. Pitt. I have some passing familiarity with that
statute. When I was an attorney at the SEC, I litigated a
couple of cases under the Public Utility Holding Company Act.
And even then, I wondered why the Commission was administering
I believe that the Commission's position of endorsing those
proposals is a sound one. Obviously, I would want to consult
with my colleagues before I articulated a definitive position,
but my instinct is to support that movement, as I believe the
Commission consistently has.
Senator Shelby. You are familiar with the fact that this
Committee has reported out a bill to repeal PUHCA?
Mr. Pitt. I am.
Senator Shelby. What about in the future? What will be the
SEC's role in view of Gramm-Leach-Bliley? We are getting into
new terrain here. How will you work with that? You have
multiple regulators now.
Mr. Pitt. Well, Gramm-Leach-Bliley I think is a remarkable
achievement by this Committee, which sponsored and wrote the
legislation and then gave it the impetus to be enacted. It is
the law and I believe it is a sound law.
I believe the Commission's responsibilities are two-fold.
One is, to the extent that people are engaging in securities
activities, to make sure that there is a level playing field,
that everyone is subject to the same requirements. But because
there are also issues with respect to the banking industry and
whether or not banks should be required to push out certain
activities, I think the Commission is best served by a
thoughtful and transparent process.
I know that there has been a lot of criticism leveled
against the Commission's recent rules. There were reasons, I
gather, as to why the Commission approached the issues the way
it did. But I think that without transparency, without letting
people comment on the rules, without giving them a chance to
show why a rule may be misguided, no matter how good the rules
are, they will not be accepted by those who are subject to
I believe the Commission has an obligation to work very,
very closely with the banking regulators to make sure that it
is on the same page as the banking regulators. But it also must
make sure that whatever it thinks is appropriate in the way of
securities regulation, ultimately prevails.
I think the Commission took a major step toward that
yesterday when it extended the deadline on its interim final
rules and it relieved banks of the obligation to start
I might add one other thing, and I apologize for going on.
I am very concerned whenever Government adopts rules that
require private businesses to restructure the way they do
I would not say that there aren't circumstances where that
may be needed in the public interest. But I think the
Government should be very circumspect about telling business
people how they should run their business. And so, that is a
concern in that area as well as in others.
Senator Shelby. Thank you.
Thank you, Mr. Chairman.
Chairman Sarbanes. Thank you very much.
Senator Corzine. Thank you, Mr. Chairman.
I was very pleased to hear that you think reviewing the
requirements that the SEC administers and regulations it
imposes need a thorough review, whether it is broadly or I have
specific interest with regard to a lot of the----
Chairman Sarbanes. Jon, I think it would help if you pulled
the microphone closer to you.
Senator Corzine. The capital rules in particular and
whether your intention is or view is that we need to move to
more risk-based focused rules. I would love to hear your
comments on that, or initial thoughts.
The second area I would love to hear some comment on is the
investor protection issues that are rising with regard to
analyst recommendations, which is one of the more serious
concerns that I think is undermining the fairness of security
markets now, whether the steps on a voluntary basis are
Then I have an ongoing concern which we spoke about
privately, that I think one of the great challenges of the SEC
is its activities in periods of crisis management, whether you
have the adequate forums for discussion with your counterparts
in the regulatory and supervision areas, not only domestically,
but also internationally, whether you feel those are right, the
skill sets there within the SEC, and do you have the legal
flexibility to address some of these 1987 kinds of crises or
international issues that from time to time seemingly arise.
It is a broad list, but I would love to hear your comments
and initial thoughts on these and to hear comments over time.
Mr. Pitt. I will do my best, Senator. I think with respect
to the broad-based review of rules, the way in which capital is
raised is a very critical issue. The SEC has recognized that
need, but it has yet to succeed in coming up with an approach
to reform the capital-raising mechanism.
It proposed rules that were known as the aircraft carrier
release, euphemistically, in part because it carried quite a
heavy load. And those were fairly roundly criticized and the
SEC, in the face of that criticism, withdrew its proposals. But
it does seem to me that it is very important for our markets to
be able to function on a real-time basis and to permit capital
to be raised more effectively.
With respect to broker-dealer capital, I think that the
entire area of net capital and the requirements we impose on
brokers leave me concerned that we may not have today a modern
correlation between what the requirements are and what the
risks faced are.
Firms can come into business for $25,000 and so on. And
there is not as much correlation between what the firms do and
what the net capital requirements are.
Although this is not perhaps a sexy or exciting area, it is
a critical area. I think that investors have to believe in the
integrity of their brokers. And so, I think looking at risk-
based capital requirements is something to which the Commission
should give very serious consideration. My hope would be, even
though I know you have other matters on your plate, that we
could tap into your expertise, as well as work with the
With respect to crisis management, I come back again to
something that is of great concern to me. I think that the time
to deal with a crisis is not when it occurs, but before it has
happened, when you can plan for it.
One of the things that I believe is critical is for the
SEC, working with this Committee and its House counterpart,
working with the Federal Reserve Board and with the
Administration closely, is to be a part of a team that has a
ready plan to deal with various crises that can arise.
My big concern is that we not have to think on the fly, but
be in a position to assure people that if something untoward
were to happen, we have a clear path to dealing with it, and
that we have also dealt internationally with the ramifications
overseas from the ripple effects of our own market problems.
Senator Corzine. Do you have some comments on the analyst
Mr. Pitt. Oh, I am sorry. On the analyst issue, I think
that there has clearly been an issue of perception at a minimum
that has been raised. One person's perception is that person's
reality. I believe the industry, the self-regulatory bodies,
and the SEC have a firm obligation to look at the issue and to
make sure that if there are conflicts of interest, that they
are either eliminated or they are disclosed.
In many cases in the securities field, disclosure has often
been thought to be a substitute, although in the analyst area,
some of the criticism has been that the disclosure has become
boilerplate and therefore, hasn't been meaningful.
The SIA has put best practices and it is a very good
initiative. The concern I have is that the SIA's efforts would
have been better received if they had had the imprimatur of the
SEC and perhaps the imprimatur even of this Committee, at least
indicating that issues were thought through.
One of the main concerns I have is that the SEC may not be
seen as an hospitable place for people to come and to talk
about their problems.
One of the things, if I am confirmed, I hope I could
accomplish, would be to take issues like the analyst issues and
encourage the SIA along with the NASD, the New York Stock
Exchange, and others, to work cooperatively with the Commission
and to trust that the Commission is not going to seek to take
over the process, but will try to facilitate the process in a
way that assures that investors are well protected.
Senator Corzine. Thank you.
Chairman Sarbanes. Did you want to follow up?
Senator Corzine. This whole area could explode into hours
of conversation. I think this is a great response to the
Chairman Sarbanes. Senator Bennett.
COMMENTS OF SENATOR ROBERT F. BENNETT
Senator Bennett. Thank you very much, Mr. Chairman.
Mr. Pitt, I will try not to prolong this too long. As the
father of six children, watching some of the fidgeting of your
own, I understand that this is not the most engrossing thing
for them and I will try to bring this to a close as quickly as
Chairman Sarbanes. Gosh, I thought Robert and Sally were
doing a pretty good job.
Senator Bennett. They are doing wonderfully well.
Chairman Sarbanes. Yes.
Senator Bennett. But we ought not to prolong it.
Like Senator Corzine, I am delighted with your comment
about the need to change what you call the securities
equivalent of the Internal Revenue Code, which is a definition
for something that is impenetrable and Soviet-style, subject to
interpretation in whatever way the particular reader wants to
interpret it at that time.
I wonder if you are suggesting that we have a Gramm-Leach-
Bliley effort on security law, as you refer to the fact that
they are 70 years old. Maybe it is time for us to try to
rationalize those, as Gramm-Leach-Bliley tried to rationalize
the banking laws. If you have any suggestions for us, I for one
would be glad to hear those. Are you thinking in terms of
recommending substantial legislative changes in the securities
laws to catch up with the 70-year gap?
Mr. Pitt. Senator Bennett, I don't know at this point what
the product would be from that effort.
What I do believe is that there is a need for review. The
impenetrability of rules and even in some cases, statutes, is
something that we should not allow to exist.
The SEC has done a wonderful job of promoting plain English
disclosure. It would be very nice if the statutes and rules the
SEC administers were also written in plain English, but they
are not always written in plain English. And that is not a
criticism. It is just a statement of fact.
I don't know whether it is necessary to pursue legislation.
To my way of thinking, the SEC ought to read a review that
makes it clear what policy issues there are, that identifies
whether the SEC has the authority, and this Committee sponsored
the National Markets Improvement Act in 1996 that gives the SEC
very broad-based power, and then decide whether the judgments
are of a sufficient policy nature that they need to be ratified
by the Congress.
The SEC exists to fulfill the Congresses' intention, not to
create the Congresses' intent, if you will.
But whether legislation ensues, the effort will produce
very good ideas for how to make this area of the law more
manageable and, to some extent, reduce some of the burdens that
we impose, provided that we don't eliminate any of the investor
protections that are so critical.
Senator Bennett. Thank you.
The story is told about Admiral Rickover. The reason that
he rose to the very top of his profession and held that
pinnacle position for so long against the opposition of most of
the power in the Navy is that very early on, he agreed to keep
the minutes of the various meetings that he attended.
So every time when they would go back to what they had
decided in the last meeting, Rickover would read the minutes
and somehow, the decision was always clear that Rickover was
right and the other folks had not understood or remembered
I tell you that because the equivalent of keeping the
minutes comes out of the accounting profession. And when the
accountants give you a number, it is regarded as absolutely
sacrosanct and that number proves something. My own experience
shows that there are accountants and there are accountants and
there are numbers and there are numbers. And very often, the
justification for number A is pretty shaky and it represents
the bias of that particular accountant. But once it is written
down on paper and in numerical form, it seems to be beyond all
We have had in this Committee tremendous controversy about
accounting procedures. And much of that in the past has spilled
over on the SEC and the SEC's accountant.
We have spent an enormous amount of time talking to FASB
about accounting standards. We have had almost knock-down,
drag-out fights over the issue of accounting for a merger by
the pooling or purchase method with accountants sounding like
Medieval philosophers, justifying their view of one approach as
opposed to the other.
You have the authority to pick the new chief accountant for
the SEC. I understand the current one has resigned or taken
employment someplace else. You are going to play a very pivotal
role here in choosing the person who keeps the minutes. That
is, in terms of the numbers. Do you have any bias one way or
the other about which school of accounting you feel good about
or what you would look for in a chief accountant?
Mainly, I am giving you the statement more as an urging
than a real question. But if you have any comment you want to
respond to, I will be happy to hear you.
Mr. Pitt. Let me say that I have heard reports that the
current chief accountant may have accepted a position
elsewhere. But I have not had a chance, obviously, to talk to
him about that, and I don't know for sure whether he is
planning on leaving or not.
What I do believe is that the right form of accounting is
one that gets it appropriate the first time, not the second or
the third time. And one of the things that I am concerned about
is that there is too much after-the-fact disagreement between
corporate America, accountants, the SEC, and others.
It strikes me that there ought to be a better way to help
companies and accountants find the right accounting principles
before financial statements are prepared, to help companies
that have difficult accounting issues resolve them, so that
investors are not burdened with accounting statements that then
have to be restated if there is disagreement.
I believe FASB, which is a private-sector standard-setting
body, is the right model for the setting of these rules,
provided that there is transparency and the FASB does use
transparency. And I believe that the SEC's role is to make sure
that investors are protected in that effort. But I think it
would be even more remarkable if the SEC can assist before the
accounting statements are prepared in making sure that people
understand what the requirements are, particularly in the high-
Many of the restatements we have seen come about because
people are confused about what the standards mean. I think it
would be helpful to have a collaborative effort to try and make
sure that we can avoid some of those confusions, some of those
But I am definitely in favor of an accounting system that
gets it right, not that uses Medieval philosophy, as you put
Senator Bennett. Thank you very much.
Thank you, Mr. Chairman.
Chairman Sarbanes. Senator Dodd.
Senator Dodd. Thank you very much, Mr. Chairman.
Many of these questions have been asked already by others,
Mr. Pitt. Let me just pick up on the last line of questioning
from my friend and colleague from Utah, and in a sense also
from Senator Corzine from New Jersey, who brings a wonderful,
unique expertise to his role here on the Banking Committee, and
that goes to the statement that I made at the outset about
transparency and competence.
I think the SEC and FASB have done a pretty good job
already in their responsiveness to this Committee and others on
the accounting standards issue, and the importance of
maintaining a very independent FASB.
Certainly, we all want to get rid of Medieval standards
that don't apply any longer. But your job is not to become the
most popular guy in town. It is to be the guy that will
actually look at us and tell us, when we may be calling on
behalf of constituent interests, no matter how popular it may
be, that you have an obligation to do what is really right on
behalf of investors in this country, the consuming public that
depends upon the integrity of these markets.
You are going to hear a lot of talk about various ways to
do things. I think you ought to listen carefully and you have
indicated you will do that. But at the end of the day, you have
to decide, the Commission does, what is really in the best
interest of maintaining those basic pillars and standards that
have, I think, sustained this country and its markets and their
integrity for so long.
Senator Corzine raised the issue with you of the analyst
issue. It is a serious, serious problem. You have a Wall Street
Journal analysis that says that in the last quarter of 1999 and
most of 2000, less the 1 percent of the 28,000 recommendations
from stock analysts called for investors to sell. Less than 1
percent of them called for them to sell.
Now, I am all for a bull market. I think it is a wonderful
thing. But that is ridiculous. Something's going on there that
is troublesome, in my view. And I don't expect you to tell me
what the answer is today, but this is a serious problem that
needs some very aggressive attention, in my view. I know the
Securities Industry Association, you mentioned them already,
and NASD, and others, have addressed the subject to varying
degrees. This really needs to be brought together here in a way
that can give people a much stronger sense of confidence.
There is just something blatantly wrong here. There is a
real cloud here on the horizon, in my view. We are going to be
counting on you to lead us on this. We can all have our views
up here, but it really is you and the Commission that have to
be the lead on matters like that.
So if you want to respond to this a little further, I would
be happy to hear you on it, it is important.
Now let me ask you, basically, do you agree with me that
FASB ought to be independent? Would you want to see Congress
legislate accounting standards?
Mr. Pitt. No.
I don't believe that Congress should legislate accounting
standards. I believe that having the private sector with an
independent entity do it is the best way to do it.
Let me say this, Senator. You are correct. If I am
fortunate enough to be confirmed, I am not running for office
and I am not expecting to be popular. In fact, I think by
taking the oath here, everything after that has subjected me to
the potential that I may walk out the least popular person in
the world. I am willing to take that risk if I believe that
what we do is right.
What concerns me is that when the SEC takes action, I would
like people to understand what it did. I would like it to be
set forth plainly. I would like people to hear the explanation
and understand it. So that, even when there is disagreement,
people have confidence in why the SEC acted the way it did.
This is a wonderful agency and as I pointed out earlier, I
started my career there. I have enormous affection and
admiration for the SEC. It would be a high honor for me if I am
confirmed by this Committee. But I think that the SEC can do a
lot to promote confidence both in the way the industry
regulates itself and the way disclosure is made on a real-time
basis and the like.
I would say one other thing, Senator.
Although there is some criticism about the statutes being
almost 70 years old, there was one concept that was built into
the statutes that is incredibly valuable, that is the concept
It is a wonderful concept because, among other things, it
reduces the burden on Government. And second, it allows the
industry that is most knowledgeable to have the first crack at
setting standards. And beyond that, all that legislation can
really do is to find what is fraudulent or what is legal or
what is not legal. Self-regulation can allow the creation of
ethical rules. And I believe the securities industry has done a
wonderful job of looking after the ethics of its members.
The analyst situation is now at a sufficient hue and cry
that I think everyone has to work together to change the
popular perception. But I could not tell you today sitting here
that I believe there is a need for legislation or anything of
that sort. I just think we need a collaborative effort.
Senator Dodd. Let me pick up quickly on a related matter,
then one other quick question, if I could, Mr. Chairman.
I see my colleague from New York has returned here as well,
so I won't take up much time.
I was teasing bringing up Regulation FD. And I presume most
of the people gathered in this room and certainly you know what
I am talking about with the regulation on fair disclosure,
which has attracted a lot of attention.
I had an article in my hand a few minutes ago on the
various heated debate growing around this issue. It certainly
And just for purposes of discussion, as everyone should
know anyway, that the SEC passed this rule, which attempted to
provide a fair distribution of financial information by
preventing companies from giving material information to
securities analysts unless they shared it simultaneously with
This rule has its strong proponents and its strong
opponents for a variety of reasons. Critics have charged that
it is reduced the quality of the information reaching the
marketplace, while proponents of the rule contend that it is
made the marketplace fairer to the greater number of
In light of your comments about the problem I see with less
than 1 percent of 28,000 recommendations from analysts to sell,
what comments do you have on Regulation FD?
Mr. Pitt. I am familiar with some of the criticism of
Regulation FD because I know that you are aware that when the
rule was proposed, I expressed criticism on behalf of clients I
I think the underlying concept of Regulation FD is
unassailable, which is that no one should have an unfair
advantage in the marketplace. That has to be right.
The SEC has made an effort to try and deal with that very
issue. Were I in a position to have had something to do with it
when they adopted the rule, I might have suggested changes or a
We now have a rule, and the SEC has undertaken a review of
I am concerned when a broad array of groups, the Securities
Industry Association, the National Investor Relations
Institute, and others have raised concerns, in some cases, very
serious concerns, in other cases, what I guess I would call
I think the SEC has an obligation to listen, to have a
dialogue, to understand the criticisms, to do a review as it is
doing now, and then to explain what its conclusions are and
what its findings are and why it thinks either some changes are
appropriate or that no changes are appropriate.
That is something that I believe requires a clear look and
that is something I would look forward to doing. But I have no
preconceived intention with respect to that rule whatsoever.
Senator Dodd. I appreciate that. Again, I won't use all
deliberate speed, but, obviously, to the extent that we can
move fairly quickly to get clarity on this I think helps
tremendously as well. So, I would hope that you would undertake
that fairly quickly.
And last, I worked on the Securities Litigation Reform
bill, and I talked about this the other day in the office. It
was a fairly controversial piece of legislation at the time and
there were uniform standards after that. As someone who is in
the practice of law and has had to grapple with this a little
bit, I cannot help but asking you the question of how that law
None of us know with any certainty whether or not the laws
we pass up here are going to achieve the desired results, and I
would be interested in your point of view as an attorney
practicing in the area of securities litigation, whether or not
that law is working fairly effectively.
Mr. Pitt. Senator, as I mentioned to you when we met, I
testified in support of the legislation.
As I look at the Federal securities laws, I find the
PSLRA--the Private Securities Litigation Reform Act--that you
authored is a rare and unique piece of legislation in the
securities field. There have been virtually no cries for
amendment of the legislation. There have been no outcries that
it is working major unfairness.
People have raised issues and expressed some concerns with
it. But my sense is that this was an appropriately conceived
piece of legislation and then it was adopted with a very
careful balancing to protect the rights of investors when
legitimate issues arise, but to cut out frivolous lawsuits
which really harm, after all is said and done, other investors.
Frivolous lawsuits only take more money away from those
investors who have chosen to invest in a particular company.
My sense is that it is a sound piece of legislation that is
working well. And, I am not just saying that because you were
Senator Dodd. That is okay.
Mr. Pitt. Well, I know that. But I am saying that I think
it is a very strong piece of legislation and is making an
important contribution to the securities laws.
Senator Dodd. I thank you for that.
Mr. Chairman, I went over my time and I apologize. Thank
Chairman Sarbanes. Senator Schumer.
Senator Schumer. Thank you, Mr. Chairman.
Thank you again, Mr. Pitt, for your good work.
I have a lot of questions. I would ask consent to submit
some of them in writing. I see your son's view of this hearing
is, at least to some, a reality. So, I will try to be quick.
First, globalization. I think we have built up almost an
exquisite balance between regulation and competition or
regulation and freedom here in this country. And you are right.
The SEC has been remarkably successful, of all the Government
regulatory agencies. Yes, I hear my constituents in New York
complaining about the specific instances. But I think if you
asked each one of them, has it led to us having the strongest,
deepest, and most transparent security markets in the world,
they would say yes.
My worry is that all that could become unraveled with
globalization, that with the new technology, it is just as easy
to buy a stock in London or eventually, who knows, the Cayman
Islands, and they will offer an opportunity to buy it a little
more cheaply and a little quicker with no regulation at all.
And while, in the long run, we know that usually fails,
regulation is the strength of our markets, in the short run, it
is very alluring and most people, particularly the larger
investors, feel, hey, I can get away with it because I am so
What is your view of globalization and this run to a least-
common-denominator and its effect on the securities markets and
securities regulation here in this country?
Mr. Pitt. I think you are absolutely right. Globalization
is not an issue about which the United States has a choice. We
are confronted with it. It is a reality. And what we need to be
certain of is that U.S. companies and U.S. markets can compete
effectively and efficiently in a globalized marketplace.
One of the problems that we have, I think, is that because
our system is so sophisticated and because it has been around
for so much longer, there is a tendency to think that anything
other than our system is inadequate. Sometimes that is true.
But other times it is not.
I believe that the SEC has to develop a posture in the
international community as a leader to promote our standards,
but also as one that respects the integrity of other nations
and the integrity of conflicting ideas and tries to find an
approach that will enable us to give all investors maximum
protection and yet not descend to the least common denominator.
Senator Schumer. And do you think that is do-able?
Mr. Pitt. I hope it is do-able.
Senator Schumer. My nightmare is that 15 years from now, we
find, despite our efforts, that things have unraveled a great
Mr. Pitt. I believe that is a risk. I don't know whether it
is do-able. I know that we have to hope it is do-able.
I think the other thing that we have to do is to devise
strategies, first, to make it successful. Negotiation requires
you to listen to the other person, not just to talk to the
Senator Schumer. Right.
Mr. Pitt. We have to listen. In addition, I think we have
to have a strategy in the event that negotiation fails.
Senator Schumer. Right.
Mr. Pitt. I think if we prepare for both, we can be
Senator Schumer. Do you envision possibly the sort of thing
like the Basel--you know, capital requirements for the banks
were, I guess, the first place where this hit and there was
eventually, I think it took 20 years or something, the Basel
Accords. Could there be something like that in the securities
Mr. Pitt. My hope is that there could be something like
that. I think we need to try for it. And I think that the SEC
appropriately plays a leadership role in that effort.
We understand sophisticated markets. But I think we also
have to be able to understand other cultures and make sure that
when we insist on something, we have taken into account the
views of other countries and we have tried to accommodate their
legitimate concerns without sacrificing investor protection.
Senator Schumer. A related question is the conflict between
the deep liquidity of the markets and the so-called natural
monopoly that one market has, and with the new technology, the
fragmentation of markets. And when there is fragmentation, at
least without some kind of sharing of information for the
average investor, that the average investor gets rooked because
they don't see the alternatives. What are your views on that
basic tension that I think has increased in our markets?
Mr. Pitt. Well, unfortunately, you are absolutely right.
There is a very real tension between them.
The fragmentation in our markets is really a pernicious
development because it threatens the confidence of individual
investors. Moreover, it places potential risks on the brokerage
community, which may not have the tools and the ability to find
the best transactions and the best prices.
The tension that exists is that, in this high-tech era,
there are people who are quite creative and innovative and we
do not want to stifle innovation and creativity. Nor should we
want to stifle competition.
The trick here, and I wish I could give a simple
prescription, but I don't have it just yet, is to encourage
innovation and competition and yet, provide sufficient
transparency so that people have confidence in the way the
markets operate. I know the Commission has spent a lot of time
on that and it has pursued these issues with certain new
disclosure requirements. And once those are assessed, we will
have a better idea. But I think we cannot be discouraged. We
have to find the solution to this problem.
Senator Schumer. The big-screen type idea seems to be the
sort of place you are headed in, provided it is technologically
Mr. Pitt. It is a possible solution. I think one of the
concerns is that before the Commission seizes upon any
solution, I think it has to hear all of the interest groups
involved and make sure that it has not inadvertently killed
some form of competition or deprived some people of their
Senator Schumer. Next, decimalization. I am hearing
complaints from my constituents in New York in the brokerage
business that decimalization, contrary to what people thought,
has increased illiquidity in the market and that it is not
working as well as people had thought. I know, as it was being
tried, that the SEC was somewhat reluctant to go forward, but
they did. What is your view as to how decimalization is working
and the problems that it might be creating?
Mr. Pitt. In the first instance, decimalization puts U.S.
markets on a comparable basis with world markets. That is
clearly a plus.
Second, in some instances, decimalization has had the
salutary effect of reducing spreads because, previous to the
decimalization, the lowest spread was one-sixteenth, and that
was about 6\1/4\ cents. Now, you can go down to a penny, and
there is debate about sub-penny decimalization.
I think there are concerns about fragmentation. There are
concerns about certain professionals stepping in front of
orders. And liquidity, because the pricing can change so
quickly, that you have people who are concerned about staking
out large positions--that is, offering certain prices for
larger positions and narrowing the positions at which they will
offer any particular price.
I think these are complicated issues. The Commission
yesterday put out a concept release on this, if I am not
mistaken. But there are issues that need to be assessed and the
only way to deal with this is to have the Commission lead a
fact-finding review of what the impact is, what the concerns
are with it, and whether there are ways to solve the problems.
The concerns that I have heard are legitimate. The question
is, how does one deal with the enormous advantages of
decimalization without inflicting some of the enormous
disadvantages? And that, I think, the Commission has to take a
Senator Schumer. But it would be your intent if you became
Chairman to commence with this fact-finding review?
Mr. Pitt. The answer is yes, although I think the
Commission has already commenced on it. But the answer is yes,
and also to start a dialogue on these issues with people
believing that the SEC is receptive to their points of view. It
may not adopt them, but it wants to hear different points of
view so that whatever it comes up with is the very best it can
Senator Schumer. One final question. I thank the Chairman
for his indulgence.
The legislation that Senator Gramm and I sponsored with the
support of most Members of this Committee on 31(e) fees and
their elimination, do you have a view on that?
The reduction. I am sorry.
Mr. Pitt. I believe that the fee reduction legislation is a
very sound principle. I believe that it has been tied to pay
parity, which is of vital concern to the SEC and something I
hope can be passed this session of Congress, because the SEC is
suffering huge attrition and turn-over. Combined, it is a
sensible legislative package.
Senator Schumer. Thank you, Mr. Chairman.
Mr. Pitt, I look forward to your Chairmanship.
Mr. Pitt. Thank you.
Chairman Sarbanes. Thank you very much, Senator Schumer.
I have a number of questions I want to ask before we draw
to a close. One just follows along a little bit with the
question that Senator Schumer asked.
The Wall Street Journal about a week ago, in an article--
Enforcement Chief At SEC Plans To Move To Private Sector--
reports that the retiring Enforcement Division Director, Rick
Walker, recently confirmed that the agency has nearly 260
financial fraud investigations underway, mostly complicated
cases handled by teams of attorneys and accountants.
He said those cases alone could consume the enforcement
staff for the next 5 to 10 years. That would not include any
new cases that would arise. And the article then went on to
conclude, ``the agency must deal with new pressures on limited
Now, I am one of those who thinks that the agency does not
have adequate resources to fully discharge its
responsibilities. I think it has very important
responsibilities. I think we need to ensure that it has the
resources. So one of the issues that we discussed when we dealt
with this fee question was whether there would be enough room
left--there is enough room to do its current budget, but its
current budget may be inadequate. And whether there is enough
room left to do an adequate budget.
Now the fees are way up above at a higher level. The
Congress is obviously programmed to bring those down. What is
your view of the adequacy of the resources that are available
to the SEC in order to do its job?
Mr. Pitt. Senator, it is very difficult for me to give you
a definitive response to that because I have not had a chance
to sit and talk with the people who have been responsible for
making these decisions.
What I will say is, in part, I am concerned that there will
never be enough personnel for the SEC to do everything it wants
to do. That is why I believe as an agency, it has to
prioritize. I believe you need to know what the SEC's
priorities are and you need to make sure that the SEC is acting
in the best interests of investors and of capital markets.
But I also believe that the SEC is a part of the
Government. And one of the concerns I have is that before we
engage in a broad expansion of the SEC's staff, we make sure
that the SEC is utilizing the resources it already has as
effectively and efficiently as it can.
It may well be that there is a need for additional
enforcement personnel. I could not answer that now. And the
only thing I can assure you of is that if I thought that the
SEC were understaffed, I would certainly tell you what I
believed and I would tell you what I think would solve the
I am concerned, however, that the SEC focus not just on
real-time disclosure, but real-time enforcement.
I have great respect for Mr. Walker. Going back to Irv
Pollack and Stanley Sporkin, the leaders of the SEC Enforcement
Division have been exceptional public servants. But my concern
is that 5 to 10 years to bring cases now in hand is far too
long. Even if we had more people, 5 to 10 years is too long.
Bringing cases long after companies have been declaring
bankruptcy and investors have lost millions of dollars really
doesn't help anyone.
The SEC has an obligation to figure out how to come up with
real-time enforcement. If we do that, and we think we also need
more personnel, then we should come back to you and tell you,
we have now made efficient use of the personnel we have and
here is what we think we now need and these are the reasons
why. And that, of course, I would pledge to do to you promptly
But I don't start out by seeking a broad expansion or a
broad contraction. I think we have to figure out what we have,
what our priorities are, and then see what we need.
Chairman Sarbanes. But if you make a determination as to a
need, I take it you won't be hesitant about expressing that and
fighting to get the resources with which to meet it.
Mr. Pitt. I will not be hesitant about expressing my views.
But I do want to tell you that something that I believe firmly
is that the SEC is not a Government unto itself. I believe it
is part of the Government.
One of the things that I believe the SEC has an obligation
to do is to check with OMB, to check with the Congressional
Budget Office as well, and make certain that even though it may
think it has a compelling need for people, which it can state
honestly, it also has to fit within an overall budget
People may choose different priorities. What I believe is
not in fighting, but trying to come up with the best position
and then trying to persuade people that giving the SEC more
people, if that is appropriate, is the right result.
I would not hesitate to express to the Administration or to
the Congress my legitimate views. But I believe that the SEC
has to adhere to Government as a whole, not Government by
individual agency. That is the only caveat I would express.
Chairman Sarbanes. Let me pursue that caveat for a minute.
I understand it and I think up to a point, it is appropriate.
But the SEC is an independent regulatory agency established by
Now if you are within an Executive Department and the OMB
tells you, this is your budget and this is the Administration's
position, then that is your budget and that is your position.
When you interact with the Congress, that is your budget and
that is your position. Unless you bootleg the information in
one way or another to the Congress, that is that. I don't see
the independent regulatory agencies in the same posture.
In a sense, you have an obligation being within the
Executive Branch. I also think you have an obligation to give
Congress your best evaluation and judgment of your budgetary
situation, even if that evaluation differs with the OMB
determination. What is your view on that?
Mr. Pitt. I don't think that you and I have any difference
of view, Senator. I believe that the SEC is an independent
agency and its independence is important. But I have a very
strong view that independence does not mean an unwillingness to
listen to other points of view, to take into account every
consideration possible. I think independence means that after
everything has been taken into account, what you want to do is
make your own decision, not a decision that is necessarily
forced on you.
I also want to assure you that I would never encourage,
although I know it goes on, bootlegging of information. What I
prefer to do is give you the information openly, and if we had
a disagreement and we could not persuade the Office of
Management and Budget, we might present the budget in one way
and if we are asked what our views are on it, we will tell you
honestly and we would make sure that OMB knew that.
I just believe our starting point should be that we are
part of one Government and, as a result of that, we need to pay
very careful attention to what other parts of the Government
But I have no question that the SEC is an independent
Chairman Sarbanes. I yield to Senator Schumer and then I
Senator Schumer. I have one final question.
Chairman Levitt had been in for 8 years. I believe it is a
full 8 years. Right?
Mr. Pitt. For 7\1/2\ years.
Senator Schumer. For 7\1/2\ years, and he did a lot of
things. He gets good marks from me and from many others.
Is there any significant decision that he or the SEC made
over those 7\1/2\ years that you disagree with and would work
I could not ask you all nice questions.
Mr. Pitt. There is an informal group known as the
Chairman's Protective Association.
It would ill-behoove me to say anything negative about my
predecessor, particularly since I consider him to be a friend
and I think he was a very committed public servant and I know
that he has support from this Committee on both sides of the
Senator Schumer. I am not asking you to say anything
negative about him. I think he has been an excellent Chairman.
I am simply asking, do you have policy disagreements with any
of the major decisions, which were many and broad, that the SEC
made during his tenure?
Chairman Sarbanes. I might point out that this Chairman's
Protective Association to which you made reference seems to
operate not only looking backward, but also looking forward
because Chairman Levitt is saying very nice things about you.
I just want to get that on the record.
Senator Schumer. Mr. Chairman, I would note one more thing.
Chairman Levitt is also from Brooklyn.
So it may be the Brooklyn Protective Association.
Chairman Sarbanes. That certainly complicates the
Senator Schumer. Seriously, would you answer that question?
Mr. Pitt. There are decisions that the SEC made which I
have viewed from the outside and which I have viewed from the
prism of a private lawyer understanding the legitimate concerns
of many clients.
And so, there are decisions that were made that I would not
have made. But that notion is based on incomplete information.
Unless you have the ability to talk to the people who made the
decisions, to understand why they did what they did, it is
pointless for me to criticize them. That was okay for a private
practitioner. It is not okay for a public servant to criticize
any decision that has been made, unless he or she has taken the
trouble to inform himself completely.
So, yes, there are a number of decisions that were made
during the 7\1/2\ years, not necessarily an enormous number,
but a number of decisions with which I would have disagreed,
but based on incomplete information and not having the ability
now to sit down and talk to the staff, the Commissioners who
remain, and Chairman Levitt, as a matter of fact.
I do know this. That every change he promoted was designed
to be protective of the public interest, and to my way of
thinking, the one thing that I wouldn't dream of changing is a
commitment to the Commission's obligations to the public,
public investors, and capital markets.
And Chairman Sarbanes, I would just say one thing. It does
go forward in terms of the Chairman's Protective Association.
One of the things I realize is that if I am fortunate
enough to be confirmed and if the President then appoints me as
Chairman, I will have a successor. I will not be the last
Chairman of the SEC. It strikes me that I would like him or her
to treat me as well as I would like to be treated. And so, I am
treating Chairman Levitt that way as well.
He deserves it, but I am also self-protective.
Chairman Sarbanes. Just to flesh out Senator Schumer's
question, I take it that, while you might not have made a
particular decision the same way, looking from the outside, and
you have said if you were inside and had more information, you
might have seen it differently.
Once the decision has been made that is in place, is not
the burden--I mean, you are not moving in there with the notion
of overturning these things because it seems to me, at that
point, the burden of changing it is much heavier than the
burden of putting it in place to begin with.
Mr. Pitt. I am not coming in with a notion of overturning
decisions that were made. I am, however, coming in with, first,
a view to review all of the Commission's regulatory
requirements to make sure that they continue to make sense.
Second, to continue the efforts that the Commission has
already begun to determine the effectiveness and the impact of
some of these rules, some of which I had concerns about, to see
if they are working as intended.
I believe that I have an obligation which remains constant,
which is not to act first and then think. My view is, I would
like to think first, hear what other people have to say,
understand the criticisms, and then make a decision.
But I can assure you this--if I think that there are rules
or regulations on the book that are inappropriate, first, I
would want to be able to persuade my fellow Commissioners
because the Chairman has only one vote. And if the Commission
as a whole thought that were advisable, on major things, we
would want to make sure that this Committee was fully informed
of what our intention is.
I have no problem in complete transparency for the SEC. I
want you to be comfortable if I am confirmed that you will
always get my honest answer, and you are not going to be
surprised. You are going to know what our views are and have
the ability to talk us out of it or persuade us otherwise.
Senator Schumer. Mr. Chairman, could I just follow up?
Again, I think your answer is an extremely reasonable one.
I am not asking you to compare the representations you made as
a private citizen and attorney. But I am trying to get a feel
for where you want to take the agency under, as I have said,
extremely able leadership.
Are any of those decisions in the last 8 years, any that
particularly stand out in your mind that you think do need that
kind of thorough review and that you might, in the first, say,
6 months of your tenure, when you are confirmed as Chairman--
and I say when, and I think I can ask you this question because
I think it is a foregone conclusion that you will be
confirmed--but that you might when you get in there say, we
need a review on this?
Mr. Pitt. Again, the answer to that is that, without
talking to Commissioners Unger and Hunt, without talking to
senior staff people, I would be doing a disservice to the
notion of collegiality.
I think that I could tell you a number of initiatives that
I might have done differently or with which I was concerned.
But I also believe in the consistency of regulation. I believe
agencies should not pull the rug out from under people every
time there is a change in the composition of the agency.
So, I basically prefer to have a lot of guidance and input
before I articulate anything.
Going in, there are no rules I would start out believing
should be overturned, or no decisions that should be
overturned. But there are also no rules or actions that would
be off the table if people can persuade us that there are
problems with them.
Senator Schumer. Thank you, Mr. Chairman. I appreciate your
Chairman Sarbanes. I have been contacted by a number of
constituents who work at the SEC. About a year ago, SEC
employees voted by really quite a substantial margin, well over
70 percent, to be represented by the National Treasury
Now these constituents voiced these concerns to me. First,
they say that the union officials have not had an opportunity
to meet with the Chairman. Second, there is negotiations
underway on a contract, but they feel that on the SEC's side,
they are not proceeding intensively enough to try to reach a
They allege that there has been management harassment of
employees who are union officials. And in fact, the NTEU has
filed a number of unfair labor complaints against the SEC. So
these are allegations.
Also, they say they have a number of suggestions for
improving the workplace for the employees and they are having
difficulty being heard on those proposals.
If confirmed, and then serving as the Chairman, it seems
obvious to me, but would you be willing to meet with the
elected officials of the union who now represent your
employees? Would you push your staff to negotiate--I mean, the
management side on this negotiation--to intensify their
negotiations with respect to arriving at a contract? Would you
take a look at the allegations of unfair labor practices, and
also consider the union's suggestions to improve the work
I was quite concerned by these reports because they all
seem to me to be counter to what one would regard as
appropriate standard practice.
Mr. Pitt. Senator, let me start by saying that it has been
almost a quarter of a century since I worked at the SEC. And
the one thing I can say is this is not my father's SEC. This is
not the SEC that I knew.
I am aware that a union was voted in and is a determination
that has to be respected as a matter of law. I don't have any
idea where the contract negotiations are. As a general
principle, if people want to meet with me and it is
constructive to do so, I have no problem meeting with people,
providing it is appropriate.
One concern I have is there may be times when a meeting
could undercut an effective process by nullifying the ability
of people who have the obligation to come up with some product
from doing that.
But I have no problem meeting with anyone.
If there are unfair labor practices that are ongoing, one
of my concerns is that an agency that enforces the law has to
obey the law. So, I believe that there should be zero tolerance
for any law violations by the SEC. I just don't know that those
allegations are appropriate or accurate.
Finally, I guess on improving the workplace, I would say
that is something I am totally committed to and I would welcome
any suggestions anyone has on making the SEC what I believe it
always has been--the most exciting Government agency and a
place that attracts the highest caliber of professional
Chairman Sarbanes. I take it that it is a matter that you
are prepared to turn your attention to. I just received these
reports very recently and I was concerned to hear them.
Mr. Pitt. Well, I am concerned any time there is criticism
of the agency and there is something, if I am confirmed, that I
would turn my attention to and figure out what the most
appropriate approach is. From time to time, if you want to
understand what I am learning and so on, I would be very happy
to share it with you and the Committee.
Chairman Sarbanes. In testimony before the Senate Foreign
Relations Committee, Nina Shay, a very distinguished
Commissioner on the U.S. Commission on International Religious
Freedom, raised a question about SEC requirements for companies
in terms of their disclosure that are engaged in economic
activity in nations that have been sanctioned by the United
States. And the leading example of this is the Sudan. We have
economic sanctions in place against Sudan. Those are
administered by the Office of Foreign Asset Control at the
So there is an immediate preclusion as far as U.S.
companies are concerned. However, foreign companies are able to
operate in the Sudan and also operating in the U.S. capital
markets. Thus, Americans may well be unknowingly investing in
companies that are operating in foreign countries such as the
Sudan that are being sanctioned for some really absolutely
atrocious practices. The disclosure requirement would give more
information to potential investors about these companies.
Now the SEC, in a letter to Congressman Frank Wolf back in
May, indicated that they would heighten disclosure requirements
for foreign companies doing material business in or with
countries that have been sanctioned in the way that I
indicated. Do you have a view on this issue? We are
particularly anxious to carry forward the response that the SEC
has made to Congressman Wolf 's inquiry. In fact, he has talked
to me about this.
Mr. Pitt. Let me start by saying, Senator Sarbanes, that
the atrocities being committed in the Sudan are despicable and
as a citizen, I denounce them.
As to the securities laws, however, I start from a slightly
different premise--the SEC is really not the place to develop
foreign policy, and the SEC should be a supporter of this
country's foreign policy.
So, I believe that the SEC should consult with the State
Department, that it should consult with the Treasury
Department. It should consult with this Committee and
understand what the concerns are and it should be a contributor
to a national policy. If there are material items that should
be disclosed, obviously, the SEC should require that.
The concern I have, and there have been suggestions that
the SEC ought to preclude access to the U.S. capital markets
and things of that nature, it seems to me that this is a place
where the SEC should be part of a team. It should be listening
to those with the responsibility for setting U.S. policy, and
then it should take what actions are thought to be appropriate.
If there are violations of the securities laws, they cannot be
I just wonder about interpreting the securities laws in
ways that would extend the reach of the SEC to a whole variety
And so, I think that before the SEC can take steps or
actions, it has to carefully consider what the impact of its
decisions are, not just with respect to the particular item,
but with respect to similar questions that may come up.
Those are complicated issues and the one thing I would do
is, and I realize that this is a topic of great importance and
urgency and it is something I would devote immediate attention
to if I am confirmed.
Chairman Sarbanes. Well, let me just sharpen the issue for
you a little bit.
First of all, amongst those with whom you would consult, I
presume you would also include the U.S. Commission on
International Religious Freedom, which is a Congressionally
established Commission and given these responsibilities to
examine the question of religious freedom around the world.
Now, the question I was putting involved disclosure with
respect to companies doing business in a country that had been
sanctioned under U.S. law.
So it is not putting the SEC in the lead or the initiating
position. The premise of this question is that that has already
happened by the Treasury placing the country on the OFAC-
administered sanctions. And whether the SEC, then, should
require, as part of the disclosure--it is not even access to
the market. That is a step beyond. This question is whether
there should be disclosure to the investors of the fact that
this company is making investments in a country that has been
Mr. Pitt. The key issue in answering your question is
whether the information would be material to a reasonable
My only hesitation is, before I believe that the SEC can
take a definitive position on issues like that, I think it
needs to be first informed about appropriate national policy.
And I accept your amendment, by the way, in terms of other
bodies to consult. I was not meaning to exclude anybody that
has relevance to this. Then the second is to make certain that
the SEC's participation is consistent with its application of
the securities laws in other contexts. If this information were
deemed to be material, under our laws, it must be disclosed.
There are some who suggest that we may be changing the
standards of materiality to lower the threshold because the end
result may be a better one. That is to me not a step the SEC
should take lightly. It is a step that the SEC should
Before it opines on that, it should make sure that it
understands that information is material within the traditional
meaning of that term, unless, for some reason, there is a
desire to have the SEC take a different position with respect
to an issue, and that I think is a policy judgment that would
require Congressional directive.
Chairman Sarbanes. Let me close with this observation.
We think that the response that was made in the letter back
to Congressman Wolf by Acting Chair Laura Unger was responsive
to this situation. So the SEC is, in fact, addressing that
I will just leave it at that, although I guess I leave it
wondering whether the Chairman's Protective Association extends
to Acting Chairmen, as well as Chairman.
Mr. Pitt. It absolutely does, especially when the Acting
Chairman is a personal friend, as Acting Chair Unger is. So the
answer is, it extends to her as well.
Chairman Sarbanes. What management or process changes would
you consider at the Commission? Do you have any in mind as you
get ready to take over?
Mr. Pitt. I do have some thoughts, although, again, I have
not actually pursued them because I have not been confirmed.
I believe, as I have indicated, in transparency. I also
believe that regular meetings at which the Commissioners can
articulate their views to one another and debate back and forth
with members of the staff are the best vehicle to produce sound
policy and decisions.
The Commission has been short-handed, as you noted at the
outset. And in some events, the Commission has acted by
seriatim decisionmaking. While I don't have any views with
respect to any of the decisions the Commission has made by that
process, my own view is that the purpose of a collegial body is
to have all of the Commissioners interacting face-to-face.
I would hope that the Commission would have a schedule of
regular meetings. The way we did it a quarter of a century ago
was to have meetings on Tuesdays, Wednesdays, and Thursdays,
and have an open calendar on one of those days and a closed
calendar on the others. To me, having Commissioners interact
with one another is a very, very important part of the
statutory framework that this Committee oversees.
Chairman Sarbanes. In closing, I think it is extremely
important that we try to have a full complement at the SEC. It
is a five member Commission. Currently, three positions are
vacant. The terms of the other two Commissioners who are
serving have, in fact, expired. But under the law, there is a
holdover period that is permitted, and they are now both
serving in the holdover period.
Mr. Pitt. That is right.
Chairman Sarbanes. The SEC is much too important an
institution to be left without a full complement of highly
qualified Commissioners. I am responsive to your observation of
trying to get the Commission to work as a collegial body. I
think early in the hearing you made the observation that each
person has a vote down at the SEC. The Chairman has a vote, one
vote, just like each Member of the Commission has one vote.
There is a tendency that has developed, I think, in
Washington with respect to many of these Commissions or Boards
to think that only the Chairmanship matters and to neglect the
other Members of the Board or of the Commission, who often
share equal, at least as far as voting is concerned, equal
And that, I think, has resulted in a depreciation of what
is expected from the Commission Members. People come in and
they have a high standard, or one hopes that they have a high
standard for the Chairman. Then they tend to let that tail off
when it comes to Commission Members. And I think the SEC is of
such importance that we need five very able, well-qualified
We have discussed this with the Administration and I think
that they are sensitive to this problem. We are hopeful that
they will send us candidates as well qualified as Harvey Pitt,
or at least approximates--it is hard to be as well qualified as
Harvey Pitt, as everyone has said here this morning, but at
least moving up in that direction.
We have indicated that we are prepared to act promptly on
nominees as they come before us. We intend to act on this
nomination in the very near future and take it to the Senate
floor and hope to have early action on it there as well, so we
can get a confirmed Chairman into place.
Because of the alterations that were made in the term which
you will be filling, you will be able to go into place with a
quorum, without any question.
To allow an agency with the importance of the SEC to get to
the point where there are questions being raised about a quorum
is a serious development. Now, I am not laying that off on the
new Administration. I realize that there are responsibilities
that trace back a bit into our past.
But that is our intention with respect to the Commission. I
think the biggest service this Committee can perform right now
for investor protection and the strength of the markets is to
get a fully functioning SEC Commission into place of highly
able and competent people. That is our intention. We hope to
accomplish that, working with the Administration. We are very
pleased to have you before the Committee today. I don't think I
am giving away any secrets if I wish you the very best in your
Unless there is something you want to add, I want to close
by again telling Robert and Sally, they were superb performers.
Mr. Pitt. I would like to thank you personally, Mr.
Chairman, for both your expedition in having this hearing and
your very generous comments about me.
If I am confirmed, I would consider it an honor and a
pleasure to be working with you and the rest of the Committee.
Chairman Sarbanes. Good.
This hearing is adjourned.
[Whereupon, at 12:30 p.m., the hearing was adjourned.]
[Prepared statements, biographical sketch of the nominee,
and response to written questions follow:]
PREPARED STATEMENT OF CHAIRMAN PAUL S. SARBANES
I would like to welcome Mr. Harvey L. Pitt this morning before the
Committee on Banking, Housing, and Urban Affairs.
The President has nominated Mr. Pitt to be a Member of the U.S.
Securities and Exchange Commission and to serve as its Chairman. His
nomination papers were completed as of July 9, 2001.
Mr. Pitt earned a Bachelor of Arts degree from Brooklyn College and
a Juris Doctor degree from St. John's University.
Mr. Pitt has worked with the securities laws for his entire
professional career. After graduating from law school in 1968, he
worked at the SEC, rising from working as a Staff Attorney in the
Office of the General Counsel to the positions of Chief Counsel of the
Division of Market Regulation, Executive Assistant to Chairman Ray
Garrett, and General Counsel. He was the youngest General Counsel in
the SEC's history. In 1978, Mr. Pitt left the Commission to join the
law firm of Fried, Frank, Harris, Shriver & Jacobson, where he is now a
partner. In private practice, he has represented virtually every
segment of the securities markets, including securities exchanges,
trade associations, accountants, publicly traded corporations,
corporate officers, broker-dealers, registered representatives,
investors, and others.
Mr. Pitt has actively published on securities issues. He has co-
authored two legal treatises on financial services: The Law of
Financial Services and Securities in the Electronic Age: A Practical
Guide to the Law and Regulation. He has co-authored over 300 published
articles and nearly 200 law firm client memoranda on many aspects of
the securities laws.
Mr. Pitt belongs to several legal, social, and educational
organizations. He also has served on the Board of Trustees of Cardozo
Law School, as Chairman of the Practicing Law Institute Annual
Securities Law Institute, as Chairman of the Securities Regulation
Institute of Northwestern School of Law, and as President of the SEC
The U.S. securities markets are the envy of the world. The Chairman
of the SEC plays a critical role in promoting the strength and
efficiency of these markets and inspiring trust and confidence among
investors. I believe that protecting investors, ensuring the fairness
and integrity of our securities markets and aggressively enforcing the
securities laws are primary functions of the Commission.
Citizens and institutions invest their money in stocks traded on
these markets for a number of reasons. They trust the accuracy of the
income statements and balance sheets that public companies file. They
rely on the certification of financial statements by accountants. They
believe that public companies give them fair disclosure and do not make
material information available to some investors before others. They
trust market and exchange professionals to execute their orders fairly,
without stepping ahead or manipulating the market. And, they assume
that the SEC and the self-regulatory organizations under its authority
are vigorously enforcing the laws, developing methods to more
effectively detect and prosecute violators, and imposing significant
punishments and, in the case of fines, collecting those fines.
Mr. Pitt's work at the SEC and representing clients brought before
the SEC give him an extraordinary knowledge of both the Federal
securities laws, as well as the varieties of misconduct that can harm
investors and the markets. We hope, if confirmed, he will use this
knowledge and experience to better protect investors and enhance the
quality of the securities markets.
We look forward to hearing the testimony of Mr. Pitt.
PREPARED STATEMENT OF SENATOR JON S. CORZINE
Thank you, Mr. Chairman, for holding this hearing. I also want to
welcome Mr. Pitt and thank him for joining us here today.
Mr. Chairman, I had the opportunity to sit down with Mr. Pitt
earlier this month, and came away from our conversation with great
respect for the depth of his knowledge about the many issues affecting
America's securities market. He struck me as being fair-minded and
balanced in his approach to the complex questions that he will
encounter at the agency.
Obviously, in assuming the leadership of the SEC, Mr. Pitt would
take on the critical responsibility of maintaining the honesty and
integrity of our Nation's securities markets. It is a charge I believe
Chairman Levitt sought dutifully, and admirably to uphold, and I would
be remiss if I failed to acknowledge his work at the agency.
In my view, maintaining the integrity of America's markets is the
SEC's paramount responsibility--because it promotes market efficiency,
and ultimately, it reduces the cost of investment.
While I may have, at various points, during my previous career
disagreed with the agency, I have long felt that the SEC, particularly
under Chairman Levitt's stewardship, has done as credible and effective
a job as possible in undertaking the enormous task of managing our
markets. And as a result, America's securities markets are the envy of
However, our dominance should never be taken for granted--nor
considered a foregone conclusion in perpetuity. If our markets are to
remain strong, we must vigorously pursue even greater efficiency,
transparency, and competition. Our ability to maintain a position of
dominance will be shaped in many ways by the extent to which the SEC
works to ensure that our markets remain efficient, reliable, and
progressive places to do business.
These characteristics need to be attained in both benign and
stressful market environments. In fact, crisis management may
ultimately prove to be the attribute by which the effectiveness of the
next SEC Chairman is evaluated.
The U.S. securities market has in many ways provided the fuel for
the expansion of the global marketplace. Both domestically, and abroad,
it has driven economic growth and been a force for global,
technological, and cultural change. In doing so, our capital markets
have grown stronger, more liquid and more adaptable to ever-changing
economic conditions around the world and here at home.
We are in the midst of a period like none other. The
democratization of the markets has led to millions of new investors,
and 48 percent of U.S. households own equities either directly or
indirectly through mutual funds, 401(k) plans or other pension
accounts. The socioeconomic demographics of those who invest have
changed as well, with more middle-income individuals than ever before
now enjoying the benefits of equity ownership and investment in
America's capital markets.
Mr. Chairman, I look forward to Mr. Pitt's testimony before the
Committee today, and his insights about the direction he will take the
SEC in this era of globalization and technology.
I am also looking forward to his thoughts on the ways in which the
agency will seek to mitigate market fragmentation; handle the emergence
of new trading technologies, and the ways in which he will seek to
promote increased competition.
To be certain, there are a great many issues that the SEC will have
to deal with immediately--including transaction fees and the pay parity
issues that this Committee has sought to remedy. But issues such as the
agency's fair disclosure (Regulation FD) requirements, the issues of
accounting standards, analyst recommendations, and the issue of payment
for order flow are all incredibly important items that must be dealt
with as they get to the heart of the integrity and credibility of our
markets--and the trust that investors have in them.
Mr. Chairman, I want to thank you again for holding this hearing. I
look forward to Mr. Pitt's testimony.
PREPARED STATEMENT OF SENATOR MICHAEL B. ENZI
I thank Chairman Sarbanes for holding this hearing on the
nomination of Harvey Pitt, to be a Member of the Securities and
Exchange Commission (SEC). Chairman Sarbanes, I appreciate you
scheduling this nomination hearing and vote in an expeditious manner.
Mr. Chairman, there are currently only two Commissioners serving at
the Securities and Exchange Commission (SEC). The addition of Mr. Pitt
will provide the SEC with three out of a total of five Commissioners
that are needed. Harvey's tremendous credentials and qualifications are
unquestionable. His immense understanding of securities laws and
regulations is essential for the post he is about to assume.
The SEC serves an important function for the protection of
investors' interests and the integrity of our securities markets.
However, it is crucial that the SEC does not issue regulations only in
the name of protecting investors. The policymaking process should be
accompanied by a cost-benefit analysis approach and the appropriate due
diligence in the rulemaking procedures.
I welcome Harvey Pitt to the Banking Committee and look forward to
working with him in the future.
PREPARED STATEMENT OF HARVEY L. PITT
Member-Designate of the U.S. Securities and Exchange Commission
July 19, 2001
Chairman Sarbanes, Senator Gramm, Distinguished Members of this
It is with great respect, and humility, that I appear before you
today, to seek your confirmation of President Bush's nomination of me
to serve as a Member of the Securities and Exchange Commission. I am
deeply grateful to President Bush for the honor he has accorded me by
this nomination, as well as by his stated intention to appoint me the
next Chair of the Commission, if I am fortunate enough to be confirmed.
And, I thank you, Chairman Sarbanes, Senator Gramm, and the Members of
the Committee and staff, for your support and expeditious scheduling of
this confirmation hearing. I am particularly grateful to my fellow
Brooklynite, Senator Schumer, for his kind introduction of me to the
With your permission, I would like briefly to introduce some of the
members of my family here today to witness this important hearing.
First, I would like to introduce my wife and best friend, Saree Ruffin
Pitt. Next, I would like to introduce my father, Morris Pitt, of New
York, who is 87, and without whom I would not be here today. I would
also like to introduce my wife's parents, Dalton and Sarah Ruffin, of
North Carolina. Finally, I would like to introduce to you my four
children, Emily, Jonathan, Robert, and Sally.
I come before this Committee with deep respect for the critical
role assigned to Congress in general, and to this Committee in
particular, with respect to the important multiple missions of the SEC.
If I am confirmed, I pledge to work with you, and the Administration,
to ensure that the Commission is a partner, an independent partner to
be sure, but not an adversary, in our mutual desire to maintain our
capital markets as the fairest for all investors, large and small, and
the most efficient in helping our corporations raise needed capital to
succeed in highly competitive global markets. This is a critical time
in the development and strategic future direction of our capital
markets. It is a time for bold and creative thinking, to formulate an
agenda that will ensure that the SEC's next decade can be as
universally respected and admired as its past, nearly seven, decades.
Seated before you is a first generation American, who has benefited
from the manifold opportunities this country offers to people of
limited means to achieve a piece of the American Dream. The SEC has a
key role to play in overseeing markets that enable millions of
Americans to fuel that dream. I have devoted my entire professional
life to that role. Over the past 33 years, working first at the SEC,
and then in the private sector, as a securities lawyer, I have been
blessed with wonderful colleagues, and have been fortunate to enjoy a
broad and diverse exposure to the many aspects of securities regulation
and enforcement. Nearly a quarter century ago, I was privileged to
serve as SEC General Counsel, an experience that shaped my life as a
lawyer and counselor. As a result of my experiences within and outside
the Commission, I have enormous respect for the agency, its mandate,
and the dedicated people who strive to give Congresses' legislative
words true meaning, day in and day out. Having an opportunity to serve
the investing public, and the needs of our capital markets, would make
my fondest dreams a reality.
There are several goals I would pursue, if I am confirmed and
become the next SEC Chair. First, I will ensure vigilant enforcement of
sound rules that protect all investors against fraudulent, deceptive,
and manipulative misconduct and that make our capital markets the
world's most honest, efficient, and envied. While I am proud of my past
legal practice on behalf of private clients, I want to assure you that
my commitment to the public interest and public investors, both small
and large, is genuine, strong, and all encompassing.
Second, I will focus on the agency's mission to nurture a climate
that is conducive to, and encourages, the creation of capital. Much has
changed since the SEC's birth--new competition at home and abroad, new
technology, instantaneous communications, exponential increases in
international trade, the creation of more complex financial products,
and greater involvement in our markets by both American citizens and
overseas investors. Capital is the life blood of innovation. Emerging
businesses, and established multinational conglomerates, create jobs,
research and development breakthroughs, and higher standards of living.
I believe the Commission has a mandate to ensure efficient, cost-
effective, and seamless capital-raising.
Third, to protect American capital markets and their participants,
we must ensure that our marketplaces remain vigorous and efficient. I
would like the SEC to lead a review of the requirements it administers,
and the regulations it imposes, to be certain they are sound,
reasonable, cost-effective, and promote competition. Our securities
laws are, in the main, nearly 70 years old, and reflect a time, and a
state of technology, light years away from what we now confront daily.
Commission rules are rapidly becoming the securities equivalent of the
Internal Revenue Code, making it difficult for those obliged to comply
with the rules to understand their obligations, and making it
impossible for those who benefit from those rules to understand the
rights they have and how to enforce them. I believe the Commission,
working with this Committee and its House of Representatives
counterpart, is obligated to ensure that statutory and regulatory
requirements do not needlessly increase costs or drive transactions
offshore, where investors often lack protection of the laws the
Finally, but not least, I believe Government is a service industry.
To make Government meaningful, efficient, and competent, agencies like
the SEC must reflect a commitment to service. If confirmed, I will
devote my total and untiring efforts to enhancing the Commission's
responsiveness to all its constituencies, with respect,
professionalism, clarity, and expedition. That is the superb legacy of
the SEC to which I am fully committed. If confirmed, I eagerly look
forward to working with you during the coming years, and I feel
confident about the ability of all of us working together, with the
best interests of investors, issuers, and the markets in mind, to meet
Thank you, Mr. Chairman, Senator Gramm, and Members of the
Committee, for this opportunity. I would be pleased to try to answer
any questions you may have.
RESPONSE TO WRITTEN QUESTIONS OF SENATOR SARBANES FROM HARVEY
Q.1. Shareholder Proposal Rules. In 1998, the Commission
revised the shareholder proposal rules, reaching a compromise
among the corporate and investor constituencies interested in
the rule. I support shareholder democracy and want to be sure
that investors have a fair opportunity to make shareholder
proposals. Do you believe the current shareholder proposal
rules are working well? If not, how would you retain the rule's
core commitment to shareholder democracy and participation in
the context of further rulemaking or rule interpretation?
A.1. I embrace the fundamental concept of shareholder
democracy, and share your commitment to it. The Commission
appropriately attempts to balance the importance of providing
shareholders an ability to communicate with one another on
matters of broad shareholder interest with a recognition that a
minority of shareholders should not be permitted to tyrannize
the majority to further their own agendas. If confirmed, I
expect, in conjunction with my fellow Commissioners and the SEC
staff, to consider how the current rules function, and whether
the process can meaningfully be enhanced, consistent with the
overarching principles the rules attempt to embody.
Q.2. Payment for Order Flow. Former SEC Chairman Arthur Levitt
in a speech to the Securities Industry Association in November
1999, worried ``that best execution may be compromised by
payment for order flow.'' He added, ``When a broker-dealer
sells customer order flow to a designated market maker or
exchange, the question of whose interest is being served--the
broker's or the customer's--is squarely raised.'' What are your
views on the practice of payment for order flow and its impact
on investors? Should added or clearer disclosure to investors
be required? Should the practice be curtailed or prohibited?
A.2. Payment for order flow is a multifaceted issue. In the
equities markets, the SEC requires disclosure of payment for
order flow, and a broker-dealer's assessment that such payments
are consistent with best execution obligations. Decimalization
is narrowing equities markets spreads and reducing the
incidence of payment for order flow, since penny increments
often make payment for orders too expensive. Since multiple
listing of options became common in 1999, payment for order
flow practices have arisen in the options markets, too. The
issue of payment for order flow, along with other broker-dealer
trading practices, are properly the subject of SEC regulatory
review. If confirmed, I look forward to the benefit of thinking
about these issues by my fellow Commissioners and the SEC staff
in determining whether additional measures may be appropriate.
Q.3. Accounting Fraud. USA Today on June 22, 2001, published an
article ``Fuzzy Accounting Raises Flags--Investors Feel the
Pain When Companies Fudge the Facts,'' highlighting the problem
of accounting fraud. It pointed out there ``have been 464 cases
of financial statements being restated during the past 3
years'' and that, in the year 2000 alone, ``More than $31.2
billion in market value was wiped out following earnings
restatement'' as the stock prices of these companies fell after
the restatements. It continued, ``While some mistakes are
honest, the number of companies intentionally twisting the
numbers to show better quarterly results is rising, accounting
experts, analysts, and academics say. Pressure to meet Wall
Street estimates, especially during an economic slowdown, can
cause executives to use accounting tricks.'' What is your
reaction to these instances of so-called ``fuzzy accounting''?
Will you continue and strengthen the SEC's current efforts to
sanction accounting fraud? Also, would you work toward
requiring ``Plain English'' financial disclosures?
A.3. Accounting fraud--deliberate misapplication of accounting
principles to mislead investors--should be met with swift,
vigorous, timely, and efficacious enforcement responses. But
enforcement, by definition, is an after-the-fact response to
problems that should be minimized or eliminated by providing
investors with ``real time'' meaningful information.
Questionable accounting practices can result from insufficient
clarity regarding the principles to be applied, or the methods
by which those principles should be applied, and should be
avoided before investors are injured. The SEC and its staff
should assist public companies and outside auditors at an early
stage in identifying critical accounting principles and
determining whether the proposed or anticipated application of
those principles is consistent with professional standards. The
Commission and its staff also should work with private sector
standard-setting bodies to eliminate ambiguities to the maximum
extent possible. If confirmed, I will consult with my fellow
Commissioners, the SEC staff, the Financial Accounting
Standards Board (FASB) and the accounting profession to see
whether the concept of ``Plain English'' financial disclosures
can be developed.
Q.4. Investment Company Act and Biotechnology Industry. Some of
my constituents in the biotechnology industry have brought to
my attention their concern regarding the status of their
companies under the Investment Company Act of 1940. Some
biotechnology firms wish to make extensive investments in new
biotechnology companies. However, they believe that their
companies, if they make such investments, would be deemed to be
investment companies under the Investment Company Act and be
required to register with the Commission. They question whether
the Investment Company Act was intended to reach this
situation. As Chairman, would you be willing to meet with
biotechnology companies, such as these constituents, to discuss
the application of the Investment Company Act to the
biotechnology industry and to consider their views?
A.4. As I testified, Government must understand the concerns of
those it seeks to regulate. The problem of whether, and when,
an operating company may be deemed an ``inadvertent investment
company'' is a subject about which the SEC has broad exemptive
authority, and extensive administrative experience. If
confirmed, I will work with my fellow Commissioners, the SEC
staff, and the biotechnology industry to facilitate a dialogue
about these issues.
Q.5. Mutual Fund Advertising. The late Commissioner Paul Carey
noted in a March 2, 2001 speech entitled ``Mutual Fund
Performance Advertising: Is It In Overdrive?'' that mutual
funds sometimes advertise stellar performance results without
putting those results in context and investors are misled. As
Chairman, how would you seek to enhance the accuracy and
completeness of performance advertising by mutual funds?
A.5. One of Commissioner Carey's lasting legacies is his
advocacy for our Nation's mutual fund investors, including his
efforts to promote the accuracy and completeness of mutual fund
advertising. If confirmed, I look forward to considering
whether, and how, to enhance disclosures of this nature.
RESPONSE TO WRITTEN QUESTIONS OF SENATOR SCHUMER FROM HARVEY L.
Q.1. Mark-to-Market. The trend globally is toward fair value or
mark-to-market accounting for financial institutions. However,
I have seen numerous articles pointing out a disparity in
accounting practices between commercial banks and securities
firms. It is my understanding that commercial banks do not
apply fair value accounting to the loan commitments they make
and instead carry them on their books at par value, while
securities firms mark their loan commitments to market. This
discrepancy means that a commercial bank's income statement
would reflect higher earnings than the income statement for a
security firm engaging in the same activities. This disparity
in accounting treatment may be confusing to investors. Is this
something the SEC will examine as part of its responsibility to
assure that investors receive accurate information?
A.1. The guiding principle in financial regulation, expressed
in the Gramm-Leach-Bliley Act, is the concept of a ``level
playing field.'' Disparities in accounting treatment between
banks and securities firms could contravene this guiding
principle, and should be examined to understand the reasons for
any differences in treatment that may exist, and the effects of
those differences. With specific respect to requirements that
certain securities be marked to market, I understand that the
FASB is considering the formulation of technical guidance. If
confirmed, I will consult with my fellow Commissioners, banking
regulators, SEC staff, the accounting profession and affected
parties to develop an appropriate approach to this legitimate
Q.2. Accounting. The current accounting framework does not
anticipate needs of capital market participants in an economy
of rapid technological change, where investors receive
information instantaneously--some accurate, some not, and where
the number of households involved in the equity markets have
grown substantially. The system needs to be modernized so
investors can still be protected but given access to
information that better enables decisionmaking. Do you believe
we need to reassess the basic financial reporting model? Would
you support the Garten Commission recommendations? Do you
believe that information on intangible assets should be
included on the financial statement?
A.2. As I testified, I believe that investors must receive
meaningful financial information on a ``real time'' basis, to
give them an accurate picture of public companies in which they
place their investment dollars. The resolution of this issue
centers, in part, on whether meaningful information is not
being reported, or simply is being missed, due to gaps in the
requirements of the current financial disclosure model. The
recent Garten report, and in particular its consideration of
intangible assets, is a significant contribution to our
understanding of this aspect of the issue. I believe this is an
issue of great importance, not only to those who create and
audit financial statements, but to all investors who rely upon
this essential information. If confirmed, I look forward to
rigorous and timely consultation, first with my fellow
Commissioners and SEC staff, and then with accounting experts,
corporate issuers and representatives of public investors, to
find ways to enhance financial reporting.
RESPONSE TO WRITTEN QUESTIONS OF SENATOR MILLER FROM HARVEY L.
Q.1. The Investment Company Act and the Investment Advisers Act
give the SEC very flexible authority to update these laws
without the need for Congress to do so, although of course, we
could. What is your view about the need to update and modernize
these 60-year-old Acts?
A.1. Mutual fund assets have topped $7 trillion. With so many
Americans investing so much money in mutual funds, the SEC must
work diligently to maintain its excellent record of mutual fund
regulation, and should undertake a review of the statutes and
rules adopted to ascertain whether they are consonant with
current issues and practices. If I am confirmed, I will, in
consultation with my fellow Commissioners and the SEC staff,
review the need, if any, for updating the current regulatory
regime. It may be that most, if not all, necessary changes can
be made by the Commission, without the need for additional
legislation, but I will, if confirmed, keep the Committee and
its staff apprised of our thoughts on these matters, and work
with the Committee to ensure an appropriate regulatory
Q.2. You know that Congress passed the Gramm-Leach-Bliley Act
that modernized the structure of the banking and securities
industries. I understand that the Investment Company Act and
the Investment Advisers Act have not been updated to come into
line with that very important modernization Act. Are you going
to have the SEC bring those Acts up to speed with the new
A.2. I concur in the Gramm-Leach-Bliley Act's intent to impose
``functional regulation'' on financial services, and I look
forward, if I am confirmed, to working with my fellow
Commissioners and the SEC staff to assure that the 1940 Acts,
and the regulations promulgated pursuant to them by the SEC,
are consistent with the new legislation.
Q.3. Are you committed to preserving and increasing competition
among exchanges and over-the-counter markets, especially in
light of the innovation and the other benefits that such
competition can bring?
A.3. I am firmly committed to preserving and increasing
competition among exchanges and over-the-counter markets. If
confirmed, I will seek to assure that such competition
flourishes in U.S. markets, and that U.S. markets maintain
their preeminence in the face of increasing global competition.
Q.4. What is your current thinking on the ``central limit order
book'' for the Nasdaq market?
A.4. As a private attorney some years ago, I advanced the idea
of a ``centralized limit order book'' on behalf of several
large brokerage firms. Since then, the SEC adopted new rules
enhancing disclosure of execution quality. If confirmed, I will
consult with my fellow Commissioners and the SEC staff to learn
of the experience with these rules. As a general proposition,
it is of vital importance to investors that they receive the
benefits of competition among diverse markets in the form of
RESPONSE TO WRITTEN QUESTIONS OF SENATOR CRAPO FROM HARVEY L.
Q.1. In a September 23, 1999, speech, former SEC Chairman
Arthur Levitt said: ``In the listed market, traditional
structures like the archaic Intermarket Trading System must not
bar participation by ECN's that remain broker-dealers . . .
ECN's simply must be able to compete with traditional exchanges
and dealer markets in an environment free from unfair
advantages or unreasonable barriers.'' Do you agree with former
Chairman Levitt's sentiments that we must find a way to bring
the benefits of electronic agency markets to the listed
A.1. I believe the ECN's should be able to compete with
traditional exchanges and dealer markets in an environment free
from unfair advantages or unreasonable barriers. At the same
time, recognizing their differences, ECN's must be subject to
the same high quality regulatory scrutiny and oversight that
protect investors on the exchanges and Nasdaq. Implementing
this goal is an ongoing challenge, in light of constantly
changing market dynamics. If confirmed, I will endeavor to work
with the other Commissioners and the SEC staff to achieve this
Q.2. Technology and the introduction of the ECN's have caused
tremendous changes in the competitive environment between the
exchanges. What is your view as to whether the ECN's should be
permitted to become registered security exchanges? Should the
Commission continue to require exchanges, now changing to for-
profit corporations, to maintain a majority public board, or is
such a policy becoming outdated?
A.2. Several of the ECN's have applied to become exchanges, but
I have not seen their applications. If confirmed, I look
forward to discussing this matter, as well as the issue of
public board membership on exchanges, with my fellow
Commissioners and the SEC staff.
Q.3. With the structural changes in the markets such as
Nasdaq's IPO and bids by electronic markets to become
registered national securities exchanges, what is your position
as to how to create a truly competitive environment? How can we
ensure that we pursue policies that allow our markets to
innovate so they can continue to lead the world?
A.3. Fair competition, transparency, price discovery, best
execution, and efficiency have created a foundation of investor
confidence, allowing U.S. markets to flourish. Applying these
principles prospectively, the SEC must allow markets to
continue innovating. The Commission should allow existing
structures to be modified to accommodate new business models,
while assuring compliance with appropriate SEC regulatory
principles. The details of these modifications can be complex
and even controversial. As in other areas, I believe that the
Commission should approach these issues with an open mind and
in consultation with the Congress and all affected parties.
Q.4. Given the impacts of the ITS plan and the importance of
electronic agency markets to the continued competitiveness of
our equity markets, do you agree with the SEC's idea of
applying a ``trade through disclosure'' rule to our Nation's
A.4. A ``trade through disclosure'' rule rests on the basic,
and laudable goals of price priority and effective access
between markets. The Commission must assure that the national
market system facilities and procedures reflect the changing
conditions of today's markets. There are a variety of ways to
achieve these goals and, if confirmed, I look forward to the
opportunity to explore possible alternatives not only with my
fellow Commissioners and the SEC staff, but also with affected
constituencies, including whether broker-dealers, exchanges,
ECN's, and investors.
RESPONSE TO WRITTEN QUESTIONS OF
SENATOR SUSAN M. COLLINS FROM HARVEY L. PITT
Q.1.a. Please describe your views on the SEC Regulation FD. As
Chairman, would you seek to repeal or modify Regulation FD?
A.1.a. As I testified, the premise underlying the rule, that
investors should not be disadvantaged by being denied equal
access to material information, is unassailable. But,
Regulation FD, as adopted, has engendered much debate. The
Commission is now monitoring its effects. I will await the
results of the current monitoring before deciding how
Regulation FD is working, and whether it can be enhanced.
Q.1.b. Would you vigorously enforce Regulation FD as Chairman?
A.1.b. I believe in vigorous enforcement of all the Federal
securities laws. The Commission's Enforcement Staff has stated
that it will not attempt to second-guess reasonable, good faith
judgments by persons who honestly attempt to comply with
Regulation FD. I agree with that approach.
Q.2.a. The Permanent Subcommittee on Investigations has a long
history of investigating securities fraud aimed at small
investors. In 1997, when I Chaired the Subcommittee, the
Subcommittee held its most recent hearing on the subject in an
investigation focusing on fraud in the microcap market. During
our hearing, we found that fraud among low-capitalization
stocks frequently involves two different but related problems.
The first is aggressive, and at times fraudulent, sales
practices such as misleading customers or making unauthorized
trades in their accounts. The second involves manipulation of
microcap stocks by brokers, issuers, or promoters.
In his testimony, then-SEC Chairman Arthur Levitt described
the Commission's campaign against fraud in the microcap market
as focusing on three aspects: Prevention, enforcement, and
regulatory initiatives. What weight would you give to each of
A.2.a. Fraud in the ``microcap'' securities market, like penny
stock frauds in the 1980's, poses a serious threat to
investors. In recent years, there have been many large-scale
schemes in which criminals bilked investors of millions of
dollars through fraud and manipulation of microcap securities.
Microcap fraud is a particular concern on the Internet, but the
SEC has enhanced its efforts to enforce the securities laws in
the new Internet environment. The regulatory challenge
presented by this activity is to control this fraudulent
activity without damaging the market for securities issued by
legitimate small businesses. If confirmed, I will support
continued vigilance in addressing fraud and abuse in the
microcap market through all available means.
Q.2.b. Should the SEC institute a zero tolerance policy,
banning brokers who commit one serious offense from the
A.2.b. I believe the Commission should continue to take firm
action against securities professionals who defraud investors.
In cases of egregious fraud and evidence of recidivism, barring
registered persons from the industry is appropriate. Other
cases require the exercise of careful judgment before a
remedial sanction is selected.
Q.2.c. Please state whether you would support or oppose the
types of changes embodied in S. 1189, the Microcap Fraud
Prevention Act of 1999, which I introduced in the 106th
A.2.c. I have not had an opportunity to discuss S. 1189 with my
fellow Commissioners and the SEC staff, so it would be
premature for me to comment on the specific legislation. As a
general proposition, however, I support strong and effective
measures to stamp out microcap fraud.
Q.3.a. Do you agree with the recent ``investor alert'' issued
by the SEC to warn investors not to rely solely on analysts'
reports when purchasing or selling securities?
A.3.a. I believe investors are often better served if they
review information from more than one source before making
investment decisions. Investor education can play an important
role in clarifying investors' perception of analysts' reports.
Q.3.b. What are your views on potential problems posed by the
conflicts of interest faced by analysts and whether they
A.3.b. Recent accounts of analyst conflicts are troublesome.
There needs to be careful analysis of the conflicts of interest
in this area. The securities industry recently has taken some
important and constructive first steps to address these issues.
Additional consultation among the industry, self-regulatory
organizations, and the SEC, with Congressional oversight, will
be needed, and I look forward, if confirmed, to providing
leadership in this area.
Q.4.a. What role do you see for State regulators in the
regulation of securities and individuals participating in
A.4.a. State securities regulators play an important role in
safeguarding the fairness and integrity of U.S. capital
markets. The Commission has long had a vital partnership with
the States in pursuing these mutual goals, including joint
enforcement sweeps and investor education efforts coordinated
with the North American Securities Administrators Association
(NASAA), the association of State securities regulators. If
confirmed, I will support appropriate efforts to foster the
Commission's cooperative relationship with NASAA and State
Q.4.b. In what ways could the SEC assist States in the
enforcement of their securities laws?
A.4.b. The SEC staff communicates on an ongoing basis with
State securities commissioners to support and to facilitate
State enforcement efforts. The Enforcement Division regularly
shares information with States on emerging enforcement issues
and on specific entities and individuals who either have
engaged, or are engaging, in violative conduct. The Enforcement
Division also conducts training programs that include the
States. In addition, the SEC's regional and district offices
periodically hold cooperative enforcement conferences with the
State securities commissions, self-regulatory organizations,
and local and Federal criminal prosecutors at which enforcement
priorities and program initiatives are discussed. If confirmed,
I will encourage the continuation of such activities.