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78–787 PDF 2002

S. HRG. 107–398

NOMINATION OF HARVEY L. PITT

HEARING

BEFORE THE

COMMITTEE ON

BANKING, HOUSING, AND URBAN AFFAIRS

UNITED STATES SENATE

ONE HUNDRED SEVENTH CONGRESS

FIRST SESSION

ON

THE NOMINATION OF HARVEY L. PITT, OF WASHINGTON, DC, TO BE A

MEMBER OF THE U.S. SECURITIES AND EXCHANGE COMMISSION

JULY 19, 2001

Printed for the use of the Committee on Banking, Housing, and Urban Affairs

(

COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS

PAUL S. SARBANES, Maryland, Chairman

CHRISTOPHER J. DODD, Connecticut

TIM JOHNSON, South Dakota

JACK REED, Rhode Island

CHARLES E. SCHUMER, New York

EVAN BAYH, Indiana

ZELL MILLER, Georgia

THOMAS R. CARPER, Delaware

DEBBIE STABENOW, Michigan

JON S. CORZINE, New Jersey

DANIEL K. AKAKA, Hawaii

PHIL GRAMM, Texas

RICHARD C. SHELBY, Alabama

ROBERT F. BENNETT, Utah

WAYNE ALLARD, Colorado

MICHAEL B. ENZI, Wyoming

CHUCK HAGEL, Nebraska

RICK SANTORUM, Pennsylvania

JIM BUNNING, Kentucky

MIKE CRAPO, Idaho

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

(II)

CONTENTS

THURSDAY, JULY 19, 2001

Page

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

NOMINEE

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

(III)

(1)

NOMINATION OF

HARVEY L. PITT, OF WASHINGTON, DC

TO BE A MEMBER OF THE

U.S. SECURITIES AND EXCHANGE

COMMISSION

THURSDAY, JULY 19, 2001

U.S. SENATE, COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS, Washington, DC.

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 the

Commission.

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

Members.

The way the Commission is structured, one term expires in June

of each year. If the Member does not serve out the term, someone

2

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 to fill.

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 him shortly.

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 morning.

[Laughter.]

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 SEC’s history.

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 securities markets.

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 securities law.

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 seVerDate 11-MAY-2000 15:40 May 01, 2002 Jkt 000000 PO 00000 Frm 00006 Fmt 6633 Sfmt 6633 78787.TXT SBANK4 PsN: SBANK4
3

curities 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 Government.

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 you.

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 people.

Chairman SARBANES. As do Senators.

[Laughter.]

Senator GRAMM. As do Senators. That is exactly right.

[Laughter.]

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

4

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?

Senator Shelby.

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.

Thank you.

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.

[Laughter.]

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

5

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.

[Laughter.]

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.

[Laughter.]

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 eliminating others.

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 fierce.

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.

6

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, this morning.

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

7

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 Exchange

Commission.

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.

[Laughter.]

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 valuable

contribution.

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.

8

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 aweinspiring.

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 Brooklyn.

[Laughter.]

And who has just recently celebrated his 87th birthday. Without

my father, I wouldn’t be here in many, many ways.

[Laughter.]

His friend, Harriet Richter, who is also from Brooklyn. Senator

Schumer has a fair number of constituents here today.

[Laughter.]

I would also like to point out my four children, who are my pride

and joy: Jonathan, Emily, Robert, and Sally.

9

Senator DODD. Is it Robert who we had the test with on whether

you are doing well on television?

Mr. PITT. Exactly, yes.

[Laughter.]

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.

[Laughter.]

Senator GRAMM. He is certainly sure he has a favorable crowd.

[Laughter.]

Senator DODD. One day, he may sit on this side of the dais.

[Laughter.]

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.’’

[Laughter.]

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 before it.

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 Dream.

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 our markets.

10

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 would pursue.

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 promote competition.

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

11

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 have.

Chairman SARBANES. Thank you very much for a fine statement.

We will do 5 minute rounds, given the number of Members that

are here, then we will go back for a second round if Members wish.

I want to get right to an important question, although you have

addressed it to some extent, I think, in your opening statement.

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 1990’s.’’ 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 would.

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 examine.

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

12

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 co-extensive interests.

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.

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 truck.

[Laughter.]

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.

[Laughter.]

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 current facilities.

13

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.

[Laughter.]

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 this Committee.

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 important.

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 it?

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

14

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 reflect.

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 critical.

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 financial

reporting.

15

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 weakened.

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.

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 recidivism.

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

16

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 realtime 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 me enormously.

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 criminally prosecuted.

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 it.

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

17

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 them.

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 complying.

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 business.

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.

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 riskbased 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 sufficient.

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

18

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 capitalraising 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 Committee.

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

issue?

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

19

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 initial areas.

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 I can.

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 alVerDate 11-MAY-2000 15:40 May 01, 2002 Jkt 000000 PO 00000 Frm 00023 Fmt 6633 Sfmt 6633 78787.TXT SBANK4 PsN: SBANK4
20

ways 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 accurately.

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 challenge.

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.

21

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-tech area.

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 concerns.

But I am definitely in favor of an accounting system that gets it

right, not that uses Medieval philosophy, as you put it, Senator.

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

22

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.

[Laughter.]

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 of self-regulation.

23

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 is related.

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 the public.

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 participants.

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 represented.

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 different

approach.

We now have a rule, and the SEC has undertaken a review of

the effects.

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 tweaking concerns.

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

24

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 is working.

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 the author.

Senator DODD. That is okay.

[Laughter.]

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 you.

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.

[Laughter.]

First, globalization. I think we have built up almost an exquisite

balance between regulation and competition or regulation and freeVerDate 11-MAY-2000 15:40 May 01, 2002 Jkt 000000 PO 00000 Frm 00028 Fmt 6633 Sfmt 6633 78787.TXT SBANK4 PsN: SBANK4
25

dom 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 smart.

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 deal.

Mr. PITT. I believe that is a risk. I don’t know whether it is doable. 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 other person.

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 successful.

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 markets?

26

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 feasible.

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 livelihood.

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,

27

the lowest spread was one-sixteenth, and that was about 61⁄4 cents.

Now, you can go down to a penny, and there is debate about subpenny 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 look at.

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 do.

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

28

that would arise. And the article then went on to conclude, ‘‘the

agency must deal with new pressures on limited resources.’’ 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 problem.

I am concerned, however, that the SEC focus not just on realtime 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 and honestly.

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.

29

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 presentation.

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 Congress.

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 think.

But I have no question that the SEC is an independent agency.

Chairman SARBANES. I yield to Senator Schumer and then I will

resume.

Senator SCHUMER. I have one final question.

30

Chairman Levitt had been in for 8 years. I believe it is a full 8

years. Right?

Mr. PITT. For 71⁄2 years.

Senator SCHUMER. For 71⁄2 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 71⁄2 years that you disagree with and would work to change?

I could not ask you all nice questions.

[Laughter.]

Mr. PITT. There is an informal group known as the Chairman’s

Protective Association.

[Laughter.]

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 aisle.

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.

[Laughter.]

So it may be the Brooklyn Protective Association.

[Laughter.]

Chairman SARBANES. That certainly complicates the situation.

[Laughter.]

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 71⁄2 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

31

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.

[Laughter.]

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

32

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

indulgence.

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 Employees Union.

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 contract.

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 environment?

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

33

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 employees.

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 Treasury.

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.

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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 countenanced.

I just wonder about interpreting the securities laws in ways that

would extend the reach of the SEC to a whole variety of issues.

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 sanctioned.

Mr. PITT. The key issue in answering your question is whether

the information would be material to a reasonable investor.

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.

35

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 understand.

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 matter.

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 hearVerDate 11-MAY-2000 15:40 May 01, 2002 Jkt 000000 PO 00000 Frm 00039 Fmt 6633 Sfmt 6633 78787.TXT SBANK4 PsN: SBANK4
36

ing 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 decisionmaking authority.

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 members.

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 future responsibilities.

Unless there is something you want to add, I want to close by

again telling Robert and Sally, they were superb performers.

[Laughter.]

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:]

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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 Historical Society.

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.

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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 the world.

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 everchanging 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.

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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 Committee:

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 Committee.

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

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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

Commission enforces.

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 these challenges.

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.

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RESPONSE TO WRITTEN QUESTIONS OF SENATOR SARBANES

FROM HARVEY L. PITT

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

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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 someVerDate 11-MAY-2000 15:40 May 01, 2002 Jkt 000000 PO 00000 Frm 00100 Fmt 6602 Sfmt 6602 78787.TXT SBANK4 PsN: SBANK4
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times 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. PITT

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 concern.

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

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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. PITT

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 framework.

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 legislation?

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.

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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 best execution.

RESPONSE TO WRITTEN QUESTIONS OF SENATOR CRAPO

FROM HARVEY L. PITT

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 environment?

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 goal.

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 forprofit 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?

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tively, 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 equity markets?

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

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as focusing on three aspects: Prevention, enforcement, and regulatory initiatives. What weight would you give to each of these?

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 industry?

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 Congress.

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 warrant

regulation?

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 securities markets?

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

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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 securities regulators.

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.

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