Commentary: A Handicapper's Guide to the New SEC Chief

By Christopher H. Schmitt

Bush Administration officials pass up few opportunities to extol the virtue of the nation's growing investor class. And why not? The fact that half of U.S. households now own equities is seen as vindication of former President Ronald Reagan's belief in "the magic of the marketplace." But all the democratization of investing has also exposed investors to an array of abuses as Wall Street's second-class players. Now, with the selection of a savvy Wall Street insider as chairman of the Securities & Exchange Commission, comes an important test of just how serious the Bush folks are. Will Harvey L. Pitt, a Washington (D.C.) securities lawyer with a roster of clients ranging from Wall Street finagler Ivan Boesky to the Big Board, continue the energetic defense of individual investors championed by outgoing SEC head Arthur Levitt Jr.?

SWIFT RISE. Those who know Pitt insist he has the talent to head the agency. From 1975 to 1978, he was its general counsel, capping a swift seven-year rise at the agency. Since then, he has been a securities litigation superstar whose nomination has won bipartisan praise.

The morning line on Pitt is this: He's expected to be an energetic and vigilant chairman, in the tradition of Levitt. But most believe he'll lack his predecessor's appetite for public jawboning and backroom pressure tactics. "The commission will continue to be activist," ventures John F. Olson, a securities lawyer who has known Pitt for years. "But there will be more of a cordial give-and-take with the industries it regulates."

As a legal hired gun, Pitt hasn't left much of a philosophical record on many of the thorny issues that matter to individual investors. So, to determine if the new chief is a Wall Street patsy or a Pitt bull, investors should follow these bellwether issues:

-- Regulation FD. A recent Levitt legacy, it bars companies from selectively and preemptively sharing information before its public release. Reg FD is detested by the securities industry, which is preparing a new assault. Some of Pitt's former clients are among those who'd like it weakened. If the new chairman wants to level the playing field for small investors, watch to see that he doesn't countenance any rollback of Reg FD.

-- Creative accounting. To boost profits, companies have been tarting-up their earnings statements as never before. These approaches range from changing critical assumptions to omitting or redefining traditional expenses. With enforcement cases expected soon, an activist SEC head won't temper the agency's enthusiasm for referring such cases to the U.S. attorney's office.

-- Market structure. New electronic trading systems have raised questions about whether investors have been getting the best deals on trades. Previously, Pitt drafted a plan, first embraced but then dropped by the SEC, that would have centralized trading among his then-clients, some of the biggest investment banks. Now, Pitt will need to look beyond vested interests and ensure that investors get the best prices.

-- Regulatory overhaul. On Capitol Hill, Senate Banking Committee Chairman Phil Gramm (R-Tex.) is beginning a sweeping review of decades-old laws that underpin the workings and oversight of the nation's security markets. Financial giants are eager to roll back rules. Key for investors: Will Pitt fight his old allies to preserve protections in the face of industry- streamlining efforts?

-- Circular dealing. Acting SEC chair Laura S. Unger recently took up a longstanding issue: the conflict created when securities analysts use their research to curry favor with companies in hopes of landing investment-banking business for their firm. Already she has called for better disclosure, changes in analysts' compensation to play down incentives for them to be involved in banking, and stronger patrols of the all-but-collapsed division between firms' analysts and dealmakers. A pro-investor SEC chief will throw his weight behind such a drive.

Certainly, the new chairman's actions may not always be so black and white. But these tests will give investors a clear view on whether Pitt is emerging as an advocate for investors, or investment firms.

With Mike McNamee and Paula Dwyer, in Washington, D.C.

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