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Friday, November 8, 2002

The Pitt Fallout

Reported by Sean Hanna, Editor in Chief

While it is too early to do anything but guess at who will replace outgoing SEC Chair Harvey Pitt and how mutual funds will be impacted long-term, some short-term ramifications are apparent. One first guess: while current initiatives may slow down they will not stop altogether.

"While the Chairman is important, he gets one vote just like all of the other commissioners," points our MassMutual's Washington expert Ken Cohen (MassMutual is the parent to Oppenheimer Funds). "His vote does carry more weight, though."

The initial focus of the staff will likely be to implement the rules necessitated by the passage of Sarbanes-Oxley last summer. Included in that bill was a controversial (for the fund industry) requirement that CEO's sign off on their company's financial statements.

The SEC has initially interpreted the law to require fund firm CEOs to sign off on each of the annual reports for the funds in their complex as each fund is a separate investment company. For large shops, such as Fidelity, this requirement is unworkable the industry has contended.

Unfortunately for the industry, this may be an issue that the SEC staff will wait for a new Chairman to settle.

Also on the staff's plate is the new proxy-vote disclosure rule. That rule is now in comment period and it is less likely that its implantation will be slowed by Pitt's resignation. The SEC had also been looking at whether the disclosure requirements around fund holdings should be increased. Some advocates have asked that funds be made to reveal this information more frequently. That initiative is not as far along as the proxy-voting rule, however, and is more likely to warm on a back burner. Also in the early stages was the SEC's exploration of revenue sharing practices in the industry.

Earlier this year at the ICI General Membership meeting, Pitt had warned the industry that 12b-1 fees had not been intended as a permanent fee.

With the importance of to the industry it is no surprise that speculation on who will replace Harvey Pitt at the SEC already abounds. As a handy guide, we have browsed the Web to put together a list of the likely candidates. Of course, at this point we would bet that even President Bush is not sure of who will take the post, so take these predictions with a grain of salt. Oh yes, the consensus seems to be that former New York City Mayor Rudy Giuliani is a long shot at best. Perhaps that means he is a shoe-in?

Washington Post:

The political insider's paper reports a long list of possible candidates. The four topping its list include former SEC chairman Richard C. Breeden, former SEC enforcement chief William R. McLucas, former SEC general counsel and Bush family friend James R. Doty. Another front-runner, according to the paper is former Nasdaq chief and Dick Cheney friend Frank G. Zarb.

Rudolph W. Giuliani, the seeming favorite son on Wall Street told the paper that he is not interested in the job. "I need time out of government right now. That is not something I'm interested in," the paper quotes him as telling members of the Securities Industry Association last night in Florida. "I'm not looking for a job," he said.

Another dark horse listed by the paper is Credit Suisse First Boston General Counsel Gary G. Lynch. The paper posits that he would be a popular choice inside the SEC as he is a former SEC enforcement chief. It also mentions Charles Schwab a possible choice.

Wall Street Journal:

The Wall Street hometown paper reports that the search may bog down as candidates are put under a fine tooth comb in wake of the recent revelations about nominees' pasts and the criticism of Pitt's conflicts. That may be counter-balanced though, by an easier passage through a Republican controlled Senate. It also recommends looking between two types: Washington veterans (sages) and law-enforcement specialists.

Those falling into the law enforcement category, according to the paper, include: Assistant Attorney General Mike Chertoff; former Judge and ex-SEC enforcement director Stanley Sporkin; and Lynch (that makes two votes for Lynch for those counting). The paper adds that Lynch's current job on Wall Street may be a strike against him. It also throws Giuliani into this category (that makes two votes for those counting). Chertoff made his bones prosecuting Arthur Andersen earlier this year in the Enron case.

The Journal also reports that the White House will revisit the list of candidates who missed the appointment in 2001. That list includes Grundfest, Doty and Zarb.

New York Times

The paper of record reports that Wall Street "wants a thoroughly nonpolitical choice" and "as soon as possible." It also quotes Vanguard's Jack Bogle as calling Pitt's resignation an "American tragedy" (interestingly Bogle made no paper's list of candidates, although one insurance company counsel told the 401kWire.com that he would be an interesting choice).

Possible replacements named by the paper include Zarb, Giuliani, Breeden, Grundfest, Chertoff and Doty. It also adds Oklahoma's governor Frank Keating's name into the ring

USA Today:

Main Street's paper leads with the Giuliani rumor but adds that "one member of Giuliani's camp said Giuliani wouldn't take the job." The paper twice mentions that integrity will be a key criteria for the job, once in the same breathe as Giuliani. It then mentions both Zarb and Doty as other possibilities. The paper also notes that SEC chief accountant Robert Herdman is likely to step down also as SEC chairmen tend to pick their own chief accountants.

Boston Globe

The Boston paper mentions the familiar names (Breeden, Lynch, Sporkin, Doty and Zarb). It also throws in another dark horse, Oklahoma Governor Frank Keating.

NY Post

The local New York City paper adds a few more names not brought up elsewhere. They include: Texas Securities Commissioner Denise Voight Crawford; SEC Commissioner Harvey Goldschmid, a Democrat; and former SEC Commissioner Laura Unger, a Republican. It also mentions Chertoff and Zarb.

The List (number of mentions)

Washington Post
  • Joe Grundfest
  • Richard C. Breeden
  • William R. McLucas
  • James R. Doty
  • Frank G. Zarb
  • Rudolph W. Giuliani
  • Gary G. Lynch
  • Charles Schwab

    Wall Street Journal
  • Mike Chertoff
  • Stanley Sporkin
  • Lynch (2)
  • Giuliani (2)
  • Grundfest (2)
  • Doty (2)
  • Zarb (2)

    New York Times
  • Zarb (3)
  • Giuliani (3)
  • Breeden (2)
  • Grundfest (3)
  • Chertoff (2)
  • Doty (3)
  • Frank Keating

    USA Today
  • Giuliani (4)
  • Zarb (4)
  • Doty (4)

    Boston Globe
  • Giuliani (5)
  • Breeden (3)
  • Lynch (3)
  • Sporkin (2)
  • Doty (5)
  • Keating (2)

  • Denise Voight Crawford
  • Harvey Goldschmid
  • Laura Unger 

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