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Less than 24 hours after the terrorist attacks of Sept. 11, Securities and Exchange Commission Chairman Harvey Pitt headed for Manhattan. Among the first members of the Bush administration to visit Wall Street following the attacks, Pitt was clear in his mission — to get the stock market up and running in an orderly fashion as soon as possible. But as the new SEC chairman quickly saw firsthand, determining the appropriate time to resume trading was not a simple calculation, given the devastating loss of life and physical destruction experienced by major market participants and the markets themselves. Despite enormous political pressure, Pitt delayed the opening until Sept. 17 — the longest closure of the stock market since before World War II. It was the first in a series of decisions that may have helped avoid a major financial meltdown. In his first real test as chairman, Pitt has shown a willingness to work with other market regulators at home and overseas, and also with the behemoths of Wall Street that his agency must oversee. Overall, the SEC’s response has been measured — made up of small technical changes designed to encourage the flow of capital. Pitt has resisted pressure from some lawmakers for more dramatic policy shifts, such as a ban on the short-selling of stocks. “I think the commission has worked very hard to both maintain responsiveness to circumstances but also to maintain a sense of calm,” says Brandon Becker, a partner at D.C.’s Wilmer, Cutler & Pickering and former director of the Division of Market Regulation. “It’s clear they want to instill confidence that the markets are going to continue to operate as they always have.” In its most significant action, the SEC called on untested emergency powers to allow companies to purchase their own stock without meeting certain restrictions. The SEC also extended assistance to ailing airline and insurance companies, agreeing to speed access to the capital markets by processing stock sale registrations within five days, instead of the usual waiting period of several weeks. In addition, the agency has postponed several compliance deadlines and signaled a general willingness to work with securities businesses as they recover from the effects of the terrorist attacks. “A key component of our response to the events of Sept. 11 has been to work with regulators and market participants to ensure that the country’s markets continue to operate in an orderly and fair manner,” says SEC spokesman Michael Robinson. ON THE SCENE The SEC’s biggest challenge may have been its first — determining when to reopen the stock market. After arriving in Manhattan on Sept. 12, Pitt brought together leaders from the New York Stock Exchange, Nasdaq, and the major brokerage firms. It quickly became apparent that the markets would not be prepared to open before Friday, Sept. 14, at the earliest and possibly not until Monday, Sept. 17. The SEC and administration officials faced two competing interests. On the one hand, with each day the markets stayed inactive, investor anxiety built, increasing the potential of a steep drop when they eventually opened. On the other hand, it might be even more devastating for trading to begin and then be interrupted because of a technical failure. In the end, trading resumed Sept. 17, leaving time for the exchanges to perform crucial systems tests over the weekend. Most market-watchers view the reopening as a success, given the unprecedented circumstances. Though stock values fell considerably, there was record trading volume and no major operational problems. “The proof is in the pudding,” says Steven Wallman, an SEC commissioner from 1994 to 1997. “Markets have obviously stabilized at a lower level than they were before, but there has been nothing like the enormous volatility there might have been.” WELCOME RELIEF As the markets prepared to open, the SEC announced a series of relief measures, including a waiver of certain restrictions that would ordinarily apply to companies purchasing shares of their own stock. Normally, companies buying back shares near the opening or closing of trading would risk being investigated for stock manipulation. But since the 1987 market crash, regulators have been aware that, during a crisis, those restrictions can inhibit liquidity and do more harm than good. Former SEC insiders say easing the buyback restrictions was probably part of existing SEC contingency plans for handling a major market crisis. Other relief measures — such as allowing displaced American Stock Exchange specialists to sell stocks on the trading floor of the New York Stock Exchange — were probably cobbled together as the extent of the catastrophe became apparent. “Unlike the 1987 stock crisis, which was purely economic, here you have people whose lives have been sorely affected and firms that have been physically affected,” says Wallman, who now runs the online broker service FOLIO fn. “It’s a terrible mistake to insist on ordinary rules in extraordinary times.” In response to a request by the Securities Industry Association, the SEC pushed back a deadline for broker-dealers to provide disclosures on their procedures for routing orders. Stuart Kaswell, the group’s general counsel, calls the SEC’s response to the attacks “thoughtful” and “flexible.” “There was a lot of nervousness among firms trying to pull operations back together,” says Kaswell. “The SEC has basically assured us that if problems arise they will be taking these events into consideration.” He adds, “It’s a different personality over there, and we couldn’t be more pleased.” While the SEC has seemed willing to grant nearly any small measure that might assist market participants in the aftermath of the terrorist attacks, Pitt has stood firm against calls for banning short sales of stock. The short-selling of stock allows an investor to profit off a decline in share price. Rep. John LaFalce, D-N.Y., ranking minority member on the House Financial Services Committee, wrote Pitt on Sept. 24 urging him to consider putting a halt to the short-selling of stocks. But despite an ongoing investigation into whether people involved in the Sept. 11 attacks might have profited by short-selling airline, insurance, and other affected stocks, Pitt maintains that the practice is part of normal market operations and that to change the rules on investors now would send a signal that market activity has been disrupted by the attacks. “The history of this country, going back even to the attack on Pearl Harbor and the Kennedy assassination, had never seen this country ban short-selling,” Pitt said at a Sept. 26 Hill hearing. “When the markets reopened, we wanted investors to be met with the same markets they had seen before the catastrophe.” Now, in a move some call oddly timed, the SEC seems prepared to actually loosen existing constraints on the short-selling of stocks. According to The Wall Street Journal, the proposed rule changes, which were set in motion several years ago, would allow unrestricted short sales of high-volume stocks. The SEC may be proceeding now in anticipation of the December debut of single-stock futures — a high-risk product that will similarly allow investors to profit off price drops. “It may just be a recognition that the rules as they currently exist don’t do much anyway,” says Brian Borders, president of the Association of Publicly Traded Companies. “We’ve always supported tighter regulation, but we’ve never seen a rule that couldn’t fairly easily be worked around.” Still, even those skeptical of Pitt’s cozy relationship with Wall Street are reluctant to criticize his performance over recent weeks. “To a certain extent, I think the results speak for themselves,” says Barbara Roper, of the Consumer Federation of America. “The reopening of the markets basically went off without a hitch, which is really pretty remarkable.” As for the relaxation of buyback provisions, Roper is less enthusiastic. “Obviously, it is not something we would want to see go on indefinitely,” she says. “For now, I’m just going to assume that the SEC and the exchanges will be monitoring closely.”

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