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SEC approves new ethics rules for stock analysts

The Securities and Exchange Commission approved new ethics rules for stock analysts Wednesday as the agency's chairman faced growing calls to step down for being insensitive to his own conflicts of interest and for undermining public confidence in the markets.

With minor modifications, the commission unanimously approved the analyst rules proposed earlier this year by the New York Stock Exchange and the National Association of Securities Dealers. The rules were applauded by some of Wall Street's largest firms. The industry's main trade group, the Securities Industry Association, called them tough and necessary for maintaining trust, but said they would be onerous for smaller firms to comply with.

Some Democrats, institutional investors and consumer groups complained that the rules were both tardy and tepid and were intended by industry cheerleaders to head off more stringent proposals to completely bar analysts from also working on merger and underwriting business for clients of their investment banks.

A somber mood pervaded a commission hearing Wednesday morning, stoked by lead editorials in the Wall Street Journal and the Financial Times strongly suggesting that Harvey Pitt, the chairman of the commission, step aside for repeatedly being insensitive to the appearance of possible ethical breaches. The headline on the Journal editorial, "Harvey Pitt's Credibility" and its conclusion that the White House should have no confidence in him, cast a heavy shadow at the agency on a day in which Pitt had hoped to shine.

The latest incident occurred two weeks ago, when Pitt met with the new head of KPMG, a former client of Pitt's when he was a partner at the law firm of Fried, Frank, Harris, Shriver & Jacobson. KPMG is under a fraud investigation for the auditing work it performed for Xerox, which recently settled the case with a US$10 million fine.

Pitt has denied an account by Eugene O'Kelly, KPMG's new chief executive, that O'Kelly raised the investigation during the visit and suggested that the agency drop the case. But Pitt has also said that he will no longer participate in such meetings. He and O'Kelly have been asked by lawmakers to provide a written account of the meeting.

Under political pressure to demonstrate his independence from his former Wall Street clients, Pitt praised the new rules for stock analysts as an important first step but emphasized that they may not be enough.
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