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U.S. Securities and Exchange Commission

Testimony Concerning
The Condition of the U.S. Financial Markets Following the Recent Terrorist Attacks

Harvey L. Pitt, Chairman, U.S. Securities and Exchange Commission

Before the Committee on Banking, Housing and Urban Affairs, United States Senate

September 20, 2001

Chairman Sarbanes, Ranking Member Gramm, and Members of the Committee:

I appreciate the opportunity to offer the Securities and Exchange Commission's perspective on the condition of our financial markets in the aftermath of the recent terrorist attacks in New York and Washington.

September 11th was a terrible, dark day. The terrorists who attacked our Nation's Capital and the World's Financial Capital, inflicted irreparable losses of innocent lives and caused untold physical damage; but they did not destroy or diminish our Nation's strength, courage or resolve. We grieve for our lost friends and relatives; yet the Nation's response to this catastrophe has been extraordinary. On Monday, all the Nation's securities markets resumed trading, a trenchant symbol to the perpetrators of the heinous attacks.

As the events of last week and this week demonstrate, our capital markets are the world's strongest and most resilient. They reflect the character of our great Nation. When tragedy struck last week, our Nation responded by coming together. Police, firefighters, emergency medical personnel, members of the military and civilians participated in rescue efforts to save those injured in the attacks.

This same spirit of cooperation imbued the tremendous efforts by so many in the private and public sectors to restore the vitality of all of our securities markets less than one week after the attacks. Over the past week and a half, we have been privileged to work with the major U.S. securities markets and securities firms, industry associations, service providers and federal and state government bodies -- all of whom have provided leadership and invincible perspicacity in this crisis.

An attack of this nature and magnitude cannot be viewed in a vacuum. Accordingly, we coordinated our efforts with the larger federal government of which we are a part, and we worked cooperatively with the industry we oversee. We had two critical roles: first, to assist in implementing national policy; and second, to facilitate the responses planned by the securities industry, and ensure that those responses were consistent with the protection of investors and the national interest.

Upon learning of the World Trade Center disaster, we established communications with the organized securities markets and participated in frequent telephonic meetings of the President's Working Group on Financial Markets. In addition, we provided information to the White House and members of our Senate and House oversight committees. In times of crisis, we believe strongly that our obligation is to keep all those with a role as fully informed as possible.

Although the Commission has broad power over the securities markets and the professionals who operate in them, we viewed our role as ensuring that the markets and market professionals acted in unison and in furtherance of the interests of public investors. Thus, we listened first and responded only when the industry reached consensus. The overarching national goal was to have our securities markets up and running as soon as practicable, but only if there was no threat to public investors.

All the major markets and market participants decided, as a safety precaution, to remain closed for trading on Tuesday. We supported this decision as a responsible approach, and immediately issued a press release to notify investors of the change in normal trading patterns and to assure them this was a temporary phenomenon.

Concerned about safety and the well being of so many in the industry, we spoke with heads of firms to extend sympathy and express our hope that their employees would be accounted for, safe and sound. Sadly, many people employed in the securities industry are missing or dead, and we will forever mourn their loss. Fortunately, many personnel miraculously were evacuated to safety and reunited with loved ones.

Thereafter, our Staff and we continued monitoring developments and helped coordinate efforts to assess the situation and reopen the securities markets. Commission Staff contacted broker-dealers located in lower Manhattan, as well as other major broker-dealers, investment advisers, mutual funds and service providers, to determine their status and operational capability. We also remained in regular communication with the clearing agencies to assure they remained functional and to assess any connectivity problems with their participants. Virtually all securities firms that suffered significant physical damage were able to relocate promptly to alternative disaster recovery sites. We believe that much of the securities industry's success in meeting the demands of this unspeakable horror was due to the hard work and effort made to prepare for Y2K. Securities firms had in place contingency plans and emergency procedures designed to manage the conversion to 2001, never imagining that these plans and procedures would see them through the events of September 11.

We arranged to meet in Manhattan with the leadership of major markets, securities firms, banks, and clearing agencies, along with the offices of the Governor and Mayor, Con Edison and Verizon, and the New York Fed, to assess the situation and determine readiness for a reopening of the markets. Our role in arranging this meeting was not to dictate a decision, but to facilitate a market solution. The decision on when to reopen the markets was made by the private sector -- the markets and major market participants -- in consultation with the Commission. We held daily joint press conferences to keep the public fully and timely advised.

At meetings beginning the afternoon of Wednesday September 12th, this group unanimously agreed that, while every effort should be made to reopen the markets as soon as possible, there should be no interference with rescue efforts or jeopardy to securities industry personnel returning to work. Additional considerations included whether employees would have access to their workplaces and whether there would be adequate and reliable electric power and telecommunications services.

Connectivity among various market participants was also a significant concern. As a result, the industry representatives unanimously decided last Wednesday that the equities and options markets should not reopen Thursday, but rather Friday or Monday at the latest. Having participated in the discussions that produced that decision, our agency was confident the right decision had been reached under the circumstances.

On Thursday, the fixed income markets and futures markets successfully resumed trading. Although trading was relatively light and the number of market participants smaller than usual, no major problems were reported. When connectivity problems with clearing banks affected the government securities clearing agency, we closely monitored these problems in conjunction with the Federal Reserve.

We traveled to the financial district on Thursday morning to examine the facilities of the New York Stock Exchange and to meet with service providers (Verizon and Con Edison), as well as representatives of the Mayor's Office involved with rescue efforts, and representatives of the New York Fed. When industry representatives met later that day, they unanimously decided to reopen equities and options markets on Monday, not Friday.

Deferring the resumption of trading until Monday permitted extensive testing by market participants of systems operability and connectivity. Throughout the weekend, Commission staff worked with market and industry participants to monitor and coordinate extensive systems testing by the exchanges, clearing agencies and market participants. We offered assistance to every affected firm in New York City, and provided staff where requested. The Commission also sent staff to the major markets to monitor the testing. Participants in those tests included the New York Stock Exchange, and its specialists, floor brokers, and member firms; Nasdaq and its market makers and market participants, including ECNs; regional exchanges; DTCC; and SIAC. Fortunately, only minor problems arose and those were readily resolved. The tests ultimately verified that all systems were sound and operational.

We received invaluable assistance from FEMA, the Mayor's Office of Emergency Management, and New York State officials in assuring that market participants needing electrical or communications services received appropriate priority. They also kept us apprised of their assessment of the structural integrity of damaged buildings in the financial district.

From a regulatory perspective, last week the Commission reached out to major market participants, both directly and through industry groups such as the Securities Industry Association and the Bond Market Association, to determine whether it could provide appropriate temporary regulatory relief to facilitate the reopening of fair and orderly markets. The New York Stock Exchange, the NASD, Treasury and other regulators undertook similar outreach efforts.

As a result, the Commission for the first time invoked its emergency powers under Securities Exchange Act Section 12(k) and issued several orders and an interpretive release to ease certain regulatory restrictions temporarily.

A cornerstone of this relief was facilitating the ability of public companies to repurchase their own shares, thereby providing greater liquidity. Specifically, the Commission, for five business days following the resumption of trading, has permitted issuers to repurchase their securities without meeting the volume and timing restrictions that ordinarily would apply under our Rule 10b-18 safe harbor, and to do so without adverse accounting consequences. Our efforts were aided by the announcements of major public companies of significant buy-back programs. We also permitted brokerage firms to calculate net capital without considering days the markets were closed. We allowed mutual funds to borrow from and lend to related parties to facilitate liquidity.

We also responded to physical ramifications of the World Trade Center attacks. We provided temporary relief permitting Amex specialists to function like floor brokers under certain conditions due to space limitations of the Amex's relocated operations to the NYSE floor. We issued an interpretive release permitting accounting firms to provide bookkeeping services to, and help recover records for, audit clients with offices in and around the World Trade Center. To facilitate mutual fund board meetings, we relaxed in-person meeting requirements.

While we broadly solicited and considered suggestions for appropriate temporary relief, we did not implement all suggestions we received, such as prohibiting all short selling, moving to ten-cent quotation increments, and extending settlement cycles in the equity and corporate debt markets. We did, however, take action -- not intervention -- wherever we could to be responsive to industry concerns and to facilitate a smooth reopening of the markets.

We also made ourselves accessible to investors and market participants. We believe that government is and must be a service industry. Last week, the SEC placed additional information for investors and market participants on our website regarding market recovery efforts. Investors were invited to e-mail questions to our staff at a new hot line, help@sec.gov. We established a special toll-free investor telephone line. For the first time in our history, we also established dedicated telephone lines for inquiries from market participants and for firms seeking additional relief. And, we assured industry participants that if they came to us with their problems, we would work with them to find solutions, without after-the-fact recriminations, except in cases of venal conduct.

Fortunately, on Monday September 17th, all U.S. securities markets resumed trading without incident. Our Staff closely monitored the resumption of trading. We had staff available at the markets to provide assistance where necessary and made staff available on-site at each major broker-dealer that wanted our assistance. Commission Staff remained in constant contact with major market participants throughout the day, and was available to address any regulatory issues that arose. America's investors once again were able to rely upon the strength and soundness of our markets. All market and investor protections were squarely in place. The markets did not give way to panic selling; delays in resuming trading gave investors time to reflect and to speak up about the strength of America's markets. And, the world heard them.

Over the last week and a half, we have witnessed an extraordinary level of cooperation among market participants in the face of this tragedy. For instance, the New York Stock Exchange opened a portion of its floor to accommodate trading in equities and exchange-traded funds by the Amex. In addition, the Philadelphia Stock Exchange is permitting Amex options members to continue their livelihood by temporarily trading in the Philadelphia Stock Exchange's trading crowds. In less than a week, the entire options business of the Amex was moved to the Phlx. People worked day and night to ensure trading in those options opened on Monday without a hitch and that all options series were once again available to America's investors. And, brokerage firms that two weeks ago looked for every advantage over their competitors are today providing space to competitors that suffered as a result of the attacks. In short, the most competitive markets in the world are also the most compassionate.

As you know, our Northeast Regional Office at 7 World Trade Center was destroyed in the aftermath of the attacks. First and foremost, we have been focused on the human side of this tragedy and confirming the safety and well-being of all of our employees. We are gratified to report that every one of our employees has been accounted for and is safe. The staff of the office is convening offsite today to begin the healing and emotional recovery process, and we are making sure that counseling is readily available to anyone who wants it. As far as the work of the office is concerned, we have moved quickly to get things back on track. We have already identified new office space and hope to begin occupancy as early as October 1. Until then, the United States Attorney's Office in Brooklyn has generously provided us with office space for use by Northeast Regional Office supervisors to oversee the office's recovery efforts. Within two days of the attack, we had retrieved all documents stored electronically and had commenced a review of every single investigation and case currently underway in the office with the twin aims of ensuring that we do not miss any imminent deadlines and of developing a plan for completing our investigations and cases in timely fashion. While our review has not been completed, we are optimistic that we will not lose any significant investigation or case as a result of the loss of our building. No one whom we have sued or whose conduct we have been investigating should for a single moment doubt our resolve to continue our pursuit of justice in every such matter.

There also will not be any serious long-term impact on the Commission's oversight of securities firms located in the New York area. The Commission's records related to examinations of all securities firms are maintained electronically in a central database, and were unaffected by the tragedy. Electronic copies of examination reports and deficiency letters are maintained off-site for investment advisers, investment companies, broker-dealers and transfer agents. Records relating to open examinations will be reconstructed from records that exist at registrants' offices and from other sources. We are planning to utilize examination staff from other offices (Boston, Philadelphia and Washington, DC) and to work with self-regulatory organizations (the NYSE and NASDR) to ensure that examination cycles are fulfilled and that appropriate examination oversight is maintained. We are very mindful of the disruption to many firms' operations and records, and are ensuring reasonable accommodation to requests for extensions of time for on-site examinations or to produce records and other information.

We can be justifiably proud of our market participants and the way they have performed. Everyone pulled together to overcome this disaster and successfully reopen the U.S. equities and options markets. Americans demonstrated continued confidence in our markets. With the momentum built from this experience, we will move forward to make our markets even stronger, more transparent and more vibrant. As a Nation, and as an agency, we will not allow terrorists to destroy our spirit or impede our mission.

On behalf of the Commission, I appreciate the opportunity to submit our views on the current state of the markets in America. I am happy to try to respond to any questions the Committee may have.


Modified: 09/21/2001