Eliot Spitzer's aggressive pursuit of Merrill Lynch over conflicts of interest between its research and investing arms is focusing critical attention on SEC chairman Harvey Pitt's low-key approach to the issue

There are few fights as fierce as turf battles, and Harvey Pitt, chairman of the Securities and Exchange Commission, is caught in one of the fiercest.

Eliot Spitzer, the publicity-hungry New York state attorney, has put the affable Mr Pitt on the spot by aggressively pursuing Merrill Lynch over conflicts between its equity research and investment banking operations. He has forced Mr Pitt to kick-start an SEC probe into analysts' conflicts; drawn attention to the alleged conflicts of interest of the 57-year-old lawyer, whose former clients include securities firms and accountants; and allowed critics to paint the US markets watchdog as a patsy of Wall Street and the accounting profession, rather than a champion of investors' interests.

Mr Pitt has refused to bow to such criticism. Indeed, he has continued to wear his beliefs on his sleeve. A recent profile in the New York Times was illustrated with a photograph of the SEC chief in his trademark coloured braces and cufflinks with a Republican party elephant motif.

Launching a special SEC "investor summit" last week, Mr Pitt declared that the US was "on the verge of the greatest overhaul in securities legislation since this agency was created 70 years ago". Few doubt that the SEC should guide that reform programme. But questions are being asked about whether Mr Pitt should lead it.

Criticism mounted last week after it emerged that Mr Pitt had met Eugene O'Kelly, new chairman of KPMG, a former client, in late April. The details of the meeting are disputed: Mr O'Kelly says the two men discussed the SEC investigation into accounting at Xerox, the copier group that KPMG used to audit; Mr Pitt denies the subject came up. But observers are baffled that Mr Pitt even agreed to the meeting. "The entire KPMG matter had no element of corruption but it was surely careless," says Roderick Hills, a former SEC chairman.

Mr Pitt also seemed to misread the frenzy over analysts' conflicts of interest. Like many people close to Wall Street, he was familiar with the long-running debate over whether research departments have been used by investment bankers as a marketing tool for initial public offerings and deals.

But the SEC was slow to take the initiative after Mr Spitzer began to publicise damning e-mails that suggested that Henry Blodget, the Merrill Lynch analyst, privately disparaged internet companies that the bank had publicly recommended.

On the day the SEC announced its formal inquiry, Mr Pitt said: "Because new facts have been brought to light and the issue has therefore resurfaced, it would ill behove the SEC to ignore \." But he described the Spitzer case as "to some extent . . . a reflection of old news".

Mr Pitt should know: his knowledge of US securities laws and history is encyclopaedic. In the early 1970s he was the youngest general counsel in SEC history. After he moved to private practice for law firm Fried Frank Harris in 1978, his clients included Ivan Boesky, the insider dealer, the New York Stock Exchange, Merrill Lynch, and all Big Five accounting firms.

As a regulator, however, Mr Pitt is perceived to have pulled his punches. The SEC last week agreed new rules to tackle analysts' conflicts but critics say they do not go far enough to prevent analysts being compensated on the basis of business won for the investment banking department.

The fact that individual securities houses, such as Morgan Stanley, and the investment banks' trade body, the Securities Industry Association, were quick to support the SEC's inquiry into the issue has lent more weight to the theory that Mr Pitt's main objective is to defuse the time-bomb Mr Spitzer planted.

"I just don't see the leadership there. Pitt follows and he follows only as much as he has to, so he is not driven out of office," says Sarah Teslik, executive director at the Council of Institutional Investors, which represents big shareholders such as pension funds and unions.

Defenders of Mr Pitt see the criticism as unfair. The SEC has been drawing attention to analysts' conflicts for years. His predecessor, Arthur Levitt, an outspoken Democrat, lambasted "the web of dysfunctional relationships" between companies, analysts and their employers at the height of the bull market in October 1999. The SEC published a health warning for investors on analysts' research last year, just before Mr Pitt took over.

At the same time, public scrutiny has already forced change on Wall Street. In any case, business is so tepid in the once red-hot areas of initial public offerings and mergers and acquisitions that a research report that hyped a stock would make little difference to investment banks' bottom lines.

A more important priority for the agency is accounting fraud, against which the SEC has launched a number of investigations and has publicised some high-profile cases, including a record fine paid by Xerox to settle an SEC probe last month.

The White House also shoulders some of the blame for Mr Pitt's rocky start. It has been slow to fill three vacancies on the five-person commission and failed to budget for a badly needed increase in funding to finance a broader investigative agenda.

Even the accusations of Mr Pitt's conflict of interest echo similar charges against Mr Levitt, who came to the SEC after decades as a well-connected Wall Streeter.

Especially in the final years of his tenure, however, Mr Levitt frequently challenged the securities and accounting industries' interests.

Mr Pitt, by contrast, has shown little inclination to consider some of the proposals to end conflicts of interest on Wall Street and in the accounting profession.

Perhaps more damaging is the new chairman's demonstrable lack of political savvy. At a time when the public image of the securities watchdog calls for Levitt-style hyperbole, the agency has had to make do with the more laconic and measured approach of Mr Pitt.

For the moment, Mr Pitt's political position looks secure. But with the Wall Street scandal widening, critics and supporters are looking for him to provide more robust leadership.