Speech by SEC Chairman:
Address to the Federal Reserve Bank of Chicago's 43rd Annual Conference on Bank Structure and Competition
Chairman Christopher Cox
U.S. Securities and Exchange Commission
May 18, 2007
Good afternoon. I'm delighted to be back in Chicago, particularly on such a beautiful day. It's a special pleasure to be joining the stellar lineup you've assembled for this conference, including Chairman Ben Bernanke and FDIC Chair Sheila Bair. I also want to join in congratulating President Michael Moskow for your outstanding leadership of the Federal Reserve Bank of Chicago.
Today, as it happens, isn't just beautiful spring day in Chicago — and the culmination of an outstanding conference on bank structure and competition — it's also the anniversary of the newest amendment to the United States Constitution. The Twenty-Seventh Amendment was finally ratified on this day in 1992, after being formally proposed more than 200 years earlier. The Twenty-Seventh Amendment, for those of you who don't recall, provides that any change in the salary of a Member of Congress may only take effect after the next general election. As an agency that's intensely interested in executive compensation, the Twenty-Seventh Amendment is right up our alley.
It's sometimes called the "Congressional Compensation Amendment of 1789," because that's when it was proposed by then-Congressman James Madison in the House of Representatives. In fact, it was part of the original Bill of Rights that was submitted to the states for ratification. While the rest of the Bill of Rights got enacted very quickly, it took this constitutional amendment longer than any in history to be ratified. And at first, the job of getting three-fourths of the states on board wasn't that hard — only 10 states were required. But as more states joined the Union, the threshold kept increasing, and the goal kept slipping away. By 1873, when Ohio ratified it — 80 years after it was proposed — people were just tuckered out. No one even thought about the amendment again until the 1980s. But by the early 1990s, a modern steamroller was underway to enact this ancient idea. And in 1992, Alabama became the 38th state of our current 50 to ratify. That took it over the top of the necessary three-fourths of all the states.
On May 18, 1992, the amendment was officially certified by the Archivist of the United States. But even that didn't settle things to the satisfaction of everyone — least of all the Congress, whose pay was affected. As a House member at the time, I well remember that the Speaker — it was then Tom Foley — sued to prevent the amendment from taking effect. He claimed that over 200 years was just too long a ratification process to count. He lost.
In fact, both the House and the Senate passed separate resolutions affirming that the ratification process had been completed. Yours truly voted in favor. There was actually little financial consequence for me, because today, as SEC Chairman, I'm actually paid less than I was as a Member of Congress — and indeed I'm paid less than about 800 people who work for me at the SEC. But I love to tell this story, because it so well illustrates the agonizingly long periods of time it can take for a law, a rule, or in this case a Constitutional amendment to make it through the legal process.
The SEC hasn't been around for 200 years — only 74 — so we don't have any unfinished rulemakings that are quite so ancient. But that's how I feel sometimes about something very important to all of you in the financial services industry.
Eight years after passage of the Gramm-Leach-Bliley Act, we still don't have the bank broker exceptions we need to implement the legislation. I'm committed to completing that important task. Congress intended that the SEC write rules to implement this legislation. (I can say that with some authority, because I was a member of the House-Senate Conference Committee that wrote the final version of Gramm-Leach-Bliley.) The rules are important because Congress fully understood that reasonable exemptions would be necessary to promote competition and efficiency, and to protect investors — the very purposes of the legislation in the first place.
Over the last year, Governor Sue Bies and I personally have chaired meetings with senior representatives from the federal banking agencies to discuss the details of rules to achieve these objectives. One of our goals is minimizing compliance costs and preventing the disruption of banks' existing business practices. In these meetings, we've all rolled up our sleeves and delved into the details of the statutory provisions and the legislative history. It's all part of a joint effort to develop a practical and workable implementation of this landmark legislation. I don't think there's any question that this can be done. And despite the history of inaction over last eight years, it's abundantly clear that all of the stakeholders are committed to seeing to it that it will be done.
The new spirit that the SEC, the Federal Reserve Board, and the other banking regulators have brought to this project has already gotten us very close to the finish line. The SEC and the Fed proposed a joint rule in December, and during the 90-day comment period that ended in March we received mostly favorable comment.
Contrast that with banking industry's comments on the SEC's Interim Final Rules in 2001, which were uniformly critical. And as for the views of our fellow regulators, the comment letter from the four federal banking agencies suggested that the SEC staff had acted in "bad faith." Not an auspicious beginning for interagency regulatory cooperation.
On the SEC's next attempt, dubbed Regulation B in spring 2004, the work product was once again greeted by uniformly negative comments from the banking industry and the four federal banking agencies. Not only that, but no fewer than 14 of the 20 Senators on the Senate Banking Committee wrote to the SEC urging substantial revisions to Regulation B. Not surprisingly, in this new, successful effort to square the circle among the securities and bank regulators, we've abandoned even the name Regulation B.
One of my fellow Commissioners, Paul Atkins, contends that Regulation B stands for "broken" — and the new Regulation R stands for "repaired." Very soon, we'll see, because we're now taking all of the comments into account and preparing to consider a final Regulation R at both the SEC and the Federal Reserve Board.
Perhaps nowhere more than in crafting rules to express the intent of Congress in Gramm-Leach-Bliley has my 17-year career in Congress been such a help to me as SEC Chairman. As I said, I well remember the extensive work that went into writing Gramm-Leach-Bliley in the first place. In my House committee, and in the Senate, we had extensive hearings covering several years. The conference on the final bill was one of the largest ever, because so many committees and interests were involved. Unlike many conferences, this one was fully attended by all the participants, who stayed in their seats for hours on end, and participated in scores of votes on critical amendments. The end result was a milestone in the history of U.S. financial regulation.
Here's what the bill's chief author, then-Banking Committee Chairman Phil Gramm, said about it at the White House ceremony when President Clinton signed the bill into law:
"The world changes, and Congress and the laws have to change with it.
"Abraham Lincoln used to like to use the analogy that old and outmoded laws need to be changed because it made about as much sense to continue to impose them on people as it did to ask a man to wear the same clothes he did when he was a child.
"In the 1930s, at the trough of the Depression, when Glass-Steagall became law, it was believed that government was the answer. It was believed that stability and growth came from government overriding the functioning of free markets.
"We are here today to repeal Glass-Steagall because we have learned that government is not the answer. We have learned that freedom and competition are the answers. We have learned that we promote economic growth and we promote stability by having competition and freedom.
"I am proud to be here because this is an important bill; it is a deregulatory bill. I believe that that is the wave of the future."
As Chairman Gramm accurately noted, the history of this issue, like that of the SEC, goes back to the Depression. When Congress separated commercial and investment banking in the Glass-Steagall Act, it did three big things. First, it said banks couldn't underwrite securities or be dealers in securities. Second, it said banks couldn't affiliate with underwriters and securities dealers. And third, it said that underwriters and securities dealers couldn't take deposits.
As we all know, the changes in financial markets that have taken place over the last half century, and particularly in the last 20 years, have dramatically changed commercial banking, investment banking, and insurance from what they were before the Depression. In a world where most American households now own securities, and in which demand deposit and savings accounts are rapidly being replaced by investment portfolios, the complete exclusion of banks from the securities business simply made no sense.
Even before the Gramm-Leach-Bliley Act, the Citigroup merger in 1998 sounded the death knell for the Glass-Steagall separation of financial services. But the importance of Gramm-Leach-Bliley is that it not only formalized this transformation, but rationalized it. And that's where the need for implementing rules comes in — because without them, we won't fully achieve Congress' intended objectives. The reasons for doing away with Glass-Steagall's separations in the modern world were obvious.
A customer should be able to walk into a financial institution and get any financial product he or she needs — securities, insurance, banking or trust services. Congress agreed. At the same time, Congress sought new ways to safeguard investors that would be consistent with continued innovation in the financial services industry.
The SEC, through a number of different chairmen, supported the repeal of Glass-Steagall, so long as Congress also rationalized the regulation of the securities activities of banks. And in the end, Gramm-Leach-Bliley tasked the SEC with writing the necessary rules to implement many of the law's detailed provisions.
Congress recognized how difficult this whole process could be for some banks, and so we included an 18-month implementation deadline. But that was supposed to end in May 2001, a full six years ago.
In fact, the Commission did attempt to define some of key terms used in the Act in May 2001. And in order to address some situations that weren't clearly exempted by the statute, the Commission also granted additional exemptions for banks' securities activities. When the Commission received so much critical comment from the banking industry and the banking regulators, it ultimately suspended the rules and divided the rulemaking process into two separate parts.
The SEC addressed bank "dealer" issues first, in rules that went into effect in September of 2003. But the "broker" exclusions proved far more difficult. In order to continue to seek input from all interested parties, the Commission extended the blanket exception from the definition of broker, and we've continued to do so to the present time — most recently until July 2007.
Then the SEC attempted to address the issue of bank broker securities activities once again, in 2004. As I said, that proposal was called Regulation B, and it has never gone into effect. The comment period ended more than two years ago on Sept 1, 2004. The Commission received over 120 comment letters. But still, there were no final rules when I became Chairman the following year.
All in all, the eight-year stretch from enactment of Gramm-Leach-Bliley until today is a disappointing record of indecision and inaction. Just as with the Twenty-Seventh Amendment, we've made several efforts to finish the job, but each time we came up short.
What's at stake in the modernization of financial services — for consumers, for business, and for our economy — demands more. If clarity, consistency, and predictability are to be the hallmark of sound regulation, then it's high time that clear, final rules are issued under Gramm-Leach-Bliley. That's why it's such good news that the new process I've been leading over the last year is entirely different from what's gone before.
I will say it's true, just as before, that we're all committed to implementing the law as it was written, and to providing the reasonable exemptions to promote competition and protect investors that Congress intended. But more than that, this time we're all committed to getting the job done.
By the time the Financial Services Regulatory Relief Act of 2006 established a joint rulemaking process between the SEC and the Federal Reserve, Sue and I, and the heads of the other bank regulatory agencies, were already six months into our work to finish things up. That's why it was so easy for us to meet the statutory command of a proposed rule by year end and why the work product was so solid, and has met with such apparent approval all around.
Regulation R as proposed would allow banks that qualify within the exceptions to continue to conduct securities transactions for their customers as part of their trust and fiduciary, custodial, and deposit sweep functions. If a bank's securities transactions fall outside the exceptions, it will be required either to register with SEC as a broker or to conduct these activities through a registered affiliate or a third-party brokerage firm.
Regulation R, when it's finalized, will apply to all types of banks that conduct securities activities for the accounts of their customers. In the meantime, we've extended the existing broker exceptions to July 2. We're hoping to have final action on Regulation R by then. Finishing this work is vitally important to investors, to capital formation in America, and to our nation's competitiveness in the global economy.
There's one other area where global competition is pressing, and where securities and banking regulators can learn from one another: technology. As many of you know, I've been encouraging the use of interactive data for SEC filings, following the lead of the Federal Reserve and other banking agencies. Interactive data will give investors and analysts faster access to better information, in a form they can readily use. Interactive data can also make company filing cheaper, more efficient, and more reliable.
The payoff for users of financial information is significant. Instead of digging separately through annual reports, 10-Qs, or 8-Ks for a specific fact or number, an investor armed with interactive data can easily find exactly what he or she is looking for — and then immediately download it into a spreadsheet or other application software. In minutes, the data can be put to work to compare and analyze a company's performance, across time and across industries.
Interactive data is already used extensively elsewhere in the financial services industry. In particular, banks use it in their reports to the FDIC, to the Fed, and to the Comptroller of the Currency. As a matter of fact, the transition to interactive data has gone so smoothly in banking industry that many of you may not even realize you're tech pioneers. That's the result we always hope for with innovation.
Interactive data has proven to be a painless, productivity-enhancing improvement that helps people get their work done faster, cheaper, and better than before. For almost two years now, 8,200 U.S. financial institutions have been using XBRL — the computer language of interactive data — to submit their quarterly Call Reports to U.S. banking regulators. As a result, the investing and lending public have faster access to the financials of U.S. banks.
And there's been another important dividend: The error rate has also dropped way down, to nearly zero. Before the introduction of interactive data, fully 30% of banks' quarterly filings included basic math errors. Now those errors are gone. And now banks can even provide narrative in this interactive format, because that can be XBRL-tagged as well. As a result of this improvement, today only 5% of original reports need additional work. Before, as much as 34% of bank call reports were returned to banks for additional clarification. The old system even lacked the technology to submit notes.
Better, faster, more efficient sharing of data is the story of XBRL and interactive data when we look at bank Call Reports. At the SEC, we're working now to see to it that every public company uses interactive data in reporting to our agency. Already, voluntary interactive data filers with the Commission represent more than a trillion dollars of market capital, spread across various industries — companies large and small, foreign and domestic. I think if you talk to these companies they'll tell you it's been surprisingly painless and inexpensive — a "non-event" is the phrase that keeps coming up. And companies are excited to be on the cutting edge of financial reporting.
If you're a public company and you're not already filing with SEC using interactive data, I urge you to consider doing so. You'll find that the benefits extend well beyond easier SEC filing to such areas as receiving reports from your large customers.
Just as banking regulators are now enjoying clean, real-time, comprehensive data from their reporting banks in a readily digestible format, interactive data can be used to allow banks to enjoy the same advantages vis-à-vis their customers when they're focused on assessing counter-party risks.
All of us at the SEC are doing our best to sharpen our market's competitive edge in this increasingly global world of finance. As regulators, we know there are really only two fundamental ways for us to improve: reduce the cost of regulation, and improve the quality of the product. Interactive data lets us accomplish both. And I know each of you in this room is working hard every day to help Americans sharpen its competitive edge in financial services. It's because of your dedication that our nation's financial services industry is the best in the world.
Which brings me back to the story of the Twenty-Seventh Amendment.
Remember I told you that for a full century before the 1980s, James Madison's proposal that the Bill of Rights included a provision limiting Congressional pay raises became the Forgotten Amendment. You may wonder what resuscitated this ancient proposal from its 100 year slumber.
The true story is that in 1982, a student at the University of Texas was doing research for his government class, and he stumbled across this unratified constitutional amendment from 1789. He convinced himself that nothing in Article V of the Constitution, which governs amendments, put any time limit on ratification, and so he personally set out on a campaign to revive it. He began writing to state legislators around the nation who kicked it back into life. That undergrad, Gregory Watson, stuck to his goal, until 10 years later, in 1992, the newest Amendment to the Constitution took effect.
The example he set reminds us how important the individual contributions of any one of us can be, if only we're persistent and dedicated to doing the right thing. The leadership of everyone in this room is vitally important to the continued success of our banking system, our financial markets, and indeed continued growth of world's economy.
But there's one other lesson from this example. Don't expect too much credit for your hard work — at least not in the short run. Real success requires constant dedication, and often a long time before others recognize what you've accomplished. When Gregory Watson turned in his paper for government class, his teacher didn't buy his thesis that the Amendment was still viable. She gave him a C. And even now, when we all know he was right — the United State Constitution has been amended, but his grade hasn't.
So I want to thank you again for your work in making our markets competitive, for facilitating capital formation in this country, and for helping families and individual American investors achieve their dreams. That's the SEC's mission, too, and we're proud to be your partners.