U.S. Securities & Exchange Commission
SEC Seal
Home | Previous Page
U.S. Securities and Exchange Commission

Speech by SEC Chairman:
Address to the Council of Institutional Investors


Chairman Mary L. Schapiro

U.S. Securities and Exchange Commission

Council of Institutional Investors — Spring 2009 Meeting
Washington, D.C.
April 6, 2009

Thank you, Joe, for that lovely introduction, and I want to thank you and Ann for inviting me to join you today. It's really an honor to be here.

When I first arrived at the SEC two months ago, I noticed a very large, framed quote prominently displayed outside the Chairman's Office. It's a quote from former Chairman (and later Supreme Court Justice) William O. Douglas. And, it says, "We are the investor's advocate."

Usually, that's the only part of his quote we ever hear. But the full statement is more enlightening. It reads:

We have got brokers' advocates; we have got Exchange advocates; we have got investment banker advocates; and WE are the investors' advocate.

The date of that quote is 1937. Seventy-two years later, there are even more advocates for all of the various participants in our markets, but the SEC remains the only federal agency dedicated to looking out for investors. And surely there has been no time in history that investors have been more in need of an advocate than today.

You — the trillions of dollars that are represented in this room — need an advocate that is strong and effective. In our time together this morning, I'd like to share with you my plans for ensuring both.

The Role of Regulation in Our Markets

Now over the past many months, there's been much talk in Washington and around the globe, about the need to rethink our regulatory system. It is a discussion that has been given urgency by the financial crisis we face — and the quest for solutions.

But as we consider how to address this crisis, I think it is useful to remember that there are myriad reasons for how we got here. The ink on the Sarbanes-Oxley Act of 2002 was hardly dry before we began to hear concerns from some quarters about the costs of "over-regulation," the stifling of innovation, and the superior ability of markets to protect themselves from excesses.

Over the last 15 years, regulations that had once walled off the less risky from more risky parts of our financial system were incrementally weakened. Competition for market-based financing among banks, securities firms and finance companies resulted in a dramatic increase in leverage and risk for both corporate and consumer borrowers.

Standards deteriorated and financial activity moved away from regulated and transparent markets and institutions, into "shadow markets." Regulatory and enforcement resources, most notably at the SEC, declined.

Regulatory reform will seek to address these and the many other causes of the weaknesses in our system and the broader economy.

The SEC's Role

But, fixing all of these problems — whether it's the state of our automobile industry, the soundness of our banking system, or the integrity of our credit or derivatives markets — will take time and involve many moving parts. I'd like to outline how I see the SEC's role and, as I mentioned, my plans for ensuring that the SEC is a strong and effective advocate for investors.

Investor protection starts with fair and efficient capital markets. The SEC's job is to ensure that these markets are:

  • First, structured effectively. This means that customer orders are priced, processed and cleared in an orderly and fair way.

  • Second, that they're fed by timely and reliable information. This is imperative whether that information is provided through words or numbers.

  • Third, that they're well-served by financial intermediaries and other market professionals. These professionals must be competent, financially capable, and honest.

  • And fourth, that they're supported by a strong and focused enforcement arm. Returning to former Chairman Douglas' words, we need to have the "shotgun-behind-the-door … loaded, well-oiled, cleaned, ready for use, but with the hope that it will never have to be used."

In each of these four areas, the SEC has recently experienced both successes and challenges.

Again, first, the infrastructure of our markets does work. In these tumultuous times, despite record volumes and enormous volatility, the markets that the SEC oversees have priced, processed and cleared trillions of dollars in customer orders — fairly and timely.

We are, however, from an enforcement and regulatory perspective, looking at practices that may be contrary to fair and orderly markets. Later this week, the Commission will be considering proposing new rules limiting short sales in a down market. This is an issue that has both strong supporters and detractors — and we will be very deliberative in our effort to determine what is in the best interest of investors.

In addition to seeking comments on the new proposals, we will also convene a roundtable to seek a range of views from many experts on the topic.

Second, our lifeblood — disclosure — is generally working well. But in this area we have several significant challenges. On the one hand, until we eliminate some of the gaps in regulation (for example, concerning hedge funds and credit default swaps), the market is missing important information and disclosure about these activities.

On the other hand, while the SEC requires disclosure of important information from public companies, I am not certain that we are asking for all of the right things.

For example, in June the Commission will consider whether to enhance disclosure around director nominee experience, qualifications and skills. The current rules only require a very brief description of a candidate's business experience over the past five years. That may not be sufficient in today's complex business environment. I want to make sure that shareholders have the information needed to make sound proxy voting decisions.

We'll also be considering whether boards should disclose to shareholders their reasons for choosing their particular leadership structure — whether that structure includes an independent chair, a non-independent chair, or a combined CEO/chair.

There are some areas that may need further consideration, including whether our compensation disclosures accomplish the objective of providing shareholders with the most relevant information. We all know that compensation drives behavior. Last year, the Counterparty Risk Management Policy Group identified compensation schemes as one of five primary driving forces of the turmoil.

Just last week, the Financial Stability Forum issued a report agreeing with this assessment, and suggesting three principles for "sound compensation practices." These principles call for effective governance of compensation; effective alignment of compensation with prudent risk taking; and effective supervisory oversight and engagement by stakeholders.

In keeping with the Forum's second and third principles, I want to make sure that shareholders fully understand how compensation structures and practices drive an executive's risk-taking.

The Commission will be considering whether greater disclosure is needed about how a company — and the company's board in particular — manages risks, both generally and in the context of setting compensation. I do not anticipate that we will seek to mandate any particular form of oversight; not only is this really beyond the Commission's traditional disclosure role, but it would suggest that there is a one-size-fits-all approach to risk management.

Instead, I have asked our staff to develop a proposal for Commission consideration that looks to providing investors, and the market, with better insight into how each company and each board addresses these vital tasks.

The Commission will also consider whether greater disclosure is needed about a company's overall compensation approach, beyond decisions with respect only to the highest paid officers, as well as compensation consultant conflicts of interests.

Related to disclosure is an issue that I know is important to many in this room: proxy access. Next month, the Commission will consider a proposal to ensure that a company's owners have a meaningful opportunity to nominate directors.

We are looking at what the Commission considered in both 2003 and 2007; and we're also considering the potential impact of proposed changes to Delaware's corporate law.

But it should not surprise anyone in this room that we are viewing these issues with fresh eyes. We want to ensure that any procedural requirements for access are rational, and not a means to thwart effective investor participation.

The third component of the SEC's role concerns the regulation of market professionals and intermediaries. We oversee approximately 5,500 broker-dealers; 11,000 investment advisers; 8,000 mutual funds, the stock and options exchanges; clearing agencies; transfer agents; credit rating agencies; and many others. Including public companies filing with the SEC, we have oversight responsibility for far more than 30,000 entities.

Exchanges and clearing agencies are an essential part of the plumbing of our financial system. Their smooth operation is something that most Americans take for granted, but that the Commission takes very seriously and works very hard to ensure.

Brokers, advisers and credit rating agencies are the entities that Americans turn to for guidance and technical assistance. It is essential that these firms are held to the high standards expected of professionals.

This is an area where we are looking at many potential reforms, some of which require legislation. Our early thoughts include:

  • Requiring those with custody of client assets to undergo an annual third-party audit, on an unannounced basis, to confirm the safekeeping of those assets.
  • Harmonizing the responsibilities of investment advisers and broker-dealers, so that investors who use either can expect a uniform level of professionalism and accountability.
  • Mandating that certain investment advisers have third-party compliance audits to ensure their compliance with the law.
  • Registering hedge fund advisers, and potentially the hedge funds themselves.
  • Requiring more disclosure from credit rating agencies, including potentially the assumptions underlying their methodologies, fees received from issuers, and factors that could change ratings.
  • Overseeing more vigorously the credit default swap market, including considering reporting and recordkeeping rules that do not exist today.
  • Enhancing the standards applicable to money market funds.
  • Providing investors in municipal securities with the same type of disclosure and investor protections as are provided to investors in other securities.
  • Enhancing disclosure around asset-backed securities.

Finally, the SEC's enforcement arm provides an important arrow in our quiver, one that is not available to all regulators. In the past year alone, the SEC has brought enforcement actions related to subprime abuses, market manipulation through the circulation of false rumors, insider trading, Ponzi schemes, false corporate disclosures, and penny stock frauds.

This past year we also brought the biggest foreign bribery case ever, and — working with other regulators — were able to provide tens of thousands of investors in auction rate securities with over $67 billion of liquidity. As a result of our actions, we obtained orders requiring violators to disgorge more than $750 million in illegal profits, and to pay penalties of more than $256 million. On top of that, we distributed more than $1 billion to injured investors.

Staying one step ahead of predators and the practices that they employ is a never-ending struggle. Quite frankly, our enforcement and examination resources have been seriously constrained in recent years, and I am working hard to increase our enforcement budget — to not only provide more boots on the ground, but also the technological tools necessary to effectively prosecute our cases.

In addition, we brought on a new head of Enforcement, stepped up our internal training programs, eliminated procedural hurdles, and begun to look outside the agency for new skill sets. And, I am grateful to many of you in this room who have consistently demanded that the SEC have more enforcement resources.

I strongly believe that all of the items on our immediate agenda are direct responses to some of the many failures that have led us to this difficult point in time:

  • Proxy access is about making boards more accountable for the risks undertaken by the companies they manage.
  • Compensation disclosure is letting a company's owners know how their managers and directors ensure that compensation does not drive inappropriate risk-taking.
  • Bolstering oversight of credit rating agencies is about creating a discipline around the ratings process that was notably absent over the past years.
  • Money market fund liquidity and quality enhancements are about responding to the possible run-on-the-bank scenario that led the Reserve Fund to "break the buck."
  • And greater oversight of hedge funds, credit default swaps and asset-backed securities is about bringing sunshine to shadow markets, ending the practice of regulatory arbitrage.

Every one of these items is intended to further the interest of investor protection, which leads me to the final point that I wanted to discuss with you today. We strongly believe that, now more than ever before, investors need an organization like the SEC that is focused on their interests. Your continued advocacy for a strong capital markets regulator focused on investor protection will be important to our success.

The Commission will soon be announcing the members of an Investor Advisory Committee which will help ensure that we hear the views of a wide range of investors on a wide range of issues. But that is not the only way to guarantee that the perspectives of investors are heard. I hope you will communicate with us on all of the issues of concern to you.

As I said at the beginning, William O. Douglas' famous line "we are the investor's advocate" is framed and hanging on the wall in the chairman's suite at the S.E.C. While not framed, and perhaps not as elegant, there is sign taped to the door of my office, for all to read and ponder as they enter to present a proposal or an idea: it says, "How does it help investors?"

We are committed to addressing all of the really difficult issues facing us from that perspective. That will be our true north.

As you can see our agenda is ambitious, the issues are difficult and the time is short. There is much to do, but we are wholly committed to moving forward thoughtfully and in broad consultation with everyone who shares our desire to restore confidence in what should be the finest capital markets in the world. That is our mission.

Thank you.


Modified: 04/06/2009