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U.S. Securities and Exchange Commission

Speech by SEC Commissioner:
"SEC Rulemaking — 'Advancing the Law' to Protect Investors"


Commissioner Elisse B. Walter

U.S. Securities and Exchange Commission

48th Annual Corporate Counsel Institute
Northwestern University School of Law
Chicago, Illinois
October 2, 2009

Thank you, David, for such a kind, and overly generous, introduction. Although I know the folk here at Northwestern call you Professor, you will always be Mr. Chairman to me. For those of you who may not know, Chairman Ruder has an extremely loyal coterie of SEC staffers and ex-staffers who continue to relish hearing his views on all subjects; I'm very proud to count myself among them. And, I'd like to add a special note of thanks to you, David, for your continued support of the Agency, particularly at this critical time for our nation's investors.

I am delighted to be your keynote speaker this morning. Of course, let me first remind you that my remarks today represent my own views, and not necessarily those of the Commission, my fellow Commissioners, or members of the staff.1

When I was sworn in as an SEC Commissioner a little over a year ago, I promised to live up to the awesome responsibility entrusted to me as the "investor's advocate."

After all, the SEC is the only federal regulator whose mission is to protect investors.

When investor confidence falters, I believe that it is my job to search for solutions that will help restore their confidence in the fairness and integrity of our markets. Now, this is not a job description that I wrote myself. Rather, it is exactly what Congress intended for us to do when it established the agency in 1934. Let's take a look at the words of then-Chairman of the House Committee on Interstate and Foreign Commerce, Representative Sam Rayburn, who sponsored the bill that eventually led to the passage of the 1934 Exchange Act — and forgive me for the length of this quotation, but it fits our times precisely:

If investor confidence is to come back . . . , the law must advance. As a complex society so diffuses and differentiates the financial interests of the ordinary citizen that he has to trust others and cannot personally watch the managers of all his interests as one horse trader watches another, it becomes a condition of the very stability of that society that its rules of law and of business practice recognize and protect that ordinary citizen's dependent position. Unless constant extension of the legal conception of a fiduciary relationship — a guarantee of 'straight shooting' — supports the constant extension of mutual confidence which is the foundation of a maturing and complicated economic system, easy liquidity of the resources in which wealth is invested is a danger rather than a prop to the stability of that system. When everything everyone owns can be sold at once, there must be confidence not to sell. Just in proportion as it becomes more liquid and more complicated, an economic system must become more moderate, more honest, and more justifiably self-trusting.2

At this critical time in our nation's economic recovery, we need to remember these words. I believe the Commission should continue on its path toward "renewed investor confidence and restored market stature"3 and continue to take the necessary steps to "advance the law" concerning some difficult and long-standing issues, particularly in the areas of corporate governance and disclosure. Under the leadership of our Chairman Mary Schapiro, I believe that the SEC is doing just that.

As corporate counsel, you play a vital role in our rulemaking and other efforts. Through your comments and advice, you help us to understand whether the steps we propose to take are sound, and also — and I cannot underscore the importance of this enough — the workability of the way in which we propose to implement our policies. You give us a window into a better understanding of the practical implications of our policies. And, I want each of you to know that we take your comments and advice very seriously and want to hear from you.

This morning, I thought I'd give you all a window into my thought processes and touch on a few of our recent regulatory initiatives.

Facilitating Shareholder Director Nominations

As you all know, the Commission proposed a comprehensive series of rule amendments this past May to facilitate the rights of shareholders to nominate directors on corporate boards.

Now, I have heard some rumblings that my fellow Commissioners and I are not serious about proposed Rule 14a-11, otherwise known as our direct access proposal — in effect that we might be issuing this type of proposal to elicit comments that would justify our backing away from it. So, I want to tell you that I am, in fact, quite serious about our direct access proposal.

Although I cannot tell you today how I will vote when it comes time for me to consider an adopting release, I believe that our proposed approach, with both direct access and shareholder proposals, provides a reasonable way for us to unfetter a shareholder's franchise right. In my view, such a two-pronged approach would help ensure that shareholders have a real say in determining who will oversee management of the companies that they own.

It is simply unacceptable to me for an expensive proxy contest to be the only alternative available under our proxy rules for shareholders to nominate and seek to elect directors of their own choosing. And, although I understand that more and more companies are adopting majority voting, I do not believe that this advance alone is sufficient. Quite simply, majority voting provides a more effective opportunity for shareholders to show opposition to a candidate; access to the company's proxy statement provides an affirmative opportunity for shareholders to offer a different candidate.

With that in mind, let me give you some insight on where we are in our rulemaking process.

We received over 500 detailed and thoughtful comment letters that in the aggregate (and in some cases individually) address the over 100 questions we asked in our proposing release. And yes, we are, as always, carefully reading all of these responses — most of them, more than once. The comment letters raise a number of complex issues, including issues related to the workability of various aspects of our proposal. We are very thankful to the corporate community for taking the time to share its knowledge and experience with us.

Many comment letters also suggest strongly that we should allow shareholders to change their companies' access rules and, in particular, that shareholders should be permitted to approve provisions that may be more restrictive than those we've set in proposed Rule 14a-11-even provisions that deny shareholder access to the company's proxy statement. As my thinking about our proposed approach evolves, I am giving careful consideration to whether our rule needs any adjusting to address these concerns. I must say, however, that I have a less favorable reaction to those who suggest that directors should also have that unfettered choice.

As with all our rulemaking, we are committed to conscientiously and deliberately considering the comments and suggestions, which will — especially given the other items on our rulemaking agenda — take time. We are working diligently to make sure we understand all of the advantages and disadvantages of our proposed approach and the different parameters we set. And, at this stage in our review process, I have doubts that we will be in the position to make a truly informed judgment about these rules and be able to take final action in November (as some have speculated). Although I can't give you a definitive date, I expect we will likely move forward and consider an adopting release sometime in early 2010.

This means of course that final rules are not likely to be in place at the beginning of next year's "proxy season." To me, that timing is not ideal; however, given the complexity of this issue, I believe it is critical that we take the time we need to produce the best final product. Excellence should triumph over speed.

Proxy Enhancements and Risk Disclosures

While proxy access may not be in place for the upcoming season, I hope and expect that our proposed proxy and risk disclosure enhancements will be. We are carefully considering the more than 100 comments letters that we received.

Our recently proposed package of proxy disclosure improvements and solicitation enhancements is designed to empower investors. Investors should be able to make fully informed decisions when they cast their ballots for directors. I believe that shareholders should have better disclosure about the particular experience, qualifications, attributes and skills of each candidate that qualify her to be a member of the board of directors of that company.

And, I believe that our compensation-related proposals are critical. Today, we expect that, with respect to named executive officers, registrants are already considering the level of risk that employees might be encouraged to take to meet their incentive compensation elements. And, if material to the company's compensation policies or decisions regarding named executive officers, we expect that registrants are already disclosing those risk considerations in their filings. Under our proposals, a registrant would also be required to discuss its overall compensation policies beyond the named executive officers, if risks arising from those policies may have a material effect on the company. These proposed disclosure requirements are designed to help investors better understand whether a company is setting appropriate incentives for its employees or encouraging risk-taking that runs contrary to the company's overall interests.

Our proposal to accelerate the timing of disclosure of voting results is also particularly important. I am aware of no reason that shareholders should have to wait months to learn voting results.

NYSE Rule 452 and Proxy Plumbing

I expect that in the upcoming proxy season, market participants will be particularly interested in voting results when the amendments to NYSE Rule 452 eliminate broker voting in uncontested director elections. These amendments are designed to help assure that voting rights on critical matters like director elections are exercised by those with an economic interest in the company, rather than by brokers. And, I believe that they should improve corporate governance and enhance accountability of directors and shareholders.

I do not share the skeptics' view that, by returning the right to vote to shareholders, the amendments to Rule 452 will in fact disenfranchise retail shareholders. To the contrary, these amendments will ensure that the ballots cast by retail shareholders reflect their own decisions, not the decisions of their brokers. Many retail shareholders may not understand how important this change is — that they must now decide whether to vote in their company's director elections, and how to exercise that important right of franchise. We all need to make sure that shareholders understand these changes and what they mean for the upcoming proxy season. We at the SEC will be doing our part to educate investors, and I hope that all of you will do the same.

To further our goal of improved corporate governance, our staff is also taking an in-depth look into proxy voting mechanics (such as over and empty voting) and shareholder communications issues (including the "NOBO/OBO" distinction), a project we refer to as "Proxy Plumbing."

Just as it is in your homes, this "plumbing" is critical to the proper functioning of the proxy process. Meredith Cross, our Director of the Division of Corporation Finance, and her staff certainly agree. And, I expect that the Director of the Commission's newly-established Division of Risk, Strategy, and Financial Innovation, Dr. Henry Hu, will be extremely helpful to us in resolving these issues.

Ratings Disclosure and Rule 436(g)

To me, the corporate governance initiatives I've described so far are important because they are designed to allow investors an opportunity to exercise their rights and will help restore the balance in our system for corporate accountability. Gatekeepers, like credit rating agencies, should also serve as another important check on the potential for management to focus on short-term profit maximization in lieu of the long-term interests of shareholders.

When gatekeeper independence and integrity become compromised, market confidence can suffer. We saw this in the recent market crisis. There was an almost complete collapse of mortgage underwriting standards, with "no-doc" loans issued to borrowers without regard to income, assets, or even verified employment. Through securitization, underwriters packaged these risky loans into products that carried top credit ratings issued by the leading credit rating agencies. While advertised as a way to diversify and reduce risk, these financial instruments were often poorly understood and far riskier than their credit ratings suggested. Investors and our markets have paid a heavy price for this failure.

Last month, we considered a broad package of rules designed to improve disclosure about credit ratings history, highlight ratings shopping, and address conflicts of interest that arise in the credit rating business. These proposals are intended to provide information that should help investors better understand what credit ratings mean and, in particular, highlight for investors the fact that similar ratings can have very different meanings depending on the product.

Our credit rating proposal is also designed to help investors better understand potential conflicts of interest that could affect a particular credit rating. I believe that investors should be in a position to judge for themselves whether and how a conflict of interest impacts a particular rating. The disclosures required by this proposal and the proposed rules for NRSROs, which I will not cover today, are complementary and together should arm investors with the critical information they need to make those judgments.

In addition to proposed disclosure requirements, we also opened the door for what I sincerely hope will be a meaningful and constructive dialogue on NRSRO accountability. We issued a concept release asking for comment on the potential rescission of Rule 436(g); that release raises the possibility of our taking a different approach to improving the performance of NRSROs by subjecting those rating organizations to a stricter standard of liability.

It is difficult for me to understand why professionals at NRSROs should be subject to liability standards that differ from those applicable to lawyers, auditors, and other experts. So, if this were a new issue, I would strongly advocate for a level playing field for all expert contributors to registration statements.

(And, as a small preview of things to come from this particular Commissioner, I would also like to level the liability playing field between the primary offering and secondary trading markets. Please stay tuned on that...)

Turning back to the issue of NRSRO liability, I question whether the reasons for the Commission's liability concession to NRSROs still hold true today. In 1981, the Commission emphasized that its decision rested in part on the applicability of antifraud liability and its belief that NRSROs were required to "adhere to the highest professional standards in determining a security rating."4 Recent events lead me to question whether that predicate, on which the Commission relied nearly two decades ago, is in fact the case today.

Nonetheless, I recognize that we are not writing on a clean slate with respect to NRSRO liability. We must examine very carefully all of the consequences, intended and unintended, of subjecting those rating agencies to a stricter standard of liability. I hope that all of you will provide us with your views on this important question.

Management's Discussion and Analysis

While issuing a concept release like the one I've just described presents an important step to help the Commission determine whether to move towards "advancing the law" in a particular area, I believe that some of our rules are already flexible enough to protect investors as markets evolve. To me, Item 303 of Regulation S-K — Management's Discussion and Analysis — is the premier example.

MD&A's purpose is fairly simple — to "give the investor an opportunity to look at the company through the eyes of management."5 I cannot stress enough the importance of a robust MD&A section to an investor's evaluation of his or her investment. We all know the tremendous impact that MD&A disclosure has on market prices and investor decisions.

For nearly 30 years, the Commission and its staff have repeatedly tried to help companies improve their compliance with our MD&A requirements. We have provided interpretive guidance and increased transparency about our review process. As a recent example, the Division of Corporation Finance published its "Dear CFO" letter this past August related to loan loss provisions.

Our efforts have been extensive, but, in my view, corporate MD&As are still not where they should be. I would like to see companies recognize trends and uncertainties sooner; make reasonable likelihood determinations before they become more likely than not; and disclose this information to investors so that they can make their own, fully-informed investment decisions. And these disclosures should be made in a way that communicates to shareholders. I call on you to do everything that you can to assure that the companies that you serve provide disclosure that enables their owners, the shareholders, to view the company and its prospects through the eyes of its insiders.

Climate Change

The subject of MD&A provides a good segue into our recent work with respect to climate change disclosures.

We are taking a very serious look at our disclosure system in this area. Although I've stated publicly that we are not an agency populated with climate experts, we are taking affirmative steps to better educate ourselves. I have recently met with a number of experts who analyze the risks and opportunities posed by climate change. Discussions at these meetings have confirmed my belief that climate change is a very serious issue. And, I believe that it is time for us to consider issuing interpretive guidance regarding disclosure in this area.

Even without any further guidance, however, it strikes me that this is one area where, if I were drafting disclosure for a registrant today, I would carefully consider whether that company's particular facts and circumstances raise any disclosure obligations under the current rules, and in particular, under the MD&A requirements.


Now, I realize that I have covered quite a number of our recent initiatives, but of course, I understand all too well that when we Commissioners give our remarks at conferences like these, we are judged not only on what we say, but oftentimes, what we do not say.

So, let me fill at least one of those gaps and conclude my remarks today by "breaking my silence" and sharing with you a little bit about where I am on IFRS.

The issues raised by the proposed IFRS roadmap continue to be a priority for me. At our open meeting where we adopted the roadmap last fall, I said that we should move forward to IFRS if and only if it is the right thing to do for U.S. investors. That is still my position today.

I also continue to be troubled about the so-called "early adoption" option, particularly if reconciliation were not required. That option strikes me as the wrong kind of roadmap — one that would lead to dual GAAP for U.S. public companies. That's one destination I don't want to reach.

I remain committed to striving towards one global set of high-quality accounting standards — a single set of accounting standards, applicable around the world, that represent the economic reality of a business in a transparent and understandable manner.

But, I continue to believe that there are critical issues to be addressed as the Commission moves forward on a decision concerning the adoption of IFRS for U.S. registrants. Importantly, before I am willing to support such a move to IFRS, I must be satisfied that the standards will continue to be set through an independent process to provide transparent information for the benefit of investors. We are in the process of reviewing the over 200 thought-provoking (and very helpful) comments that we have received on the IFRS roadmap. And, we are committed to determining the best way to move forward. In terms of timing, you may have read recent news articles concerning our Chairman's continuing interest in IFRS. I expect that you will be hearing more from us on IFRS in the next few months.


To sum up, I hope and believe that, in the words of Sam Rayburn, all of our initiatives will help to make our "economic system … become more moderate, more honest, and more justifiably self-trusting." We at the SEC are striving mightily to do that. And, we greatly appreciate all of your conscientious and insightful comments and advice as we work to "advance the law" in order to bring investor confidence back to our markets.

With that, let me turn it over to Paul [Lovejoy].

Thank you.



Modified: 10/02/2009