Speech by SEC Chairman:
Alan B. Levenson Keynote Address
Chairman Harvey L. Pitt
U.S. Securities and Exchange Commission
Securities Regulation Institute
January 29, 2003
These remarks reflect solely the personal views of Mr. Pitt, and do not necessarily reflect the views of the Commission, the individual members of the Commission, or its Staff.
This is a special occasion, and I'm honored to be part of it. For one thing, it's the Institute's thirtieth anniversary. I attended the first when I was Ray Garrett's Executive Assistant, and I've been at most of them since. This conference quickly became one of my favorites. This is also the first Alan B. Levenson Keynote Address. Alan is one of the founders of this program, and a close personal, as well as professional, friend of mine for the past thirty-five years. It's fitting this keynote address is named for him, and I'm especially honored to deliver the first.
During my first tour of duty at the SEC, Alan and I worked together on many projects. I learned a great deal from Alan, but nothing as significant as the importance of caring about people. When I decided to leave the Commission after several years as General Counsel, I sought Alan's advice, and learned that his firm was interested in me. Eventually, I didn't wind up at Alan's firm, but instead at a firm to which Alan had recommended me. When I told him my decision, Alan congratulated me, and immediately scheduled dinner.
At dinner, I told Alan of my twin fears about private practice - my first was that no one would call, and my second was that someone might! Alan reassured me that all would be fine, even if at the outset private practice developed slowly. And then, to allay my concerns, he told me that when he started private practice he sat by his telephone, but no one called. Then, he said, he received his first telephone call toward the end of his first week. It was from his son Scott. When Alan asked why he had called, Scott said: "Dad, I was worried you'd feel lonely if no one called, so I decided I'd better call and cheer you up."
That heartwarming story went a long way toward alleviating the angst I was feeling about starting on a new venture. It's typical of Alan to worry about a young colleague embarking on a new mission, and I paid careful attention, making certain I replicated that effort during my own career.
Apart from these factors, this is also a special occasion because it's my last speech as SEC Chairman. Now, some of you may have thought, or hoped, I'd delivered that speech three months ago, when I tendered my resignation, but I'm like the proverbial "ring around the collar" - I'm still here!
Ever since I tendered my resignation I've been asked frequently what I'll do next. Mostly, it's my wife who asks - she's afraid I'll retire, so she reminds me daily she married me for better or for worse, but not for lunch! I haven't had much time to think about next careers because we've been so busy, but I have a few ideas, and thought I'd take a moment to solicit your feedback.
Those who know me well know movies have always been my passion. So, one possibility is joining my "cousin" Brad Pitt in Hollywood as a leading man on the Silver Screen! Another job possibility comes from a CNN piece on Memphis's Peabody Hotel, which is seeking a new "duck master" - someone who's good with ducks - to walk the Hotel's ducks to and from the lobby fountain twice a day.1 Since I've learned to let things roll off my back on this job, it'd be nice to put those lessons into practice, and share what I've learned with our fine-feathered friends!
But my most interesting lead is another "ducky" job in Du Quoin, Illinois. I chanced upon this opportunity in the SEC's news clips, which contained an article about a Harvey C. Pitt, who owns the world's largest and most priceless antique duck decoy collection.2 It's rumored he's thinking about starting a decoy museum. Given our common names, I've reached out to him to see if I can help. He hasn't taken my calls yet; apparently he's angry that my past eighteen months in public office have ruined his good name. I guess his friends and family have had a lot of fun with him over the headlines about me the past year. I hope he'll eventually take my call. Anyway, those are a few possibilities I'm considering.
In thinking about this Conference, it occurred to me it was a stroke of luck San Diego hosted the Super Bowl this year, because that delayed this conference a week. If the conference had been held last week, no one from the SEC could have participated. And, you'd have had precious little to talk about. Now, we can talk about any of the eleven rules we finalized this month, or the four studies we completed and sent to Congress. It's a veritable cornucopia of topics.
So, first, I thought I'd offer you a brief overview of what we've been up to lately. Then I'll talk a little bit about our attorney conduct rules. And finally, since this really is my swan song, I'll offer a concluding observation about public service.
The last two weeks were the busiest two weeks of rulemaking in SEC history. Of course, Congress helped us into the record books by setting ungenerous deadlines for the adoption of rules implementing the Act. It's only been six months since the President signed the Act into law. Yet, within 30 days of the Act's signing, we adopted rules requiring CEOs and CFOs to certify their financial statements and accelerating insider transaction reporting to two days. And, over the past two weeks, we adopted nine other rules relating to:
- Pro-forma financial information,
- Codes of ethics for senior executives,
- Financial experts on audit committees,
- Trading during pension fund blackout periods,
- Disclosure of material off-balance sheet transactions,
- Retention of audit records,
- Independence standards for public company auditors,
- Standards of conduct for corporate attorneys, and
- The application of certain Sarbanes-Oxley certification and disclosure requirements to registered investment companies.
In addition, last week we sent four separate studies to Congress related to:
- Penalties and disgorgements in our enforcement cases,
- Securities professionals who've "aided and abetted" federal securities law violations,
- Commission enforcement actions involving reporting violations and restatements, and
- The role and function of credit rating agencies.
Let me put these deadlines in perspective. When the President signed Sarbanes-Oxley, the NFL preseason was just beginning. Putting aside the immediate certification and insider transaction requirements, the Act mandated eight rules we had to finalize within 180 days. That meant we had to propose rules, put them out for comment, read the comments, respond to them, revise the rules and finalize them, all in 180 days. Now, fortuitously, 180 days from the Act's signing fell on Super Bowl Sunday. Recognizing this, and since I'm a fervent football fan, I decided we'd finish all our work by last Friday. So we actually had everything done in 178 days, and we all got to watch the Super Bowl. Our only problem was that none of us knew how Tampa and Oakland got there! And, most of us feel as if we're the ones who've played an entire NFL season!
We met these deadlines without sacrificing our other work or obligations - including our robust enforcement program and numerous regulatory initiatives unrelated to Sarbanes-Oxley. For example, last week we also adopted rules regarding proxy voting by investment companies and investment advisers. And, we're hard at work on other rules, studies and requirements of the Act, including proposing rules related to:
- Improper influence on auditors,
- Listing standards related to audit committees,
- Investment adviser and investment company compliance policies,
- Certifications by analysts,
- Public company internal control reports
- Critical accounting policies, and
- Expanded current reporting.
One of the rules we adopted last week establishes minimum standards of professional conduct for attorneys who represent public companies before the Commission. They're designed to increase investor confidence by ensuring that attorneys who work for public companies further shareholder interests if they learn of material corporate misconduct. The rules require attorneys to report material misconduct "up-the-Corporate-ladder." The public expects no less from company employees - and company lawyers, who know the law, shouldn't be held to a lesser standard.
Under the rules, attorneys must report evidence of material violations to the chief legal counsel or chief executive officer and, if they don't respond appropriately, then to the Board of Directors or a committee of independent directors. To avoid subjective second-guessing, the final rules set an objective standard of what constitutes "evidence of a material violation." We require a showing that it's unreasonable, under the circumstances, for a prudent and competent attorney to conclude that a material violation hasn't occurred. That's the correct standard - objectively reasonable behavior - and properly implements the statute's intent.
In proposing our rules, we sought comment on whether attorneys should be required to withdraw "noisily" from some public company representations, by notifying us they've withdrawn. In light of the interest this proposal sparked, we extended the comment period and also solicited comments on an alternative proposal that would obligate issuers (instead of attorneys) to notify the Commission if counsel withdraws over an ethical disagreement. Although I and a majority of my colleagues were tentatively prepared to accept the alternative proposal that companies do the "reporting out," we voted unanimously to solicit further comment on the proposals because seeking additional comments is constructive, enlightening, and consistent with the Administrative Procedures Act and general notions of due process.
The withdrawal notice requirements we're considering are similar to those already imposed on public company auditors. Attorneys representing public companies owe responsibilities to public shareholders. They must be satisfied that the objectives management asks them to pursue truly further the interests of the company and its shareholders. And, they need to ward against conflicts arising between management and the company's shareholders. In sum, corporate attorneys should serve corporate constituencies in all they say and do; they should not use their skills primarily to serve the interests of corporate managers, even if the goals of those managers can be harmonized with the best interests of the corporation and its shareholders.
In the past, the primary obligation for establishing standards for securities professionals was left to the professions. Sarbanes-Oxley reversed this presumption for accountants. The Act didn't go as far with respect to lawyers. Still, the Act sends a clear signal that the legal profession must ensure that, in representing public companies, the highest professional and ethical standards prevail.
In this regard, I'm heartened and impressed by the work of the ABA's Task Force on Corporate Responsibility, led by Jim Cheek, in recommending a tightening of professional standards.3 I hope the ABA pursues the recommendations in the Cheek Report when it meets next month. That's a far better approach than having the government dictate professional standards. Government is best equipped to ensure that appropriate standards of ethics and competency are established, and then rigorously implemented and enforced. But, if the legal profession doesn't establish and enforce effective professional ethics for corporate attorneys, the federal government, including the Commission, will surely step in and fill the void.
Reflecting the timelessness and complexity of this issue, the conduct of securities professionals was a subject of discussion and debate at this Institute thirty years ago, due to the SEC's decision to sue two large law firms and one large accounting firm for their roles in the National Student Marketing securities fraud. Alan Levenson was one of those leading the charge. Consonant with the ABA Model Code of Professional Responsibility then in effect,4 the Commission claimed lawyers and accountants were obligated not only to stop fraudulent conduct in conjunction with a merger but also to report to shareholders or the SEC if their clients failed to rectify their course.5
The legal profession reacted negatively to National Student Marketing; in fact, the ABA amended its Model Code to cloak corporate communications about fraud in privilege.6 Now, three decades later, Congress focused on lawyers who sit by while corporate frauds are perpetrated on their watch. The resulting legislation reflects a Congressional belief that lawyers who failed to speak up facilitated the recent spate of corporate collapses. Some suggest the Bar "provided its members with many confusing notions and no guidance on how to act."7 I confess that, as a lawyer, I was concerned about potential incursions into the lawyer-client relationship. But as a regulator, I have no doubt the Bar must assume greater responsibilities if public trust is to be restored. The Bar has a chance to assess its responsibilities and establish clear guidelines for the professional conduct of attorneys who represent public corporations. I encourage the Bar to do so, and to do so in the spirit of concern for public investors we all share.
Finally, I want to talk a little bit about public service. Here too, Alan Levenson is an aspirational paradigm. Alan went to Dartmouth. (In fact, he still prefers to write in green ink.) He also holds two Oxford degrees and a Yale law degree. When Alan embarked upon his legal career, he was an accomplished and pedigreed scholar who could have gone anywhere, but fortunately decided to come to the SEC as the first member of the Honors Program. He started as a law clerk in Corp Fin, and eventually became its Director. Alan initially chose public service over private practice because, as he recently put it, he thought he could get greater responsibility more quickly and "hopefully make a contribution."8 Now there's an understatement. Alan's contributions are legion.
Alan helped initiate the SEC's sensitive payments program, which led to the Foreign Corrupt Practices Act, which led to the widespread establishment of audit committees. He also made many other contributions to corporate governance and shareholder democracy issues. And, as I alluded at the outset, Alan helped start many legal education programs, which continue to prosper today. "The SEC Speaks" was his brainchild.
Like Alan, I was fortunate to begin my legal career at the SEC. My early experiences in public service shaped me as a lawyer and counselor. I gained broad and diverse exposure to the many aspects of securities regulation and enforcement. My experiences instilled in me enormous respect for the agency, its mandate, and the dedicated people who strive to give Congress's legislative words true meaning, day in and day out. It was an honor for me to return to chair the agency where I began my legal career. Although nearly twenty-five years had passed, I found the agency and its Staff as vibrant, creative and hard working as ever. And long after I've left, SEC Staffers will be diligently working to protect investors, thoughtfully weighing various issues and exercising sound professional judgment. They carry on the tradition of Alan Levenson and so many other dedicated public servants.
As you may know, Alan has been very involved with the SEC Historical Society. In particular, he started its oral histories project, in which former Commissioners and Senior Staff talk about their experiences at the Commission. Although he started this project years ago, Alan himself escaped being a subject until recently, when Dick Rowe caught up with him and discussed Alan's distinguished SEC career. At the end, Dick asked Alan if he wanted to add anything. Typically, Alan paused before answering, then said in classic understatement, "Yes, I'd like to use this opportunity to thank my former colleagues both at the Commission level and the Staff level. . . . They made the Commission the great institution that it became and I was privileged to be a part of it."9
I'd like to take this opportunity to echo those sentiments. I thank my colleagues at the Commission for their hard work and unflagging dedication to the SEC's investor protection mission. It's been an honor to serve with them over the past eighteen months. I'm extremely proud of what the SEC accomplished in this time, especially in helping to restore the markets after September 11th, in strengthening our Enforcement Program, and in working to put sound and thoughtful rules and systems in place to ensure that investors and our markets have more protection.
In the face of my unusual eighteen months on the job, some friends tell me public service has lost its luster and assert they would eschew the opportunity if it were offered. I fervently hope that's not the case. While I wish no one the same conditions I confronted, I do wish everyone the joy of public service I've been fortunate to experience. We live in difficult times. Difficult issues confront us. And yet, in difficult times, facing difficult issues, it's truly a privilege to have had the opportunity to be part of the solution.
||"Tennessee: Hotel Seeks New Duckmaster," CNN.com (Jan. 17, 2003) http://www.cnn.com/2003/TRAVEL/DESTINATIONS/01/17/ offbeat.hotel.ducks.ap/index.html.|
||Tim Renken, Harvey Pitt Duck Decoy Collection, THE SAINT LOUIS POST DISPATCH, Oct. 20, 2001, at Sports 27.|
||Preliminary Report of the American Bar Association Task Force on Corporate Responsibility (July 16, 2002) ("Cheek Report").|
||The ABA Model Code of Professional Responsibility provided:|
A lawyer who receives information clearly establishing that
||His client has, in the course of the representation, perpetrated a fraud upon a person or tribunal shall promptly call upon his client to rectify the same, and if his client refuses or is unable to do so, he shall reveal the fraud to the affected person or tribunal.|
||SEC v. National Student Marketing Corp., 412 Federal Securities Law Reports ¶93,360 (CCH).|
||ABA Code of Professional Responsibility 7-102(B)(1) (amended in 1974 to add "except when the information is protected as a privileged communication).|
|| Theodore Sonde and F. Ryan Keith, "'Up the Ladder'" and Over: Regulating Securities Lawyers - Past, Present & Future" (2002) (available at http://www.crowell.com/pdf/Ladder.pdf; a finalized version will appear in a forthcoming issue of the Washington and Lee Law Review).|
||Audio Tape of Oral History given by Alan B. Levenson to Richard Rowe on January 14, 2003 for the SEC Historical Society's Oral Histories Project (on file with the SEC Historical Society).|
||Audio Tape of Oral History given by Alan B. Levenson to Richard Rowe on January 14, 2003 for the SEC Historical Society's Oral Histories Project (on file with the SEC Historical Society).|