Speech by SEC Chairman:
Remarks at the Commission Open Meeting
Chairman Harvey L. Pitt
U.S. Securities and Exchange Commission
February 4, 2003
Good afternoon. This is an open meeting of the Securities and Exchange Commission, on February 4, 2003.
We have two items on the calendar this afternoon. Our first item was going to be our Analyst Certification regulation, affectionately known as Reg. AC. In order to give the Commission more time to consider last minute technical changes, we will consider it at our Thursday open meeting instead.
Custody of Investment Company Assets with
U.S. Securities Depositories
Our first item is a recommendation from the Division of Investment Management that we adopt amendments to Investment Company Act Rule 17f-4, the rule that governs the use of U.S. securities depositories by mutual funds and other investment companies.
I note, somewhat nostalgically, that the Commission originally adopted rule 17f-4 in 1978, the year I ended my first tenure at the Commission, back then as its General Counsel. At that time, Harold Williams was Chairman of the Commission and Syd Mendelsohn was Director of Investment Management. Paul, if you have trouble remembering those days, it's because you hadn't graduated from law school yet! If experience yields wisdom -- and I believe it does -- today's amendments on securities depositories wisely reflect our successful experience in that area during the last 25 years.
Back when the Commission first adopted Rule 17f-4, securities depositories were an innovation designed to solve the problem of retaining and transferring securities as paper certificates. Today, most securities around the world are held with securities depositories. These depositories play an important, indeed vital, role in the efficient clearance and settlement of securities transactions. The amendments the Commission is considering today would update and simplify Rule 17f-4, reducing unnecessary regulatory burdens on mutual funds without sacrificing one iota of investor protection.
I congratulate the Division of Investment Management on this recommendation, and want to acknowledge the efforts of Bob Plaze, Hunter Jones, and Hugh Lutz from the Division; Lori Walsh from the Office of Economic Analysis; Jerry Carpenter and Catherine Moore from the Division of Market Regulation; and Arthur Laby and Lawrence Pisto from the Office of General Counsel.
Compliance Programs of Investment Companies and Investment Advisers
The Division of Investment Management also is the source of the second item on the calendar today.
The number of funds and advisers registered with the SEC, as well as the amount of assets held by these funds and advisers, has grown tremendously over the years. Today, these funds and advisers control over $21 trillion of assets, and engage in tens of millions of transactions each year. Over the years, industry growth has substantially exceeded the growth in our resources. In addition, unlike the brokerage industry, we have sole oversight responsibility for the 5,000 investment companies and 7,800 investment advisers that are registered with the Commission.
How do we do it? We try to use our limited resources as best as we can. Like "cops on the beat," our examiners cannot be everywhere at all times. Instead, they focus their efforts on examining the effectiveness of the internal controls that a fund or adviser has established to prevent and detect violations of the federal securities laws. Where they find weaknesses in these controls, they ask management to strengthen them.
Our oversight is therefore built on the necessary assumption that those who manage investment companies and advisers are doing their part to comply with the law. But, in fact, there's no requirement that funds or advisers have a comprehensive set of effective compliance controls. Most do. But our enforcement annals are full of examples where they did not.
The Division's recommendation would formalize the requirement that funds and advisers have comprehensive compliance procedures in place; that they review them at least once a year to make sure they work effectively; and that they appoint a chief compliance officer responsible for administering them. If adopted, these rules should help protect investors by improving day-to-day compliance with the federal securities laws, while at the same time increasing the efficiency and effectiveness of our inspection program.
The rule proposals do not ask anything that any well managed fund or adviser should not be doing today. In addition, most other financial service providers in this country, including broker-dealers, are required to establish compliance controls. The Division has coupled these proposed rules with a request for comment on the advisability of additional private sector involvement in promoting fund and adviser compliance with the federal securities laws.
Events over these last eighteen months have underscored for me again and again the critical need for the Commission to become more proactive in fulfilling its investor protection mission. "Real-time" enforcement is crucial, but it's not enough. We need to focus on the most critical events of the day, to be sure, but that's also not enough. In the end, I believe we must also strive to identify and prioritize emerging issues, continuously reassess whether we are achieving our mandate as best we can in light of growth and change in the financial services industry, and coordinate and direct agency resources and efforts accordingly. We simply cannot afford to wait for other storms to break.
The request for comment must be seen in this light. I view it as an important first step in a dialogue that will allow the Commission to determine whether it needs to take additional action to enhance our oversight of the mutual fund and investment adviser industries, and, if so, how we can go about doing so in the most effective and efficient manner possible. In order to encourage a productive dialogue, the Division, to its credit, tried not to leave any stone unturned. For example, the Division included a request for comment on the possibility of having one or more self-regulatory organizations for funds and advisers. In crafting the proposed request for comment, the Division could not ignore a regulatory mechanism that already covers half the industries we regulate. I feel strongly that the Commission should have the benefit of reasoned views from both investors and industry, and not just the quickest and most vocal of critics, on the full range of possibilities before making a decision as to whether additional private sector efforts are necessary, and what form those efforts, if any, should take.
I again congratulate the Division of Investment Management on this recommendation. In particular, I would like to thank Bob Plaze, Jamey Basham, and Hester Pierce in the Division, as well as Paul Roye for his outstanding leadership on these issues. I would also like to acknowledge the invaluable assistance of Lori Richards and Gene Gohlke from the Office of Compliance Inspections and Examinations, Harvey Westerbrook from the Office of Economic Analysis, and Arthur Laby and Jill Felker from the Office of General Counsel.