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U.S. Securities and Exchange Commission

Speech by SEC Chairman:
Opening Remarks to the Practising Law Institute's SEC Speaks Series


Chairman Christopher Cox

U.S. Securities and Exchange Commission

Washington, D.C.
March 3, 2006

Thank you, Linda. And let me just take a moment to extol the virtues of our dynamic, consummately professional, and highly effective leader of the Division of Enforcement. Linda Thomsen is absolutely outstanding. She is a worthy successor to the giants of securities law who have preceded her as head of the Enforcement Division, some of whom are here today. And she leads a team of professionals here in Washington and across the country that is absolutely first rate. Linda, you are doing us all proud.

You know, all this talk about the long knives being out really does remind me of my week in the hospital. And there's been a lot of misunderstanding about my surgery. For example, just yesterday I was telling Commissioner Campos about what happened. I said, Roel, I was under the knife. Filleted like a flounder. Laid open and gutted. He said, "I know, I saw it. That New York Post piece was brutal."

Well, anyway, that was something I needed to get off my chest. Let's get on to the business at hand.

This is a truly impressive group. There are over 800 people here this morning in D.C., and another 200 joining us across the country via the Internet. And it's not surprising. SEC Speaks is truly a unique gathering — part CLE conference, part reunion, and part Anna Nicole Smith fan club. We've got it all this weekend.

I can't think of a better way to open this conference than to express my appreciation for the staff of the Commission. At SEC Speaks some years back, David Martin, who was then Director of the Division of Corporation Finance, asked each member of the staff there that morning to stand up. He started a tradition that's been carried on ever since. I'd like to continue that tradition today. So please, to our professional staff: stand and take a bow.

Thanks to each of you for your hard work and for your dedication to America's investors. I'd like to ask everyone else to join me in a round of applause in recognition of these outstanding men and women.

And to the many SEC alumni here, let me say that to my mind, there is no better confirmation that the SEC is a great place to work than the constant participation of former Commission employees in our activities.

I also want to congratulate a very special SEC veteran, Paul Gonson. Paul is this year's winner of the SEC Alumni Association's William O. Douglas award. The Alumni Association makes this award annually to the alumnus who has contributed most notably to the development of federal securities laws. Paul will receive the award at our dinner tonight.

And on behalf of all of us, I want to thank the Practising Law Institute, and its board of trustees, for putting this conference together again this year. Your mission of continuing legal education is supremely important, and you've made the SEC Speaks Series, now in its fourth decade, the premier opportunity for Commissioners, senior staff, securities practitioners, and the regulated community to come together to discuss the latest issues in SEC regulation.

These gatherings are important because things change.

How many of you watched any of the Olympics? How many of you saw the Flying Tomato? You have to admit, the Olympics have changed. For those of you who didn't see it, we're talking about Shaun White, who won the gold in the snowboarding half pipe. That didn't even exist as an Olympic sport the last time I checked. He did things on the ski slopes that have never been done before.

Right now we're on the cusp of the same sort of precedent-shattering revolution in the securities arena. Perhaps this revolution won't deliver the same adrenaline-pumping thrill of a Shaun White. But it's every bit as significant in our world as Shaun White is in his.

What am I talking about? Technology. Like Shaun White, it will do things that have never been done before.

Of course, technology has already revolutionized the financial markets many times over — as well as just about every industry and walk of life.

Scott Cook, the founder and Chairman of Intuit, calls these revolutions "game changing technology." And we're about to see another one in the financial industry through the use of interactive data.

What we're envisioning is a new platform for delivering the numbers in financial statements that can perform so fast and so flexibly, it will slash untold hours of waste, cost, and inefficiency from our economy.

Even more importantly, it will level the playing field for tens of millions of average investors. Our recent policy initiatives here at the Commission all point in the same direction: We want to improve the quality of disclosure for the average investor — to empower everyday investors to make better decisions for their families, their retirement, their health care, their education and their savings.

That's particularly true when it comes to XBRL — short for eXtensible Business Reporting Language — a deceptively dry name for a decidedly exciting technology. I have no doubt that XBRL will change the game for millions of ordinary investors. For them, it can mean the difference between a game of chance and a game of skill. And it will mean a much more level playing field.

It will let any user — anyone — take mountains of financial data and make it searchable, accurate, and most important, usable.

How is this done?

We start with the certain knowledge that today's consumers are frustrated and confused by all the enormous amounts of financial information that's dumped on them, but isn't intended for retail consumption. For the little guy who's simply trying to get a straight answer about mutual fund fees and costs, today's one-size-fits-all disclosure isn't working.

But satisfying investors' needs isn't a matter of eliminating the detailed information and replacing it with summaries or consolidations. That would simply be dumbing down the data. To borrow from a Scott Cook analogy, to do that would be like a bus manufacturer deciding to appeal to the sports car market by… adapting the bus. Take out all the seats — except for two — and there you go. Close enough. (Until you try to corner it on Dead Man's Curve.)

In the securities compliance arena, think of the totality of today's mandated disclosures as the bus. Collectively we need that bus. It's the vehicle we need to do our job. There's a reason for all that information we collect and disseminate. We need it to ensure compliance; to police fraud; and to ensure the health of our capital markets. Each of the seats in that bus has a function, crucial to what we do.

But a retail investor doesn't need all those seats. For their purposes, the bus is too big, too unwieldy, too slow. It's just not worth the trouble.

Up till now, though, that big old lumbering bus has been the only vehicle that's available to the average retail investor wanting to do his or her comparison shopping.

What the average investor really wants is a sports car. Something fast. Something to get them from Point A to Point B with speed, accuracy and precision.

How can we change today's disclosure to get individual investors what they really need? Merely adapting the bus — stripping out what we think the consumer doesn't need or want — doesn't make it a race car. It's still a bus.

Not to mention that making assumptions about what the consumer wants is risky business. Ideally, they should be the ones to decide. But let us say we take a poll, and simply start adding up the features that investors tell us they want.

One investor values this feature, another dearly wants this feature-we'd quickly find ourselves back where we started: that big, old lumbering bus.

So how do we go about building that consumer friendly, functional race car? The answer is: We don't.

With interactive data, each investor is able to order up his or her own custom model with just a few clicks of the mouse.

Picture it: all of the information you seek is called up instantly to one page. Until now, data has been held captive to the document where it was originally entered. Re-assembling data is currently an arduous scavenger hunt. It's painstaking and time consuming. You've got to slog through countless tables, footnotes, and text, hand picking the relevant information, piece by piece.

And that's assuming one can even find what's relevant. And then, after that, comes the manual re-keying of data, and reassembling it in a fashion you can use. Only then can the analysis begin.

The only way this could be less efficient is if the SEC required the use of a quill pen and an inkwell.

Not surprisingly, financial firms — who can afford it — usually end up getting the bulk of their financial information about companies not from the companies themselves, nor from SEC filings. Rather, they buy the data from middlemen all over the world, from a global industry devoted to re-keying SEC financial information.

And you can't blame them. Compiling numbers has become exorbitantly expensive. Today the numbers are lifeless and unresponsive — like an old dog, they don't come when you call them. They require a lot of work.

The solution is to bring the data to life, and make them do the work for us. With XBRL, the information is no longer tethered to its place. It will leap from its virtual filing cabinet to come to you. No longer must you ferret and dig and guess the precise locations to conduct your hunt. With interactive data, the information is all searchable. And it's called up instantly, assembled as you wish: obedient servants, awaiting your next desire.

So how, exactly, does this work? How does XBRL get quadrillions of data bytes to cooperate so cheerfully at your command?

It's through the use of data-tagging. Each piece of information is given a unique label. It's as if each number in a financial statement has its own little GPS homing device.

The benefits of all this for individual investors are obvious. And since mutual funds are the investment of choice for retail investors, that's where we hope to see interactive data make its first big splash.

We still may say "money in the bank" when we mean that something is certain. But today that's not what we say when we're talking about America's savings. Bank deposits have fallen to less than 30% of household liquid financial assets. Meanwhile, fully half of American households own mutual funds, not to mention ETFs.

At the SEC we already require mutual funds to disclose a great deal of information. With interactive data, we can help investors to tame this mass of facts, statistics and numbers, so it can serve the individual needs of each user.

That's why I've asked our Division of Investment Management to undertake a much-needed overhaul of the way we ask funds to provide mutual fund disclosure and the way we require investors to receive it.

We're currently in the process of a wholesale rethinking of the quantity and content of mutual fund information that we require to be delivered to investors, as well as the timing of that disclosure.

Of course, it isn't just individual investors who will benefit from interactive data. Analysts, for example, would be able to create their own ratios with ease.

Say they want to compare ROE across all companies in an industry, or EVA across all manufacturers, or the ROI of all companies in the Russell 3,000. All this could be possible with the click of a button.

One of the best things about interactive data is that financial information will be more trustworthy. Today, the manual re-keying of information from financial statements produces an error rate that is unacceptably high. When it comes to the gathering of financial information, to err is definitely human, but it isn't divine to have to put up with shoddy numbers.

Executives who have taken the time to double check the data that financial analysts following their companies are working with can sometimes get quite a shock. That's because some of them bear no resemblance to what the companies published. The truth is, too many CEOs have no idea what happens to their information after it leaves their control in the form of SEC-mandated financial statements. When they are asked, "Do you know where analysts get data on your companies to populate their valuation models?" they usually reply, "well, from our financial statements."

BZZZZZ. Wrong answer. And then, their first reaction is surprise. That surprise turns to concern when they realize that the numbers the analysts are using in their valuation models can have an error rate of 28%, or higher still if the data in question comes from the footnotes.

Is there any question how important interactive data can be?

And it should go without saying that if interactive data improves accuracy and gives users of financial information greater speed and flexibility, it will help the SEC in its market watchdog function.

If you've been following Commission news you know that we're putting together an interactive-data test group. Companies that agree to file in XBRL will receive in exchange expedited reviews of registration statements or annual reports.

We've extended the deadline for registration in the program, due to the number of requests from companies to consider participation. The new deadline is a week from today, March 10, 2006.

The SEC's mission as the investor's advocate is also the reason we are advancing another major initiative — our proposal to improve the disclosure of executive compensation. Here again, we have an area where companies are already disclosing a great deal of information regarding an executive's pay package. But it shouldn't require a spade and a pair of knee-high boots to wade through all the data released in the compensation tables, the footnotes and elsewhere. As with mutual funds, investors should get the information they need and they should get it in a form they can use.

This is why our proposal is built upon the presentation of one number for the entire compensation package in a fiscal year. Investors, analysts, the financial media and everyone else shouldn't have to be subjected to an "Aha!" moment when a retired CEO settles with her ex-husband and all the elements of her pay package finally come to light. The magazines at the supermarket checkout counter may be fun and titillating, but this is not where investors should be getting the information they need.

I want to conclude my remarks with a brief announcement. Last April, the Commission finished our IA/BD rule. We noted at the time that over the past few decades distinctions between investment advisers and broker-dealers have become increasingly blurred. That's due to changes in the industry, in the law, and in the marketplace.

To address the question of how best to harmonize broker regulation under the Exchange Act and adviser regulation under the Advisers Act, in light of these changes, our staff were asked to make recommendations for a study to look into these and other related issues.

Today I am pleased to announce that I have decided, after considering the staff's recommendations and consulting with the other Commissioners, that we now are prepared to move ahead with a study to address the issues specified in the IA/BD release, including those I've already mentioned.

In the near future, an announcement will be made about how exactly the study will be conducted. And when the study gets underway, your input will be solicited. This initiative can't succeed without your help.

It's been a pleasure to kick off our conference this morning. This is a wonderful event. To the panelists, I want to thank you for your time and effort. To the staff and our Practising Law Institute organizers, again thanks to each of you.

Learn a lot, enjoy renewing acquaintances, and most importantly, keep doing what you do best. You are all part of making our country's capital markets the healthiest, safest and best in the world. Thank you for what you do.


Modified: 03/03/2006