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U.S. Securities and Exchange Commission

Speech by SEC Commissioner:
Current Developments
at the Securities and Exchange Commission


Commissioner Cynthia A. Glassman

U.S. Securities and Exchange Commission

Women in Housing and Finance
Washington, D.C.
May 16, 2003

Good afternoon. As a long-time WHF member and former Board member, I am especially pleased to have the opportunity to speak to you today. Before I begin, let me dispense with the standard disclaimer: The views I express here are my own and not necessarily those of the Securities and Exchange Commission or its staff.

This past year - my first at the Commission -has been a busy one. There has been a sea change in the securities laws, and it has been both fascinating and challenging to be a part of it. I'd like to give you a chronology of the highlights of what we have done and then briefly cover what we need to do next.

Much of the work of the Commission this past year, and without doubt much of the Commission's work to come, is in rulemaking. As an economist, I focus on whether the rules will be efficient and effective in accomplishing their objectives - and I worry a lot about unintended consequences.

There was no shortage of opportunities for me to analyze new rules this past year. In particular, rulemaking for Sarbanes-Oxley has kept the Commission and the staff very busy. Sarbanes-Oxley is perhaps the most significant piece of securities legislation in over 60 years. The rules fall into three major categories: improved disclosure, corporate governance, and higher professional standards.

Promulgating the rules to implement the law was and is demanding. Sarbanes-Oxley directed us to make rules in a wide range of areas and did not give us a lot of time within which to do so - for example, 90 days for some rules and 180 days for others. Congress passed the act in July. By November of last year, the Commission had adopted rules to require CEOs to certify quarterly and annual reports and to speed up the disclosure of personal securities trading by corporate insiders -- and we had announced the membership of the PCAOB Board. In addition, while not pursuant to Sarbanes-Oxley, we adopted a rule to accelerate the filing of quarterly and annual reports for certain issuers.

In January, we adopted many more rules. We mandated heightened standards of auditor independence. We required the disclosure of off-balance sheet arrangements. We instructed that financial information prepared on a pro forma basis be reconciled to generally accepted accounting principles. We required issuers to disclose whether they have codes of ethics for executive officers. We also mandated that issuers disclose whether they have designated an "audit committee financial expert" on their audit committees. We required securities lawyers to report evidence of fraudulent corporate conduct "up the ladder" to the chief legal or chief executive officer of the corporation or, if necessary, the board of directors. Also, while not required by Sarbanes-Oxley, we adopted a rule mandating that registered management investment companies disclose how they vote proxies relating to portfolio securities they hold and file with the Commission the specific proxy votes they cast. And that's not the complete list.

The highlights of February were that we got a new chairman and it snowed a lot. Actually, in between all those snowstorms, we managed to adopt a rule, although not required by Sarbanes-Oxley, that directs those publishing research reports to include a certification by the analyst that the reports accurately reflect his or her personal views, and also requires that the analyst disclose whether or not he or she received compensation in connection with the stated views. In March, we proposed amendments to our rules and forms that would require companies to provide corporate officer certifications required by Sarbanes-Oxley, as exhibits to periodic reports, and we published interim guidance regarding filing procedures for the certifications. In April, we directed the stock exchanges and NASDAQ to prohibit listing the securities of any issuer that does not comply with Sarbanes-Oxley's audit committee requirements. In addition, we mandated the electronic filing and the website posting of the beneficial ownership reports of officers, directors and principal security holders of an issuer.

In the weeks and months to come, we plan to consider several more rules in our continuing mission to implement Sarbanes-Oxley. These include rules concerning company internal control reports, and the "reporting out" aspects of the attorney rules - an issue which has been incredibly controversial.

We engaged in other rulemaking this year that was not required by Sarbanes-Oxley. It is hard to believe, I know. In fact, this past year, we revisited our rules to implement Title II of the Gramm-Leach-Bliley Act - the broker/dealer exemption from the push-out provisions. I know this is of particular interest to many of you in this audience, so I will spend a few moments on it.

We tackled the bank dealer rules first. Our goal was not just to revisit the substance of the interim rule, but also to improve our process. We met with bank industry groups and bank regulatory agencies several times to get feedback at various points in developing the rules both before and during the public comment period. I think that everyone was pleased with our attempt to make the process more transparent and interactive. The Commission adopted the bank dealer rules on February 6, and set a compliance date of September 30, 2003.

We have extended the exemption from compliance with the broker provisions until November 2004 to give us sufficient time to deal with the more difficult task of defining terms under the "broker" exemptions and give banks sufficient time for implementation. There is more bank activity on the broker side than the dealer side. There are also more exemptions to consider. We have had very little consensus in the past on the controversial exemptions for trust and fiduciary activities and for custody and safekeeping. I do not know where we will come out in the end, but we will continue to work with the industry to develop workable solutions. We have been meeting with the banks to understand their point of view on this issue. We will also discuss our draft proposals with industry groups and bank regulators before we formally propose them for comment. We are committed to a constructive, transparent process and to reducing regulatory burdens wherever possible, consistent with the protection of investors and the requirements of the law.

Overall, the Commission worked diligently this year to draft the rules called for by Congress and to tailor the rules as best we could to their objectives. We also kept in mind the global environment in which the Commission acts and the potential international impact of our rules. Of course, the proof is in the pudding. Only time will tell how effective the rules are and whether they result in significant unintended consequences.

Before I move on, I want to mention one more topic in the realm of Gramm-Leach-Bliley that I have heard quite a bit about lately regarding thrifts. Gramm-Leach-Bliley provided thrifts with an exemption from the Investment Company Act for their common and collective trust funds. Thrifts remain subject to the Investment Advisers Act, however, when they provide investment advisory services for these same assets. In general, thrifts that engage in investment advisory business - which may range from traditional trust services to management agency accounts - must register with the Commission under the Advisers Act. Thrifts are concerned that banks are generally exempt from the Advisers Act, while thrifts are not.

Thrifts want to achieve clarity in this area and rightly so - the issue has been around for 20 years. Congress considered the matter several times in the past, but did not act on it. Indeed, the issue has again been raised in the House in this session. I want you to know that the Commission is well aware of the concerns of thrifts. The staff has brought this issue to the attention of our new Chairman, Bill Donaldson, and I have also flagged this issue for him so that we may work towards coming to an equitable solution for thrifts while meeting our mission of investor protection. Again, I cannot promise to have consensus on every point. But as with our Gramm-Leach-Bliley Act process, we are committed to a transparent and interactive process with the industry and its regulator.

Now I would like to turn to enforcement actions. I have been asked a number of times what my biggest surprise was when I became a Commissioner. My answer is always the enforcement actions. As a Commission, we typically vote on 30 to 40 enforcement actions a week. I have been amazed - horrified actually - at the number and scope of frauds and abuses that we see - from the big cases you read about in the headlines to the mom and pop scams. I am concerned not only that the frauds are perpetrated, but also that the victims believe them and invest their hard-earned money.

The ultimate goal of our enforcement efforts is to maintain the integrity of the markets. Our recent research analyst settlement is an example of how we carry out that role. I assume you have read about it in the papers. In a nutshell, we settled with 10 investment banks on a range of charges relating to evidence that the analysts were providing positive research that, in some cases, they did not believe -- in order to win or keep issuers' investment banking business. The behavior was offensive and unacceptable. Our settlement, on which we worked together with the NYSE, NASD and the states, had several components:

  • Structural changes to minimize conflicts of interest between research and investment banking;
  • A voluntary agreement to stop the process of "spinning" shares of hot IPOs -that is, allocating shares in those IPOs to officers and directors of issuers to secure their investment banking business;
  • Approximately $875 million of penalties and disgorgement, almost $400 million of which will go to investors who were harmed;
  • A $430 million fund for independent research, to provide investors with views alternative to that of the big investment banks; and
  • An $80 million fund for investor education.

I'd like to spend a few moments on this last component, investor education, which is near and dear to my heart. I actively advocated for an investor education component of the settlement.

Investor education is central to our economic system. Just as informed citizens are essential to a working democracy, informed investors ensure that our financial system works for all Americans. The Commission strives to make public companies and their actions more transparent to investors. But investors must do more than merely have information; they must understand it. To invest wisely, they must understand, at a minimum, the importance of diversification, the risk-return trade-off, and that, if an opportunity sounds too good to be true, it likely is.

I know that you are working towards financial literacy and basic investor education through the WHF Foundation. I have actually used some foundation materials in a pilot financial literacy program at Hopkins House, a preschool and child-care center for low-income families, where I am on the board. I want to commend you for the terrific work done by WHF. I am particularly concerned about increasing the financial literacy of women, especially low-income women. These women can improve their lives and the lives of their families so much if they have a full understanding of the benefits of wise money management and investing.

Whether investor education, the analyst settlement, Sarbanes-Oxley or other issues, for each matter the Commission and the staff has tackled this past year, we have worked to strengthen our markets and increase investors' trust and participation. But we have much more to do. One key area that we must address is the structure of the securities markets. Rules that were written over 25 years ago need to be reviewed in the context of major changes in the market resulting from improved technology, among other things. These are very complex issues. In my view, we must address them in a holistic way, not piecemeal, and be as neutral as possible in affecting the competitive balance.

In addition, we will be addressing the NRSRO designation for credit rating agencies. There are two paths we can take - one is to stay in and the other is to get out of the rating agency designation business. If we decide to get out of the business, we will have to consider what other regulatory regime would be substituted or if a regulatory regime is even needed and how to extricate ourselves in an orderly way. If we stay in the business of designating NRSROs, then we will have to consider whether additional oversight is needed, and, if so, what type. We will also need to improve the transparency of our process.

On another topic, we just held two days of hearings on hedge funds. The issues revolve around the extent to which retail investors are, or could be, investing in hedge funds and whether they are treated fairly, whether the market activities of hedge funds deserve more attention, and whether the Commission should take any action in these areas, without, in my view, restricting anyone's ability to pursue legitimate, but perhaps higher-risk, less liquid or more complex investments.

Although the Commission has accomplished a lot this past year, we still have many tasks ahead of us. Our goal, as always, is investor protection and promoting efficient capital markets. While we must be careful not to overreach, and we must seek to avoid negative unintended consequences, there are some consequences that are intended. Our rules and enforcement actions are, after all, a means to an end. For me, the end results include

  • clear, accurate and useful disclosures;
  • an overall reduction in fraud;
  • a better educated and, therefore, less vulnerable investing public; and
  • an appreciation by company boards and management that the market values ethical and responsible behavior - including minimizing and managing conflicts of interest and taking a good hard look at executive compensation - in other words, that company boards and management, including those involved in our research analyst settlement, truly "get it," where the "it" is the spirit of what we are trying to accomplish.

As I said, we still have a way to go in this regard. My first 15 months as Commissioner have been incredibly interesting and challenging - and it doesn't look like I will get bored any time soon! Thank you.

I am happy to take your questions.




Modified: 05/19/2003