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U.S. Securities and Exchange Commission

Speech by SEC Chairman:
Remarks from the Conference Board's 2004 Annual Dinner

by

William H. Donaldson

Chairman
U.S. Securities and Exchange Commission

New York
October 14, 2004

Good evening. Let me begin by thanking you and your Conference Board colleagues for giving me an opportunity to speak to this distinguished group.

The Conference Board's outstanding global reputation is a tribute to your first-rate research, which helps to strengthen businesses throughout the world. And you are once again helping business to "better serve society," following the revelations of corporate malfeasance and the continued erosion of ethical standards in accounting and corporate governance. I am pleased to salute the work of your Corporate Governance Center, your Directors Institute, and in particular the report by your Commission on Public Trust and Private Enterprise. In a most important way, we are all toiling in the same vineyard: we share an intense interest in matters related to executive compensation, auditing and accounting, which are the critical building blocks in the overall arena of corporate governance.

Before I go any further, let me issue the standard disclaimer that the views I express here tonight are my own, and do not necessarily represent those of the Commission or its staff.

Roughly 21 months have passed since I was confirmed as Chairman of the Securities and Exchange Commission. It has been perhaps the most active period in the Commission's history, with the possible exception of the aftermath of the 1929 market crash, and the resulting period of corporate and individual malfeasance. It was a period that gave birth to the securities acts of 1933 and '34, and created the agency I lead today.

I won't dwell on the similarities of that period with the more recent one, other than to say that both had a stock-market bubble, a broad-based market decline that followed, and multiple revelations of corporate fraud and a decline in business ethics. But a major difference was that today a much larger segment of the population has direct or indirect stock ownership.

Given the broad retail investor exposure to the stock market at a time when it was falling so precipitously, we are fortunate there was not greater market turmoil. One reason for this, I believe, is that the Commission has moved swiftly, and I believe effectively, to pursue a broad spectrum of corrective measures. These measures were designed to modernize our markets, protect investors, make the Commission more effective in its oversight responsibilities, and to restore integrity to corporate governance. And in so doing we have helped begin to restore the badly-damaged confidence of investors.

In the limited time we have tonight I would like to provide a brief overview of the Commission's action in several of these areas, with the hope that we can return to the specific observations you may have in a Q & A session. I would also like to touch on two critical areas over and above the specific rules and regulations we have promulgated.

The first is the major structural reorganization we have embarked upon at the SEC itself. It is a reorganization that seeks to enhance the Commission's ability to anticipate, identify, and act on, emerging problems in our securities markets.

The second topic is the vital role the Conference Board, and all of you here tonight, can and must play to help businesses in the U.S., and throughout the world, to do more than just comply with new rules. You can help them embrace a governing ethic that calls for them to go well beyond the letter of these rules, and to live up to the spirit of them as well.

By mid-2003, we completed under an extremely tight deadline the extensive rulemaking related to the Sarbanes-Oxley Act. Critically important was nurturing the growth of the Public Company Accounting Oversight Board, which was mandated by Sarbanes-Oxley to restore integrity to the auditing and accounting profession, and to instill new confidence in the numbers reported by public companies. A highlight of the effort was the recruitment of the widely-respected former president of the New York Fed, William McDonough, to head the new body. Under his leadership, the PCAOB has progressed from start-up to effective operating entity.

Over the past 21 months, the Enforcement division has intensified its already-aggressive pursuit of those who have violated our securities laws and the public trust. During this period, the division filed more than one thousand enforcement actions and obtained orders for more than $3 billion in penalties and disgorgements. We have also utilized new powers granted to the SEC by the Sarbanes-Oxley Act powers that now allow us for the first time to return penalties directly to those who have been harmed. Moreover, we are now authorized to pursue more vigorously the enablers of corporate crime, such as bankers who help to disguise illegal schemes. By any measure, this is the most substantial enforcement effort in the history of the SEC.

Over the past 21 months, we have also made real progress on the vital issue of self-regulatory organization, or SRO, governance. Due to concerns we had about questionable governance practices, early in 2003 we asked each of the self-regulatory organizations, including the New York Stock Exchange and the NASD, to review the adequacy of their own governance practices. This review led to a proposal by the NYSE, which was approved by the Commission this past December, to implement much-needed reforms, such as a new organizational structure aimed at insulating the regulatory functions from potential conflict with the business functions.

Just as corporate issuers must meet the higher corporate governance listing standards required by the NYSE and NASD, and approved by the Commission, I believe we should consider such standards for all the SROs. We believe that SROs play a critical role as standard setters for issuing companies, operators of trading markets, and front-line regulators of securities firms. We should consider holding them to higher corporate governance standards as well. The Commission will soon be voting on new proposals to improve the governance and financial transparency of all self-regulatory organizations.

Another area we have focused on is the problems facing the mutual fund industry. The complicity of elements within the industry in not only condoning certain unethical practices, but colluding to engage in outright illegal behavior, has been a most unwelcome shock to the system. All investors are of course entitled to honest and industrious fiduciaries who will put their money to work for them in a way that is fully consistent with the letter and the spirit of America's securities laws.

To that end, the Commission has moved swiftly and forcefully to clean up the mess in the mutual fund industry, approving 9 of 12 major new mutual fund reform initiatives. Taken together, these initiatives seek to strengthen the governance structure of mutual funds, address conflicts of interests, enhance disclosure and transparency, and foster an atmosphere of high ethical standards and compliance. One of the most important of these rules, approved by the Commission in June, includes a requirement that funds relying on certain exemptive rules must have an independent mutual fund board chairman, and at least 75 percent of the fund's board members must be independent.

I also want to highlight the work of our Corporation Finance division, which has developed our major revision of so-called 8-K filings enhancing the ability of investors and shareholders to learn of important corporate developments in a timely fashion. And new rules aimed at simplifying and modernizing antiquated reporting regulations associated with asset-back securities and public equity offerings have been proposed.

There are several other proposed rules or actions under consideration, involving hedge funds, the structure of the national market system, and the issue of the inclusion of shareholder director nominees in proxy statements. These have all received considerable publicity, and some controversy, and I'd be happy to answer questions about them in the Q & A period.

Turning to structural reforms, we seek to be the standard against which other Federal agencies are measured. And all of the work we at the SEC are pursuing is guided by our stated values of integrity, fairness, commitment to excellence, and teamwork. We seek to endow everything we do with these values which even I will admit is not an easy goal!

We have been guided by these values as we have hired more than one thousand professional employees accountants, lawyers, economists since December 2002, and we have another 100 set to come aboard in the coming months. This represents a 27 percent increase in the SEC's professional staff, from roughly 3,000 to nearly 4,000. We have sought and achieved an improved quality in the job applicants we've recruited, and we have revised our organizational structure to avoid redundancy and emphasize efficiency and effectiveness in the face of this significant expansion.

But our most important structural reform is the creation of an infrastructure around the idea of risk assessment. With limited resources in an expanding world of responsibilities and challenges, we are seeking to create an enhanced oversight regime that will equip the Commission to better anticipate, find, and mitigate areas of financial risk, potential fraud, and malfeasance. The effort is designed around so-called risk mapping, which is a running list of potential risks identified by our field staff, and the creation of a new Office of Risk Assessment, which brings together professionals experienced in seeking out potential areas of concern. We want our efforts and oversight to be more anticipatory and preventative in nature -- to look over the hills and around the corners of the securities markets. Our risk assessment initiative is an effort not to simply act upon fraud after it has happened nor to arrive at the scene of an accident after it has occurred, but rather to arrive in time to prevent infectious agents from poisoning our markets.

Part and parcel of this effort has been a companion effort to create internal task forces that cut across professional disciplines and traditional division lines. These task forces, organized around emerging problems and difficult questions of policy, will bring a new flexibility and resourcefulness to an agency that must be as mobile and nimble as the entities it regulates. It will significantly change the way we do business.

Finally, let me move on to an overarching message I want to address to all of you here tonight, and to the Conference Board itself. While the SEC has made real and lasting progress against malfeasance, we are nonetheless waging an uphill fight.

The latest UBS/Gallup index of investor optimism remains lower today than it was at any point in the five years before the September 11th terrorist attacks. A Harris Interactive poll taken earlier this year found 30 percent of those surveyed saying they had "hardly any" confidence in people running major companies a figure that has barely changed in two years, and is higher than at any point since 1974.

A recent USA Today article about how business is portrayed in Hollywood noted that "on the screen, CEOs are swimming like never before at the bottom of the low-life barrel." It isn't just the Gordon Gekko-type character. The recent remake of "The Manchurian Candidate" substituted a greedy corporation for communism as a malevolent force, and there are many similar examples.

This erosion of trust in business is a serious and worrying development, and there's no guarantee the problem will automatically get resolved. While regulators such as the SEC can enact bright, red-line rules about what is and is not permissible behavior, we know from the course of history that human nature will push aggressive managers and organizations to continue to test new laws. Some managers will pursue questionable activity right up to technical conformity with the letter of the law, and some will step over the red line either directly or with crafty schemes and modern financial technology that facilitates deception.

The SEC and others like us can set the rules and define independence but legal definitions can only go so far. And our free market, democratic system will gradually erode, and inevitably suffer grievous harm, if remedial efforts are not undertaken and endorsed by a broad cross-section of our business and financial communities.

That is why the Conference Board, with its long history of helping businesses strengthen their performance, is so important. The wide ranging and serious recommendations recently put forth by your Commission on Public Trust and Private Enterprise provide powerful examples of actions that can help to restore good business practices and public trust in companies, their leaders, and the capital markets. I urge you collectively and individually to continue to make every effort to affect such ethical change at every level from the board room to the assembly line. It is critical for the corporation to be entrusted to the leadership of a Board and a chief executive the Board selects to a leadership team that demands a corporate ethic and implants a corporate DNA that demands an approach that stays well short of pushing "up to the line."

Further, I urge you to use your membership and participation in all business organizations to press those other organizations to stay on the side of positive change. Too often certain business organizations, structured to represent "the business community," are dedicated in deed and rhetoric to perpetuating a myopic focus on the status quo. Too many are still intent on maintaining corporate prerogatives and preserving a narrow focus on short-term financial performance, often to the detriment of other goals of integrity and long-term performance defined by multiple measures.

We need your help and we want to partner with you and those elements of the business, industry, and financial community who have maintained the standards upon which our industrial leadership was founded.

Let me stop there and answer if I can any questions, and certainly entertain your observations and comments.


http://www.sec.gov/news/speech/spch101404whd.htm


Modified: 10/15/2004