Speech by SEC Chairman:
|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.|
When I originally accepted this gracious invitation, I thought this would likely be my first formal speech as the twenty-sixth SEC Chairman. After the number of speeches I have given this week, however, I think maybe it should be my last!
For those of you who attended the SEC Historical Society's Major Issues Conference earlier this week, this must be your worst nightmare! You probably have had your fill of my talks and speeches. I know I have. Nonetheless, I am here because this occasion offers me the opportunity to speak to, and more important to me, to learn from, the cogniscenti of the securities bar, my friends and colleagues, about issues of mutual concern. In doing so, I will try to adhere to Polonius' admonition that "brevity is the soul of wit." Of course, those of you who know your Hamlet know Polonius couldn't follow his own counsel - he was neither brief nor witty!
Stan Keller suggested several topics I might briefly touch upon. The key word is "briefly," since I want to leave time to hear from you. I'll touch on some of these issues in the hope that some of my comments will provoke a meaningful dialogue. But in the end, as well as at the end, I'm open to talking about whatever interests you.
One idea Stan threw out was for me to take a moment or two to talk about "crossing the great divide" - the journey from the private bar back into government. I couldn't resist the opportunity to liken myself to Captain Cook, Meriwether Lewis or other childhood heroes - but, believe me, the chasm is neither that wide nor the crossing that difficult. And you're all invited to make the journey and find out for yourselves!
First, as many of you know, returning to the SEC as Chairman fulfilled a long-held dream of mine. In that respect, crossing the great divide is everything I had hoped, and more. This is, to be blunt, a fabulous opportunity. I can't think of any other job I'd rather have, and so I relish this opportunity, recognizing that it is in the agency's interest, the Country's interest, and my own interest, not to overstay my welcome!
Second, the change from private practice to public practice is far more dramatic than I had anticipated. For one thing, in private practice, I could say whatever I pleased, and not have to worry about the consequences. In this position, I have discovered that whatever I do say, and whatever I omit to say, can be someone's idea of a media event. Since I don't think anything I ever say is worthy of that treatment, I am constantly amazed that anyone pays the least bit of attention to my ramblings. Nonetheless, since some do, I now have to pay attention to my own ramblings, surely a punishment far exceeding the crime!
Third, what makes this agency special is the fact that its impact on our Nation's financial well-being is manifest, and the potential to make public policy in the area of finance is an incredible and daunting responsibility. The realm of public policy is vastly different from the realm of law practice, however. In law practice, one gets problems cabined by the boundaries clients impose. In the public's service, boundaries are drawn by the public interest.
Fourth, I am amazed how much this transmogrification has changed my perspective. In the private sector, I could easily, speedily and readily detect the many wrong-headed and ill-conceived things the Commission continually seemed to do. Having moved into the hot seat, however, I must say that things look very different from this angle!
Finally, in at least one critical respect, crossing the great divide has proven to be far less of a leap than I had anticipated. This is due to the fact that, as in private practice, very bright, energetic, well-intentioned and capable colleagues surround me. I won't say my new colleagues are ready to return the compliment just yet, but I'm prepared to give them time!
In the spirit of exploring new frontiers together, I would like to set out for you briefly several of the major initiatives that we are or will be undertaking and then get to your comments and questions.
As you all have heard by now, one of our major initiatives is to improve our disclosure system, supplementing it by putting more meaningful information into investors' hands more promptly. One of my favorite examples of concise, but full and fair, disclosure was an advertisement posted by the British explorer Ernest Shackleton for the daring expedition he led to attempt the first crossing of Antarctica in 1914.
For those of you who don't know it, the story of Shackleton's voyage is one of the most fascinating tales of survival in expedition history. Shackleton's ship, the Endurance, became trapped in ice just one day's sail from Antarctica. Beset for ten months, the ship eventually was crushed and destroyed by ice pressure, and Shackleton and his 27-man crew were forced to abandon ship. After dragging their lifeboats and provisions across ice floes for five months, Shackleton and his crew reached water and sailed for land. Eventually they found Elephant Island, one of the most uninhabitable and remote islands on earth. Realizing this, Shackleton selected five of his men to sail with him for help.
Equipped only with a sextant in an open 22-foot lifeboat, they crossed 800 miles of the most treacherous seas in the world. Incredibly, they found South Georgia Island, but landed on an uninhabited side. So Shackleton took two of his men and trekked nonstop, for 36 hours, across the mountains. On the afternoon of May 20, 1916, Shackleton walked into South Georgia's whaling station, from which he and his men had set off nearly two years before. Although they had failed in their goal, they were welcomed as heroes. Shackleton organized a rescue for all of his men, and, after four attempts to reach Elephant Island, saved every one of them.
The advertisement that Shackleton had posted to solicit his crew for this amazing journey was simple and accurate. It read:
Notice: Men wanted for hazardous journey. Small wages. Bitter cold. Long months of complete darkness. Constant danger. Safe return doubtful. Honour and recognition in case of success.
Over 5,000 people applied.
To me, the lesson is obvious, and applicable to modern-day SEC disclosure requirements: Disclosure can be simplified and made both better and more informative. And, unlike Shackleton, we have an incredible array of new technologies to assist us. We should aggressively take advantage of technology, and harness it to make our markets even more efficient, and more responsive to investor needs.
There are many challenges inherent in moving to a system of "current disclosure" and plain-English financial statements. One advantage of periodic disclosure is that it only happens four times a year. In a system of current disclosure, the number of times disclosure must be made would vary from year to year. I realize it is not inexpensive to provide disclosure, and it can preoccupy valuable corporate employees who might prefer to focus full-time on running the business, rather than figuring out when, what and how to make current disclosures.
There are three critical aspects to this concept. We can benefit from the bar's and corporate community's focus on these. First, do we risk burdening the Internet or air waves with mundane or routine disclosures? If so, what is the appropriate balance? I have suggested that it is to require that this additional information should be disclosed immediately only when it is of "unquestionable significance." While no standard is perfect, this could permit an appropriate amount of flexibility in deciding what to disclose immediately, and what can be deferred.
Second, I envision a system that encourages the disclosure of trend information, which by definition is soft, and not necessarily much more than an inference, based on past experience. We do not want to confuse investors by leading them to believe that trend information is objective and firm, and we also do not want to risk having companies disclose proprietary information that might hurt a company's competitive situation.
Third, I favor simplifying financial statements, and converting them into simple and precise English. This is harder than it sounds, but the goal here is for investors to be able to pick up a financial statement and understand, almost instantly, what the true financial position of a company really is. At present, we are some distance from that type of financial reporting.
To do much, if not all, of this, will require us to make accommodations on the issue of liability. If companies must disclose more frequently, and less definitively, and must also summarize and simplify, it will be natural to worry about liability. Since the approach I envision is to add to the existing periodic disclosure regime, it seems fair to condition requiring these types of additional disclosures on an unequivocal understanding that liability will turn on venality, not hindsight second-guessing.
Technology plays quite a role in this endeavor, because it is possible for us to have our cake, and eat it too. By that, I mean that we can have simplified, summarized, plain-English disclosures that anyone can read, and then hyperlink those disclosures to more detailed disclosures we are all used to seeing and preparing, should a particular investor have the inclination to look for that additional information.
On another front, I won't spend any time now dwelling on what I expect to be another principal preoccupation of ours, namely the reform of the capital-raising system. It makes sense to defer that discussion until after our new Director of Corporation Finance joins us, at the beginning of the year. I expect we will announce our appointment this Monday, although many in the bar seem to think they already know who it is.
What may also be of interest to you is our effort to revisit, and perhaps revise, our process of giving informal advice. One of my concerns, based upon my experience in private practice, is that things take a long time to percolate through, and out of, the Commission. That can be very frustrating when a deal is dependent on hitting the market at the optimal time, but clients cannot proceed because they are still awaiting comments, or informal guidance. We have asked David Becker, our General Counsel, to review our informal advice giving processes, with a view toward putting out this issue for public comment.
This whole area is a double-edged sword. On the one hand, it is the use of informal guidance that has made the Commission unique among federal agencies. It is in everyone's interest if those who must comply with the law have a vehicle for ascertaining what the law really is, or at least what the Commission's Staff thinks the law really is. On the other hand, we have received complaints - and they are not frivolous - that at times, what we call informal guidance is really rulemaking in disguise, only without the procedural protections of public notice and comment.
One way we could avoid this dilemma would be to limit no-action letters to a single sentence, indicating whether the Staff will, or won't, recommend enforcement action - no reasoning, no citations of cases, no distinctions of other situations. An advantage of this approach is that it theoretically can provide virtually instantaneous responses to requests for informal guidance. A disadvantage is that a simple yes or no can leave other lawyers in doubt as to how to advise clients with similar, but not necessarily identical, situations. While our intention to solicit comments is not intended to be a plebiscite, it will be instructive to us to understand how you, the major requestors of this guidance, would like to see us proceed.
We are also eagerly pursuing a new policy of "real time enforcement." Our intention is to better protect investors by acting quickly and effectively. We want to respond with alacrity, or in real time, when violations are ongoing, or ill-gotten gains may be squandered while we perfect our evidence and complete our inquiry.
There are at least two components to this initiative. First, our Staff has been directed to look for creative ways to segment cases, so that wrongdoing can be publicly identified, and interim relief can be imposed that might effectively prevent the dissipation of significant amounts of investor funds.
A second approach is reflected in our recent §21(a) Report on cooperation. If companies are incentivized to self report, self correct, and then voluntarily attempt to remedy the consequences to investors of improper behavior, we believe that we can provide more effective and quicker relief for investors, and better coverage of the markets, while preserving our limited enforcement resources.
Some have asked whether this means we are declaring an amnesty for financial fraud. Those who ask the question, as well as those who report on those who ask the question, should, and probably do, know better. Aggressive law enforcement officials and criminal prosecutors have long recognized, and utilized, the value of this approach. I was gratified that Senator Sarbanes, the Chairman of our Senate oversight committee, in a speech earlier this week, saw fit to indicate his view that this process could produce meaningful benefits to the investing public.
One last topic that is worth spending a moment on is the relationship between the Commission and the organized bar. There have been times when relations between you and us have been strained, or downright combative. Since I know many of you, and was often foolish enough to espouse many of the same philosophical approaches you still do, but I have since outgrown, I think it important to tell you that we welcome your ideas, your concerns, your constructive criticisms, and your guidance. Many of the projects we wish to pursue will not be well executed without your active participation.
For my part, I want to maintain my continuing dialogue with you. I am eager to make sure you have ample opportunity to give us input on significant actions, and I hope to inspire each of you, when you interact with your clients, to proselytize on our behalf. I know from long experience, that the most effective way to influence the conduct of those subject to our jurisdiction is to enlist you in our efforts. Your clients appropriately listen to you, and that is why we will also listen to you. In short, our doors, our ears, and our minds are always going to be open to you.
These are just a few of our current and planned initiatives. This is an exciting time at the Commission, and we want all who interact with us to feel our excitement, participate in our proposed changes, and help steer us on the right course if you think we may have strayed. We also welcome any innovative ideas for change or improvements that you may have thought about and want to see us consider. We eagerly anticipate working with you to make sure that both you and we discharge our obligations prudently, generously and in the spirit with which the federal securities laws were adopted. And now, I'm ready to listen to those of you who are still awake!
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