Speech by SEC Chairman:
Remarks Before the National Press Club
by
Chairman Harvey L. Pitt
U.S. Securities and Exchange Commission
Washington, D.C.
July 19, 2002
Thank you, and good afternoon.
It's daunting for a public official to speak at the National Press Club. Immediately, images come to mind of the enormous responsibilities, as well as the immense power, of the press in a free society. During my first SEC tour of duty, I learned firsthand just how important and powerful the press is.
Almost 30 years ago, I was privileged to serve as Chief of Staff to SEC Chairman Ray Garrett Jr., a position then known less loftily as the Chairman's Executive Assistant. Ray was a wonderful man, a great lawyer, and much, much more than a mentor to me. At the time of his confirmation, a well-read newspaper did a profile of him, but incorrectly identified him as "Raymond D. Garrett, Jr." I'm sure he felt inadequate when he read the profile, because his first name was "Ray," not the longer and more formal "Raymond," and he came into this world, and left it, without a middle name.
This error took on a life of its own. From then on, Ray's name often appeared in news stories as "Raymond D. Garrett, Jr."; try as we would, we couldn't correct this mischaracterization. Dale Carnegie once observed, "There is nothing so important to any man or woman as his or her own name." How right he was. Ray, a sweetly disposed man otherwise, fumed every time he saw his new name in the press.
Being a smart-alecky sort, I loved to torture Ray with fresh instances of this misguided nomenclature. Once, after we received yet another speaking invitation addressed to "Chairman Raymond D. Garrett, Jr." I sent it in to Ray with a cheeky note that read, "RG, Jr.: If there were a Raymond D. Garrett, Jr. here, I'd recommend he turn this speech down." The letter and note came back in Ray's distinctive scrawl, advising: "HLP: I can't - it's from my brother-in-law!" I knew then that the press was to be both respected and feared! I've relearned that lesson every single day of the eleven months I've been in this job.
We live in difficult times. After history's longest sustained bull market, we're now confronting the tragic consequences that flow ineluctably when public companies lie or dissemble, and accounting firms facilitate such bad conduct or are incompetent to uncover it. This isn't the first time a crisis of confidence has been caused by unethical and fraudulent behavior in the corporate and accounting worlds. But, the present situation differs from previous crises.
First, the magnitude of the corporate implosions we've witnessed is staggering. Second, they occurred when more Americans than ever before are invested in the stock market - causing unprecedented financial losses for ordinary citizens who must watch helplessly as the fruits of a lifetime of hard labor shrivel up or disappear. As a result, the events in which we are all interested are now front-page news - and I'm not referring to just the front page of the business section. Several years ago, my nine-year-old son, on one of those then-rare times I was interviewed on TV, explained why he wasn't impressed by my fifteen seconds of fame. He said: "No one's really interested in what you talk about, Dad; it's boring." Today, the topics of corporate governance and financial reporting are not boring, they are the stuff of dinner-table conversations around the country.
Our focus on these topics is understandable. In the eleven months since I assumed the SEC's Chairmanship, we've confronted four major crises in our markets - the unspeakable horror of 9/11, the revelations about Enron, the demise of Andersen, and the investor confidence crisis that has resulted from these and more recent revelations, including WorldCom.
After the first of these crises - the tragic attacks of 9/11 - politicians, business leaders, and regulators came together to solve the problems and restore public confidence in our markets. In true bipartisan spirit, leaders from government and the business community worked to ensure our markets reopened, stronger and more resilient than ever.
There have been many swift actions to find and punish malefactors in the wake of the last three crises - by the SEC and by criminal authorities - and much more will be done. And, there have been many thoughtful proposals to reform our capital markets. But the public is not yet reassured. There's no doubt that investors have been given good reason to be wary. But it is important - and indeed it is the Commission's primary mission - to protect and reassure investors and our markets by ensuring that a strong regulatory system is in place, and then punishing those who violate the requirements of that system, or abuse the public's trust.
Investors won't be reassured, however, if they don't, or can't, hear about the positive things that are being done to solve these crises. Just as Chairman Garrett's own brother-in-law became convinced that Ray's real name was Raymond D., if the public is told over and over that no one is acting in its interest, some might, erroneously and very unfortunately, begin to believe it.
The investing public must be allowed to see what is really going on - all branches of government, from both political parties, acknowledging the flaws in our system and working cooperatively and constructively to solve them. And many responsible members of the private sector are joining in these efforts.
The President has demonstrated unprecedented leadership in grappling with the crisis of public confidence. Over four months ago, he outlined a comprehensive ten-point program, which was the catalyst for immediate reforms in the areas of accounting regulation, financial disclosure and corporate governance, on which we are all focused today. Within three months of the President's call, I'm proud to say that we at the SEC responded to all ten points of his program, with more - much more - still to come.
The House and Senate have also assumed leadership roles, by passing key reform legislation that is now the subject of a joint Conference Committee. Chairman Mike Oxley, who heads the House Financial Services Committee, deserves our recognition and appreciation for his decisive leadership, beginning almost 7 month ago, in holding focused hearings on the issues arising out of the implosion of Enron and related scandals, and developing bipartisan legislation that directed the SEC to set up an accounting oversight board, addressed the need for greater and more transparent financial disclosure, and provided the SEC with additional enforcement tools, as well as a substantial increase in the Agency's authorized budget. This bill passed overwhelmingly in his Committee and by an impressive 334 to 90 vote in the full House.
In the Senate, Chairman Paul Sarbanes led the Banking Committee through a schedule of ten hearings - impressive not just for their breadth, detail and comprehensiveness, but also by their completion in just two months - that covered every issue of concern from all perspectives. I was privileged to serve as the "wrap-up" witness on March 21st, where I delivered detailed remarks addressing the many important and thoughtful issues raised by Chairman Sarbanes and his hearings. Chairman Sarbanes was equally thoughtful in drafting his legislation, which passed by an impressive bipartisan vote in his Committee and unanimously on the Senate floor.
I am confident that the final legislation from these efforts will withstand the test of time and be recognized as truly in the best interests of investors and business alike.
In the midst of the mounting number of corporate failures, we've also witnessed unprecedented efforts by the private sector to acknowledge problems in the system and try to solve them. These include work by such groups as Financial Executives International, the Business Roundtable, the Conference Board, the NASD, Nasdaq and the NYSE. These problems can't be solved without a lot of cooperation from the private sector, and these organizations' recent actions represent the best the business community has to offer.
Since the darkest moments of 9/11, through each of the corporate defalcations, the Commission has been incredibly busy and productive; we've undertaken numerous initiatives in the areas of enforcement, corporate governance and disclosure, regulation of market participants, and accounting reform in the last year, in response to the problems we've inherited. I'm enormously proud of our accomplishments, proposals and enforcement program. They've been aggressive, creative, well focused and effective, and I'll recap some of them.
Last October, I made one of my smartest decisions - appointing Steve Cutler to head our Enforcement Division. I told him then that, together, I wanted us to inspire the nearly 1000 staffers who work on our enforcement program to be as creative and aggressive as possible in bringing actions quickly, with our objective being to help investors. The staff of the Enforcement Division has embraced this concept - which we call "real time" enforcement - in a way that makes those of us at the SEC very proud, while setting us on our way to our most impressive investor benefits ever.
Some of the milestones we have met as a result of the work of the Enforcement Division so far this fiscal year, include that:
- We've filed a record 122 actions for financial reporting and issuer disclosure violations in the first 10 months of this fiscal year, twenty percent higher than we filed in all of 2000.
- In just ten months, we've sought to throw unfit officers and directors out of corporate boardrooms for good in 71 cases, with more on the way - already almost twice the number we sought in 2000. As the President acknowledged in his Ten Point Plan, corporate officers and directors, and especially the CEOs and CFOs, must personally assume responsibility for compliance with our full disclosure laws. The ouster of unfit officers and directors is a critical tool to ensure that officers and directors "get it," that their mission is to safeguard the interests of shareholders. It is also important to prevent any corporate wrongdoers from getting a second chance to injure investors.
- Over the same ten-month time frame, our enforcement team has filed 42 Temporary Restraining Orders, seeking immediate relief to prevent irreparable harm to investors - up almost 30% from 2000.
- And, we've brought exponentially more subpoena enforcement actions and we are seeking more criminal prosecutions than in 2000.
We've also come up with some creative approaches to old problems. Using our long-existing authority to obtain affirmative statements from companies under investigation, we've required public companies to provide the public with critical information, on a "real time" basis, of the nature of financial frauds or other difficulties. We invoked it informally last October, to press Enron to report publicly and quickly the circumstances that led to its restatement, and we formally issued an order requiring the same thing when WorldCom's fraudulent financial reports became known.
And, speaking of WorldCom, we heeded the lessons of Enron by taking WorldCom to federal court on financial fraud charges, and seeking the appointment of a corporate monitor - former SEC Chairman Richard Breeden - to ensure that no WorldCom records would be destroyed, and no WorldCom assets would be dissipated by extraordinary payments to present or former officers, directors or employees. The filing of that action so quickly, and the obtaining of effective interim relief so rapidly, is a tribute to our crackerjack trial unit in the Enforcement Division.
The heaviest hammer against financial fraud, of course, is criminal prosecution and serious jail time. As you know, the SEC can't bring criminal cases itself. But, the new Corporate Fraud Task Force, established last week by the President, is the latest step in what has been a remarkable run of coordinated enforcement between the SEC and federal criminal authorities. This year, even before the Task Force was put in place, approximately 75 prosecutions by 17 different U.S. Attorney's Offices and the Department of Justice were filed with our assistance for securities related offenses or obstruction of justice in our investigations. The Task Force met last Friday, for the first time, and this record of cooperative achievement will only get better.
While Enforcement is an important component of our mission, there's more, much more, to solving our current crisis of confidence than just being a tough cop. To fix the problems we've all witnessed, the SEC must also lead meaningful reforms in corporate governance, disclosure, and accounting.
I am attaching to this speech, which should now be available on the SEC's Web page, a summary of nearly two-dozen major achievements by the Commission over the past 11 months, including accelerated filing of periodic reports, amendments to enhance investors' understanding of companies' critical accounting principles, and a required CEO/CFO certification of companies' quarterly and annual reports.
In addition, as the result of some six-months' of intensive public roundtables, legislative hearings, and our first-ever Investor Summit we set out a framework for an accounting oversight board, in the event legislation was not enacted.
In January, we launched our highly successful fake "scam" website initiative, to warn and school investors about Internet fraud before they lose their money. In February, at our urging, the NASD and NYSE proposed groundbreaking rules governing analyst conduct and conflicts-of-interest, capping a team effort with us that began in 2001. Around the same time, we began our on-going review of ratings agencies and hedge funds.
And, of course, we responded to the emergency in our financial markets created by the September 11th terrorist attacks, providing leadership for the securities industry and regulatory bodies, and adopting critical rules to ensure confidence in our capital markets when they reopened. We've also worked with Treasury and other government agencies to implement the Patriot Act to deter money laundering and combat terrorist financing.
Those are but a few of our accomplishments - and more are on the way. And these are in addition to the countless achievements of our staff in conducting the ongoing business of the Commission, which may not be the focus of public attention, but which are critical to the functioning of our capital markets.
Earlier this week, Consuelo Hitchcock, my senior counsel, returned from visiting her family near Woodston, Kansas - a rural town of about 100 people in the northwestern part of that state. Among the community announcements and prayer requests in the Sunday bulletin of her family's local church, she found the following prayer:
"Pray with the President for the CEOs of every company, from the largest to the smallest, that they will serve their constituencies honorably and with forthrightness, seeking the highest ethical standards with absolute moral clarity."
While our mission to protect investors from Wall Street to Main Street motivates all we do at the SEC, it's still humbling to receive such reminders of how deeply this crisis is affecting our nation, and how important the task ahead of us is. I'm not ashamed to admit that I pray every night to the good Lord, hoping for divine guidance and inspiration.
My first anniversary as SEC Chair rapidly approaches. I served the SEC over a decade during my formative professional years; it was then that I learned the vital role our capital markets play in our lives. When I accepted the President's offer to return to public service at the Commission, it was a dream come true. Today, because of the cacophony of some politically motivated attacks, I've been asked if I regret my decision. I don't need to think twice about it. This is one of a handful of lifetime decisions about which I know I will never have second thoughts or even a slight twinge of regret. We've got a chance to make a great system better. What more could anyone want?
I speak for all of us at the SEC when I say we're very proud of our agency's achievements over the past year, which reflect the work and ideas of 3,000 people; we intend to make Woodston, Kansas - and the countless towns like it across our country - at least as proud of our achievements as we are.
And now, I'm ready to entertain your questions. Thank you.
Additional Materials
http://www.sec.gov/news/speech/spch577.htm
