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U.S. Securities and Exchange Commission

Investor Summit

Friday, May 10, 2002

Securities and Exchange Commission Headquarters
450 Fifth Street, N.W., Room 1C30
Washington, D.C. 20549


From the Securities and Exchange Commission

  • Harvey Pitt, Chairman
  • Cynthia Glassman, Commissioner
  • Isaac Hunt, Commissioner
  • Alan L. Beller, Director, Division of Corporation Finance
  • Robert K. Herdman, Chief Accountant
  • Paul F. Roye, Director, Division of Investment Management
  • Robert Colby, Deputy Director, Division of Market Regulation
  • William J. Atkinson, Acting Chief Economist

From Other Organizations

  • Joe Borg, Director of the Alabama Securities Commission and Current President of NASAA
  • Patti Houlihan, President of Houlihan Financial, located in Virginia
  • Bill Mann, Senior Investment Writer for The Motley Fool and Author of "Investor Manifesto" Series on The Fool Website
  • James G. Parkel, Newly Elected AARP President
  • Damon Silvers, Associate General Counsel, AFL/CIO
  • Michelle Singletary, Author of Syndicated Column "The Color of Money"


Chairman Pitt: Good morning, everyone, and welcome.

This is our first investor summit, but it surely is not our last. As I am certain everyone interested in our capital markets agrees, we are at a critical juncture in how we regulate our markets. To address the crisis of confidence in our markets, we are on the verge of the greatest overhaul of securities regulation since this commission was created nearly 70 years ago. Nothing is off the table, as we seek to modernize our regulatory structure and restore investor confidence.

The policies that we have announced or adopted over the past eight months that I have been privileged to serve as SEC chair will shape securities regulation for the coming decades and will affect how all of us save and invest to send our children to college, prepare for retirement, and accomplish our other financial goals.

Individual investors are our most important constituency. The SEC has two critical mandates: to protect investors by ensuring that our markets are fair and to enhance the ability of our capital markets to serve as the engine for our economic growth and improved standard of living.

As many of you know, I started my career here. Over the past 25 years, our markets have changed dramatically, and the need for smarter regulation has increased.

In my first eight months in office, we have confronted several unprecedented crises: first, the terrorist attacks of 9/11; then the terrible tragedy of Enron; third, the Andersen indictment; and now renewed questions about analyst conflicts of interest.

The problems that created these crises have festered for many years but were not resolved. We can no longer ignore them.

Because individual investor confidence in our markets is absolutely critical, we decided to make it easier for investors to talk to us about their concerns, their goals, their ideals, their questions, their criticisms, and their opinions. Already, hundreds and hundreds of investors have e-mailed or telephoned us their comments, suggestions, and questions, and we are going to do our best to try to address them this morning.

As one investor, John, wrote, quote, "Our economy must have the faith of the average investor to succeed." He is absolutely right, and if we are going to have the faith of average investors, we at the commission have to listen to them and be responsive to them.

This summit is intended to be a forum where individual investors can communicate directly with the commission and can make their views known.

We've invited six distinguished panelists who can help make sure that we understand what is on investors' minds. We will have a discussion with the panel for the next two hours or so and then take a short break. When we return, we'll answer questions that investors have e-mailed to us or phoned in.

We set up a special e-mail address, summit@sec.gov, and a toll-free telephone number, 1-877-404-3222, to receive investor input. Even after this first summit is over, we are going to keep that e-mail address and that telephone number open so that investors always have a place that they can go to to let us know how they feel.

Members of the live audience should feel free to write down any questions they would like addressed. We've put cards on the chairs for that purpose.

Because our goal is to respond to the inquiries of individual investors, I ask that the press refrain from submitting questions during this period. We will do our utmost to respond to press inquiries separately.

We'll address as many questions as we have time for, but rest assured, we won't ignore the questions that we cannot get to. Our Office of Investor Education is making sure they are routed to the office or division within the commission that has responsibility for the subject area, and they are providing the commission with copies of these communications, as well.

Before we begin, I'd like to take a few seconds first to acknowledge the presence of Evelyn Y. Davis, who has been a shareholder activist for many, many years, but discretion requires me from saying how many, and we are delighted that you're here, Evelyn.

Ms. Davis: Thank you very much, Harvey. I hope you will answer some questions from the floor.

Chairman Pitt: We're taking no questions. I'm sorry.

I'd like to take a few seconds, also, to acknowledge the head of our Office of Investor Education Operations and the genius who has hatched and orchestrated this forum, along with all of the members of her office, Susan Wyderko and the Office of Investor Education. Would you all stand?


Chairman Pitt: Before we get to the panelists, Commissioner Cynthia Glassman has a few opening remarks of her own.

Commissioner Glassman: Thank you.

I would like to thank the chairman for planning this investor summit and Susan Wyderko for implementing it.

When I was being considered for this position last summer, I met with the chairman to get an understanding of his goals and objectives for the commission. One of the first things he mentioned was a plan for an investor summit this spring. I thought it was a terrific idea then, and now I think it's more than a terrific idea. I think it's critical to our understanding of investor needs, so we can develop policies that meet those needs.

In just the few months that I've been here as a commissioner, I've seen the growing investor interest, concern, criticism, and even anger at us and the system as a whole. Clearly, the immediate trigger for this outpouring is the financial crises that we have experienced. However, the underlying causes have been developing for years. Two that seem particularly important are the growing gap, spelled g-a-p, between the information needs of the investing public and the clarity of information provided by the companies in which they invest.

Over the past 20 years or so, the nature of investors has changed, and it's changed for a number of reasons. One of the reasons is the change in the way people fund their retirement. Deferred benefit plans have been replaced or enhanced significant by defined contribution plans and 401(k)'s. With the former, the retiree is a passive recipient of a stream of income. With the latter, the employee has to make investment decisions throughout employment and into retirement.

The result of these and other changes is that the average investor almost needs the sophistication of an experienced money manager to effectively make investment decisions, and at the same time, financial markets have become more complex and financial reporting more difficult to understand. While the complex instruments may lead to more efficient markets, and that's a very good thing, they may also mask problems. One of our goals is to help bridge the gap.

We need to make sure that investors get the information they need timely, clearly, and accurately to make sound financial decisions, and we also need to help investors understand the risk-reward trade-offs they are making through investor education.

This summit is part of our continuing efforts to meet our mandates of ensuring fair and efficient markets. I look forward to listening, learning, and sharing some of our thoughts.

Thank you.

Chairman Pitt: Thank you, Cyndi.

I'd like to ask the panelists to introduce themselves. We'll go through that. That way I know that the introductions will be done correctly and nothing important will be left out. And then we will each -- ask each of the panelists to open with some brief remarks on issues that they consider to be important. We'll have a topical discussion with questions, and as is only fair, if I get to ask the panelists questions, they can ask us questions, as well.

So, why don't we -- Commissioner Hunt, would you like to --

Commissioner Hunt: Thank you, Mr. Chairman.

Good morning, ladies and gentlemen, members of the panel, members of the audience. It is an honor and privilege to be here and to participate on this panel that has dedicated so much time and attention to the important issue of investor education and assistance, and again, we thank you and welcome you participation today.

I want to join in thanking Chairman Pitt for taking the initiative to set up this first SEC investor summit. Commissioner Glassman is also deserving of special praise, because immediately upon arriving at the commission, she spent several days listening and responding directly to investor complaints on our SEC hot-line.

And finally, I want to thank Susan Wyderko and all the rest of the SEC staff that planned and set up this conference, responded to e-mail and voice-mail messages, and worked tirelessly to make sure that this forum was available for individual investors.

My message to you today is education and information is important. We at the SEC work hard to give investors the tools to make informed decisions, and we strive to assure that the information filed with the commission is fair and accurate. Ultimately, however, the burden rests with individual investors to research the information and make intelligent investment decisions on their own.

One of the most important tools the commission provides individual investors is our EDGAR system. That is our electronic data gathering and retrieval system that incorporates most required filings here at the commission. Investors should review, among other things, the 10-K and 10-Q and more important reports filed by registrants on EDGAR before making decisions on which stocks to invest in.

The commission and the staff want to continue to work with investors to make sure that the information reported on EDGAR and in other ways is up to date and reliable, and we welcome your suggestions on improving that process.

Thank you very much.

Thank you, Mr. Chairman.

Chairman Pitt: Thank you, Commissioner Hunt.

Now, Joe, maybe you want to start the introductions, and we'll go down to -- starting at my right and then to the left.

Mr. Borg: Thank you, Mr. Chairman. My name is Joe Borg. I am the current president of the North American Securities Administrators Association and also the director of the Alabama Securities Commission.

Ms. Houlihan: I'm Patti Houlihan. I'm president of Houlihan Financial Resource Group and also chair of the International CFP Council and past chair of the CFP Board of Governors.

Mr. Mann: Good morning. My name is Bill Mann. I am the senior editor and senior analyst at the Motley Fool.

Mr. Parkel: Good morning. I'm Jim Parkel, president of AARP, and I've been on the board of directors for the AARP for six years now.

Mr. Silvers: Good morning. I'm Damon Silvers. I'm associate general counsel of the AFL-CIO, America's labor unions, with 13 million members and $5 trillion in pension fund assets that those members have. Thank you.

Ms. Singletary: Hi. I'm Michelle Singletary. I'm a syndicated columnist for the Washington Post.

Chairman Pitt: Joe, why don't we start with you?

Mr. Borg: Thank you, Mr. Chairman, Commissioner Hunt, Commissioner Glassman, distinguished panelists, and fellow investors.

It's a pleasure to be here, and first let me commend the SEC for holding this meeting, and as I begin, let me ask that -- I'm an optimist, and I think that investors should look to the future with hope. There are problems, serious problems. There have been serious problems before. But our financial system has fueled so much innovation in every field of human endeavor. That faith today in our system is being tested.

Our faith is also being tested by events outside our financial markets. I took over as NASAA president on September 11, 2001. That day's terrorist attacks still linger with us. The world has changed, and our markets are changing with it.

In the recent months, a steady stream of financial scandal has flowed onto the front pages of the nation's newspapers. Sadly, it appears that some who held positions of trust may have abused that trust.

Much of the commentary on these revelations has asked whether a cancer of greed is overwhelming our financial system. I think that question is premature. That some terrible choices have been made is clear. In some cases, those choices have wiped out tens of thousands of innocent investors, and there must be accountability. But with all this bad news, the question for me is, what are we going to do about it?

Doom and gloom are not the answer. We have to go to work and fix the problem, and getting to work is exactly what state securities regulators, the SEC, and other regulators are doing.

For example, the e-mails uncovered by the New York attorney general's office have culminated in headlines like Wall Street, how corrupt is it? My short answer is Wall Street is not corrupt. We're aware of the content of the e- mails. The states and the SEC and other securities regulators have opened an investigation into whether analysts or others broke the law. If they did, we will take appropriate action. The states, the SEC, and others are working together on this, on this investigation, just as we did on Wednesday's rule changes, because we have the same objective: protecting mainstream investors and the integrity of our markets.

Now, while investigations and enforcement actions are among our most effective tools for solving problems, it's not the only one. I know, for example, the SEC is looking for ways to improve both the quality and timeliness of company information. Being regulators is not only responding to scandal. It's about preventing it. One way to do that, as mentioned by Commissioner Hunt, is investor education. The investor is the first line of defense against fraud, so we try and balance enforcement actions with as much investor education as we can afford.

Our recent efforts, working with the SIA, such as a pamphlet on reading a -- how to read brokerage account statements, I think are paying off.

It's important to note that investors today know more about markets than at any time in history. Because they know more, they expect more. Though we do commend Congress for its recent decision to provide the SEC money for additional staff -- and another point. It is my hope that more and more investors, who are voters, will follow these sorts of issues.

If the numbers are correct, then 52 percent of households are in the markets. That makes investors the potential for the most effective way of looking at legislation. Be involved in politics, write your state and Federal representatives. Lobbyists are in representatives' offices every day pushing agendas. Some of those agendas may be detrimental to investors. Not only lobbyists' voices must be heard, but the vast majority of mainstream investors must be heard.

Let me end where I began, focusing on the scandal that is now overwhelming. If we take a step back, we see that our financial markets are more transparent and fair than they were 10 years ago. We see that investors are better off, because they know more and have more options. The support system for all this is trust. So, those who violate the trust must be punished, harshly if necessary.

Working with other regulators, we are investigating possible violations of that trust.

Now, when we have the answers, we'll do what needs to be done. Just remember that I'm an optimist through all this, and one final thought. Our markets are the Statue of Liberty for the world's capital.

Thank you.

Ms. Houlihan: Chairman Pitt, Commissioner Glassman and Hunt, it is such a privilege to be here today.

I want to talk a little bit about my beginning, and that beginning was as a math teacher. I left teaching when I had my children, and the reason that I entered financial planning was because my mother developed Alzheimer's. No one in my family knew anything about investments. My step-father had been a market participant, and it had always made my mother very nervous. When Gunner died, my mother went to CDs, and when Mother became ill, I knew somebody needed to know what questions to ask, and that's what I want to talk about.

As a teacher, I can tell you, people didn't come in my classroom really excited about geometry or algebra or calculus, and I'll bet if I asked for a show of hands, not many would go up that that was your favorite class either, but we took those classes and we had the faith and the trust and the hope that we would have a teacher that would help to simplify and explain very complex issues. That's what we're talking about today. Investors want to understand. I do not believe for one moment that they don't want information. I do not believe for one moment that they don't want good disclosure, full disclosure.

But you see, good disclosure is information. It is not knowledge. We need to find a way to help investors take the information and put it in their life in a personal way. I do that every day with my clients, and I've been fortunate enough the last two years, and now this year, in a role of leadership with the CFP board, to talk to investors, to consumers all over this country and now all over the world. What they say to me is, Patti, we want to know, but what we don't want is 38 pages of legalese with the nugget that we really need to understand buried somewhere in it.

I understand that we need full information. I want every single detail of information. As a professional, I need it. I need it timely and I need it from reliable sources. What clients need is they need help. Investors need help in distilling this information, and what we must do is we must help prioritize. We must help organize the information.

We have the ability. There is no question. People will say to me when I speak, especially women -- they'll say, Patti, you're lucky, because you understand this, and I have to tell you, I say every single time, luck has nothing to do with it. It was a commitment I made, a choice I made. You can make it, too. Education empowers. If you want to be an investor, you need to be educated.

What we've done today is we've placed the burden on the investor, and you're absolutely right, Commissioner Hunt, when you say it is the investor's decision. When we look at the 401(k) plan, we have passed that decision on to them. My concern is that we've passed the decision on to them when my parents had defined benefit plans and the employer and professional managers handled that portfolio of money. Today we've passed it to the individual investor, but we haven't done is we haven't equipped them to make good decisions.

We must do that. We must work together. NASAA, the CFP board, ASEC, EBRI -- just look around the room -- the states, the SEC -- we've got the tools, we've got the people that can do it. We've got to organize ourselves, and we've got to focus on communication. How can we communicate to people in a way that they can hear it, that they can understand it?

As a teacher, I got up every morning and I went in that classroom and my sole purpose was not to have one student leave that room confused. When I've gone around this country, that's been my sole purpose. When I had the privilege of working Susan in Norfolk at one of the town hall meetings, that was my sole purpose. I was there to answer any question that anyone had, and you know, it was about compensation at times. They wanted full disclosure. Patti, how are people in your business, in your world compensated? We want to know.

I asked for a show of hands. How many people in this room -- I'm not asking you right now, but in Norfolk, I did. How many people in this room have a mutual fund? And as you would expect, just about every hand went up, because they're in their 401(k) plans. I then asked, can you tell me the name of that mutual fund? Not every hand went up. One said, well, I can tell you the block title, and I said, okay, that's a start. Can you get to the name of the fund? They couldn't do it.

When I then said, do you have an A share, a B share, or a C share, they didn't know what I was talking about, and I said that deals with compensation. You need to know that. These are your dollars. This is your future. And I am so sorry that we find ourselves at this time that we do, but out of all adversity comes good.

My mother said to me, Patti, when the Lord closes the door, He opens a window. We have a window now that people are listening. They want the information, and we have the ability, we have the responsibility to help one another.

Thank you so much.

Mr. Mann: Chairman Pitt, commissioners, and distinguished audience, I want to thank everyone for coming today. My name is Bill Mann. I'm with the Motley Fool. We are an organization that teaches people how to invest. We are investors who write for other investors. As part of that, you might want to know why it is that someone would take advice from someone who willingly calls himself a fool. A fool is an idiot, is a person who is not very smart, but it actually comes from the Shakespearean term "fool," which is the only person who could tell the king the truth and not lose his head in the process.

So, we have, as part of our -- as part of our thing with the Motley Fool, we wear jester hats, and if you'll indulge me, I'm going to put on my jester hat while I make my brief comments.

Chairman Pitt: Just as long as the rest of us have a choice as to whether we put one on.

Mr. Mann: You're next.


Mr. Mann: This is going on television, right?

Chairman Pitt: I don't know. This may be a little risque.

Mr. Mann: I've got a very few brief comments.

We're very pleased that we were invited to be a part of this. The Motley Fool has 2.5 million community members. They're all individual investors, and they are -- I wouldn't even say headed by us. We just kind of guide the conversation. We are investors who write for other investors. So, we have seen from the front lines what is happening with people, what they're thinking about, what their concerns are.

It may be a fairly unique constituency in that people come to us specifically to talk about investing issues, and so, we talk about the fact that the 52 percent of the U.S. population that are shareholders are fairly hidden, but we know who they are, to some extent.

We do want to say that, although a lot of this discussion is going to be about that which is broken in the U.S. securities system, we believe that this is the best way for people to generate wealth, the best one that's ever been invented, the best system in the world today. Unfortunately, people don't make money on what's happened yesterday; they make money on what happens tomorrow. So, we look at the system and we say what are the things that make the table unbalanced, because that's what we concern ourselves about.

I have a comment from someone from our web-site in discussions with this upcoming summit, and she said, "I, for one, have become cynical about analysts, and the mistrust has affected my willingness to invest." Multiply this by a large chunk of investors and we will continue to have a dysfunctional market for the individual investors until confidence can be restored.

The confidence is the big issue with our markets. When you buy a share of stock, you are buying the future earnings of that stock. It's the only place that it's like that. You're not buying something that is tangible today; you're buying something that is tangible tomorrow. Investors need to be able to have the information to figure out what those shares tomorrow might be worth. Things such as analysts who do not disclose all of their conflicts of interest do not help.

Auditors who have conflicts, who have consulting contracts, who have a vested interest in making sure that the best information is put out and not the accurate information is put out, are a problem.

There's a reason why what investors do is called due diligence. It's not called due intelligence. It is what we need to do, what we need to study in order to make a good decision.

There was a project a few years ago put out by a group of people from Mensa, who are supposedly fairly smart people. They put together a mutual fund and ran it for several years, and as it turns out, their mutual fund performed in the bottom quintile of all mutual funds. So, it's a one-shot example, but it is to say that it's not intelligence that makes a good investor; it is diligence.

Investors need to be able to have the information provided to them in a clear, concise way in order to make those decisions.

I came to the Motley Fool having been in mergers and acquisitions in telecommunications for several years, and one of the questions that I would ask people when we were looking at companies -- it was a very frank question. I would look at them and say, are you giving me the information that you would want yourself in order to be able to make a good decision? Usually the answer was yes. Whether it was actually the case, you know, we'll never know, but that is something that I think that is missing to the corporate executives who have a fiduciary responsibility over our investments.

Are you giving us the information that we need to be able to make a good decision in a form that we can digest it?

Individual investors aren't stupid. They need the information.

I would just close by saying that we are pleased that this is being done today, that we are happy that the SEC is looking at these issues, and all we want as individual investors is to have a seat at the table during the discussions, and we want that table to be flat. We don't need advantages; we need it to be flat.

Thank you very much.

Mr. Parkel: Across the street at the AARP headquarters, we have plenty of hats, if you want to come on over after the event today.

Chairman Pitt: Yeah, but are they like that?


Mr. Parkel: Chairman Pitt and commissioners, it's a pleasure to participate in this inaugural event and to be part of this panel today. It has been a week of firsts for me. Last week, I was inaugurated as president of AARP. I can think of no better way than to be here today to begin my tenure as president representing our over 35 million members at this very important event.

Our charge is to make sure that the issues and concerns of the individual investor are communicated to the top levels of the SEC. I suspect that identifying these issues and concerns will be the easy part.

A few simple but important facts document the relevance of today's agenda for our membership, the AARP membership, and for working and retired Americans generally.

Three-quarters of the older Americans depend on investment income to meet 25 percent or more of their total income. This trend is likely to accelerate as the baby boomer generation ages and defined contribution pension plans replace defined benefit pension plans.

Interrelated with this trend of greater popular participation has been an explosion of information about investing, about the stock markets, about the economy, and about personal finance. The policy debate over the future of the Social Security program and its benefits has provided additional focus on this subject and urgency, also, to the fact that we need to look at this whole matter.

Today, even the modest investor participates in a market that is global and complex. Programs to improve the financial literacy of all Americans are very, very important. However, these programs cannot be a substitute for legally enforceable investor and investment protections. Without these protections, individual investors are subject to be misled by the brokers, the analysts, for whom they deal and for whom, really, they depend.

For most individuals engaged in some form of investing, the challenge of dealing with the complexity of and the choices in the equity markets is a daunting one. First they enter this world without any standardized performance measurement system to help them determine which analyst and brokerage firm can they trust. Next they must try to decipher the investment rating system that is established, which are virtually unique to every analyst or firm.

Individual investors, we have found, do not expect perfection in the system, do not expect perfection in the advice that is offered to them. Rather, what they do expect and have every right to expect is a fair, non-conflicted, and consistent scheme of weighing the investment risk they are about to take on.

The vast majority of Federal and state securities regulations are aimed at the single goal of promoting fair and full disclosure of all information relating to the markets, and I know we'll be hearing more about that concept of material information later. These regulations include all aspects of market trading, as well as the financing of and the financial reporting of the public corporations.

The disclosure of clear and, dare I say, understandable, accurate, and timely market information is fundamental. The availability of such information is a direct measure of trust, trust and confidence in the fairness of our credit markets.

Recent events and revelations have placed that trust in jeopardy, and there is some anxiety that there may even be more still to come.

It is through the financial statements and projections of the corporations that the accountants translate the language of business into the language of investment. The capital markets and their investors depend on assurances that are given that these corporation financial statements have been properly prepared and approved. Timely access -- timely access to financial statements is required to bring discipline to the corporate performance and the corporate governance models.

Reaching out in creative ways to consult with individual investors, illustrated today by this very important format of this session, demonstrates the commission's awareness and the sensitivity of what truly, truly is at stake: the individual investor's belief in our standards of fair, fair play.

I look forward to the discussion and the questions later, and I appreciate the opportunity to participate.

Mr. Silvers: Good morning. I'm Damon Silvers, as I said earlier. I'm with the AFL-CIO, which is the organization of America's unions. We have 13 million members. Our members participate in pension funds with $5 trillion in assets, and many, many of them, millions of them, are individual investors.

We like to think that what we do here in Washington in this area is very much what Joe said earlier, which is to be up there on Capitol Hill and in places like this, acting on behalf of our members' interest as investors, in an arena in Washington where, all too often, the folks from Gucci Gulch, as they say here, who represent interests adverse to investors dominate what goes on.

I want to first begin by, like my other panelists, thanking Chairman Pitt for convening this extremely important event at a vital moment, and Commissioner Glassman and Commissioner Hunt for all their good work. It's really a great honor to be here.

The Securities and Exchange Commission, where we're sitting, is really a true example of what is good about government, and I think it's important to take a moment to talk a little bit about that to people who are not part of this inside-the-Beltway culture about what good gets done here. This is an agency with a great history, which is truly the investors' advocate.

We're sitting here in a building full of people who could be making lots of money elsewhere and who have, instead, chosen to work extremely hard to protect individual investors, people who otherwise might not have the resources to stand up to their brokers, to companies that perhaps have not treated them fairly, and these people who work in this building deserve our gratitude, and they deserve more than that, because unfortunately, this is a building full of people who are underpaid, working -- doing jobs that are understaffed.

This is not the fault of any of the individuals on this table. Chairman Pitt, I'm sure, would be pleased to be able to have more resources to do the job he's trying to do, but in a sense, it's all of our responsibility, because the resources of this commission are determined by the political process that all of us ultimately control.

Now, because such good work is done here and because this is a place of great history and because so much of the things that have been said about what's good about our capital markets are due to the work that has been done by this agency over its lifetime, over the past 68 years, because of that, it's all the more important that this agency, the SEC, along with Congress, the White House, and the people who are making the decisions about what to do about the crisis in our markets that every speaker here has alluded to, it's all the more important that all these people, but particularly this agency, face up to the crisis that is embodied by the word "Enron," which, like all crises, is an opportunity for leadership.

We've heard already about the crisis in confidence in our capital markets. This is not a crisis with no explanation. This is a crisis that is about the extent to which our markets are riddled with undisclosed and unregulated conflicts of interest. These conflicts of interest impose a cost on all investors, a direct cost and the cost that has been alluded to several times by my co- panelists, which is that people are afraid. When people are afraid, they don't invest and they mis-price things, and the entire economy suffers.

But that fear is not irrational at this point. That is a rational fear. It is a fear that the information that we are receiving, that investors are receiving from this -- from the person who is putting $50 a week away in a mutual fund all the way to the largest institutional investors, the TIAA Cref and the CalPERS, that all of us are not receiving accurate, truthful information.

However, it's important to understand that this crisis particularly affects the small investor, because the small investor doesn't have access to special information, doesn't have the money. I personally don't have the money, I'm sure most of you who are listening don't have the money to go buy a Bloomberg terminal, to go hire research analysts who work directly for you personally, to analyze your stocks. We are, all of us, dependent on the information that's out there in the public markets.

But not only that -- a number of people here have talked about how 52 percent of Americans are in the markets, and a lot of that 52 percent are in directly as small investors, but a very large portion, I believe far more than the portion directly investing, are those of us investing through institutions, through pension funds, through 401(k) plans, the mutual funds, and those institutions are, in fact, uniquely vulnerable to what's wrong with information in our markets, because those institutions are heavily indexed and are price-takers in the market.

If information in the markets is inaccurate, if pricing is being affected by conflicts of interest and by fraud, indexed investors, some of the biggest, most sophisticated institutions out there, who invest on behalf of hundreds of thousands or millions of people, are the natural victims of those problems in the marketplace.

Now, I want to talk for a moment about what's going on in Washington and how this affects this crisis.

This week, some really positive things have come out of this building, come out of the Securities and Exchange Commission. The commission has offered a set of proposals to improve disclosure, to improve what's disclosed and how fast it's disclosed on all sorts of issues, including ones that are of great importance to union members, like executive compensation.

Some of these proposals were included a couple of years ago in a proposal that was so complex and so scary they called it the aircraft carrier, but they were good ideas, and unfortunately, they were fought. They were fought by some in the financial services community. They were fought by companies that didn't want to disclose quickly. And I want to commend the commission and Chairman Pitt for not backing off these ideas, for bringing them forward again, and the AFL-CIO supported those ideas when they were brought up two years ago, we support them today, and we'll stand with the commission to see that they get done.

However, merely increased -- increased disclosure is very important, but it's not good enough, and here's why. There are two problems.

The first problem is that most Americans invest in mutual funds. Many people invest directly in particular companies, but most people invest in mutual funds, and our mutual fund disclosure is out of date, and too many mutual fund companies are irresponsible about disclosing information investors would want to know, and I will name names.

Last week, Fidelity, the leading mutual fund company, we believe, but we can't be sure, because they refuse to tell us, they refuse to tell their customers -- we believe they cast the votes on behalf of millions of Americans to reelect an Enron director to the board of Lockheed Martin, and we believe that they did so -- that their votes were decisive in that election, and they refused to tell their customers, their clients, whether or not they did this, and we do not believe that most Americans would like to see their money used to reelect an Enron director to watch over more of their money.

But until something is done about mutual fund disclosure, companies like Fidelity will continue to do that. Why do they do that? I don't know. But I suspect it has something to do with conflict of interest.

Secondly, even when we have good disclosure rules, disclosure has to be accurate, and it has to be accurate up front, not after the fact. It's very hard to fix once people lie to the markets.

And unfortunately, we just -- a number of my co- panelists have talked about various ways in which there are problems, and in area after area, board of director conflicts, auditor conflicts, analyst conflicts, the whole chain of information that takes raw information and turns it into -- what was the term that one of my panelists used? -- knowledge, you know, makes it possible for people to understand what the data means -- all along this chain, we have serious conflicts of interest, and they are not being addressed. People are telling you that they are addressing them, but they're not telling you the truth.

What we are getting instead is bills like the one that passed out of the House of Representatives a couple of weeks ago, whose sponsors, Representative Oxley and others -- were genuine protections, but in fact, if you translate all those words into the actual knowledge, were, in fact, designed to do things like protect Enron directors and continue to allow conflicted auditors to do the damage that they've done already to American investors, and the final tragedy here is that the SEC has blessed this approach.

Now, it's not too late. It's not too late to do something here. It's not too late for the commission, for the Securities and Exchange Commission, for the people at this table, for Congress, for others to lead. There are good bills in Congress, bills that do end auditor conflicts, bills that do separate analysts from investment bankers, bills that do give the SEC the power to deal with people who abuse the public's trust, like the Enron directors.

It is not too late to do that, but it soon will be, and I profoundly hope -- and I speak on behalf of our members and, I hope, for many others here -- I profoundly hope that Chairman Pitt and members of the commission, members of Congress, administration, take the opportunity, before it goes away and before we fail to take the steps that will end the crisis of confidence, and not just the crisis of confidence. It is riveted in my mind, the people I've talked to, the electricity line people -- line workers from Portland, Oregon, lost a million dollars in Enron, their entire 25 years of savings.

Secretaries worked at Enron that I've sat with who lost their job, their health care, their pension, literally everything. It torments me, the thought that we will do nothing and that people will have that experience again.

So, I hope that this discussion will lead us to move the ball forward and really address these issues while we have the opportunity.

Thank you.

Ms. Singletary: I'm Michelle Singletary again, and I write for the Washington Post. I wrote a personal finance column, and I hear from a lot of regular readers, because I think I write for the common person, people like my grandmother, who I have to say never invested a dime in the market and retired on her savings and her pension, and certainly if she were alive today, I would probably be agreeing with her, because she was quite afraid of exactly what's going on right now.

Before I became a columnist for the Post, I had to report on these companies and do stories on their earnings reports, and it was an adventure in comedy, I would have to say. One local bank, who I won't name, would put out earnings reports that basically said, you know -- these extenuating circumstances, we made money, and somewhere buried in there, you know, clearly they had a loss, and I'd call them up -- you can't -- we had all these extenuating circumstances, we would have made money, and I told one bank, I said, you know what, let me call you when I bounce a check and tell you I had a lot of extenuating circumstances, so that's why I don't have no money.


Ms. Singletary: And this is essentially what's going on.

It's so funny. All of you talked about all the people you represent. I represent four people -- my husband, Honey, Olivia, who's seven, Kevin, who's four, and Jillian, who is 18 months -- and I think I represent a lot of people out there who are trying to do our darnedest to save enough for retirement and send our kids to college.

I think most of us, even though we think we want to be really wealthy, really just want financial security, and there's a lot of talk about information and investors have to be informed, and we do have to be informed, but quite frankly, we've got lives to lead, and before there were 401(k) plans, you had pension people whose job it was to do this research, who, from nine to five, could look at these financial reports.

From nine to five, I am trying to chase an 18-month-old around, to not tear up my house, a four-year-old who threw up on my bed last night, a husband who likes to play on the computers, and you know, a seven-year-old who thinks she's 50. I don't have time to be going over these.

Many people don't know the difference between the A shares and the B shares and the C shares, but we've got lives to lead, and that's why we have to depend on the information that's out there, that it be truthful. That's why we have to depend on the SEC and other regulators to do their jobs. It's very important that we do this and do it well and that we can respect and trust the information that they are giving out.

I think it's unfair to ask every-day people who are just trying to lead their lives to be able to wade through this stuff that is rocket science. I think investors need to be able to trust the information they are given. The stock market has to be built on integrity of the information of these publicly-traded companies. Most important, as you said, we have to deal with these deep-seated conflicts of interest. We sort of talk about this, but this is really -- these conflicts of interest are too commonplace, and I want to address a couple of areas, corporations and the auditors.

We have boards of directors that are anything but independent. They are wined and dined and handsomely paid by companies that they're supposed to be watching over. I would say that it makes it incredibly hard to be critical when you are treated that way. My grandmother used to say, whoever brings you to the party, that's who you have to be nice to. The incentive program -- the incentive that we give managers based on the value of stock options has encouraged managed to inflate the financial picture of their companies.

Companies need to be made to list the stock options as expenses -- as an expense. If they had to do that, they wouldn't hand out stock options by the fist-load, regardless of how well the company is doing financially.

Let's look at the auditors. I don't see how this is not clear to everybody, because it certainly seems to be clear to my simple mind, but as far as I'm concerned, the biggest problem with the way audits are done is this double dealing. There should be, without a doubt, limits on elimination to the consulating work by companies that are auditing.

As David Hilzenrath, one of my colleagues at the Washington Post, reported today, one of the basic conflicts of interest in the auditing system now is that audit firms responsible for protecting investors are hired and fired by the companies they audit. Perhaps the power should be given to the committees of outside directors, who, by the way, say, you know, we're not skilled enough to look at these audits.

Already, in testimony in Arthur Andersen's obstruction of justice trial, a partner said -- this is in the paper today, from his testimony yesterday -- he said he was barred from advising Enron because he was labeled too cynical.

Finally, there should absolutely be a ban on any off-the-books transactions, partnerships, or deals. Just get away with it. If the company is publicly-traded, all its business ought to be made public. I also think there should be an expanded auditor statement, which we now see, you know, in the -- reports that we look -- and they basically say they're okay, they did all right.

It feels like a rubber stamp. It reads like a rubber stamp. Instead of just asserting that the financials meet generally-accepted accounting principles, blah, blah, blah, the auditor's statement should illuminate just where, in the wide range of acceptable practices, a particular company falls. If that had happened with Enron, they would have basically said they are way out there, I would run, run, run.


Ms. Singletary: I think, ultimately, it is essential that we have a financial market where small investors, people who just want to have enough money to retire or send their rug rats to school, that they can trust the system is fair. This becomes particularly important since various groups and the President continue to push for privatization of Social Security funds. We're talking about jeopardizing those funds with the information that's out there right now, and quite frankly, I think we ought to just put on the table.

I just wanted to go over a couple of little facts, as I was researching this, that I just think is appalling, and why it's so important that we address this, as you said, and we do it now. Everybody's under the gun now, everybody is sort of running scared, and I think we ought to take advantage of that.

Look at this. The sell rating that now make up less than 2 percent of analyst recommendations -- I'm sorry - - sell ratings basically represent less than 2 percent of analyst recommendations. Many analysts, when Enron -- just a month before Enron was going down, 11 of the 16 analysts who followed Enron had buys or strong buys less than a month before the company went bankrupt.

I used to cover bankruptcy, and you definitely can see that coming.


Ms. Singletary: You know, when people are packing boxes and CEOs are leaving, you know, I've got to go be with my family, as he takes his $30 million for his deal, should know.

There were 230 restatements in 2000, up from 130 just three years ago, according to a study issued by Arthur Andersen.


Ms. Singletary: This is so funny to me.

I got a lot of e-mail as I was writing about this, and I just wanted to read a couple of comments from some of the real people out there.

One woman wrote, "I would hope the SEC would return to being a true watchdog group working with a new set of rules and regulations and with full power to impose them, including prosecution of individuals proven to have participated in fraudulent actions." As my brother would say, put their butt in jail.

Also, any monies collected through fines, etcetera, the SEC, on behalf of the government, should be awarded to the harmed party. That's a good idea.

Another reader said, "I encourage you to fight for the little investor who desperately hopes that, after all the shenanigans that go on, some money" -- some money -- I mean some of these guys make enough for small nations -- "some money will be left for her or his retirement."

And finally, one reader wrote, "There is no question that the grubby hands of uncontrollable Wall Street honchos are waiting for the big payoff when George W. Bush privatizes Social Security. Please do something about it."

Thank you.

Chairman Pitt: That's a real quick introduction to the topics we have before us.

Let me raise some questions, and obviously, anyone who has questions of what we we're talking about ought to add in.

A number of people made the point, in effect, that our securities laws were drafted in a different era, in an era of pencil and paper, party-line telephones, and paper mail, and we're now dealing in a very different world.

We're trying to take advantage of technology and have proposed rules for quarterly and annual reports to be done quicker and to have companies place their financial filings on their web-sites as soon as the financial filing is completed.

And one of the questions, I guess, is -- this is only one of many initiatives, but whether the panelists think that this initiative will be helpful, and also, particularly given, I think, Michelle's comment about investors not having the time, which I think is a very valid point, one of the things that we have proposed is a layering of information, so that the first layer would be five to 10 pages of very plain English about where the company is and where it's going with financial statements that are also done in plain English, followed at the next level, for those who want more information, by more complex disclosure and so on.

Do we think that this is heading us in the right direction? Is it heading us in the wrong direction? Are there things we're not looking at that we should, given the factors that I think have been identified that, while some burden has to be placed on investors, I think, if I can paraphrase, the burdens have to be minimal, and they have to be fair burdens that can be easily met.

I don't know, Michelle, if you want to start with that, and you don't even have to answer it, but anyone who wants to just join in, but --

Ms. Singletary: Sure. You know, it's so funny. When people ask that question, right away, some people say, you know, you're going to dumb down the information and is that right? I say dumb it down, dumb it down, dumb it down. You know, I have a college degree. I have a Masters degree from Johns Hopkins University. I read a lot of these reports, and I'm telling you, I sit there going like this: Oh, my God, I can't believe it.

You know, I think it is important that we make it - - and when we say plain English, I mean regular folks English, not the kind of English that, you know, we say is plain English. I think it is good idea to layer it and pull out from the reports -- you talked about having kind of like, you know, where you can find the additional information if you need it, but it -- needs to be put in a form in which people can readily understand it. Clearly, it has to be done that way, because we still can't trust the analyst reports, because even with disclosure, that still doesn't mean that there aren't going to be conflicts of interest.

So, I think it is important, and I think it is a good idea to layer it, and that way, it will be accessible to every-day folks, and make sure that the language is in a way that they understand. I mean you look at Enron. I mean, at one point, the CEO -- someone was asking him about his business, and he said I don't know. I mean this man was running the company, and he says I don't know, and now all the board of directors are saying, well, we didn't understand, and if they don't understand, how are we supposed to understand?

So, I think it's a great idea, and I don't think it will be a case of dumbing down the information.

Chairman Pitt: I think one point I will say is it is simply -- at least looking at it from my perspective, it's unacceptable to have the people running a company say they didn't understand what was going on, and that's one of the reasons why, in addition to everything else, we're trying to impose more liability on the people who run companies when disclosure is inadequate or investors are fooled, but to me, it is clear that, if you're running the company, you darn well better understand what the company is about or you're in the wrong place.

Ms. Singletary: And I hope by "liability," you mean you aren't going to take, you know, one million away from their 40 million.

Chairman Pitt: No, I think -- you know, the liability issue is a very difficult one. It's more difficult in cases of fraud. I mean if you look at the Enron situation, for example, just as an example, investors and retirees lost millions and millions of dollars. We have to find the place where that money is going to come from, and in many frauds, by the time we have caught up with the people, the one thing they've been clever enough to do is spend it. So, sometimes there isn't a lot of money available.

We'll talk about some of the things we try to do, but --

Ms. Singletary: I think a jail cell for, you know, two or three years might jog their memory as to where the money is.

Mr. Parkel: We applaud the notion of layered down in the information. I have two cautions. Michelle said it very, very well. The readable issue is not only making it understandable, but clearly, in my case, with the older Americans, it has to be readable, whether it be size or whether it be language, etcetera. So, I would certainly enforce what she talked about.

My other caution would be not -- because I think, in your opening question, you said technology, and about 50 - - a little over 50 percent of individuals 45 and over have computer knowledge, access, etcetera.

Now, some of that -- and the majority of it is I can e-mail my grand-kids or my kids or -- I can handle e- mail, but that is not the only method, and I wouldn't want to suggest that we should just look at the technical transfer of this layered-down information but that we have to have a system by which we can meet everybody's needs. That would be my only caution.

Chairman Pitt: Well, let me, again -- when others address this -- but I'd like to ask you first. That's a particular concern we've had. The internet provides us with a remarkable tool, but the fact is, just as you've indicated -- my dad is 88 years old, and although I've been able to get my older sister onto the internet so I don't have to always talk to her on the phone, I can't get my father onto the internet. The question is, if we rely on the internet, I think I hear you saying we shouldn't place exclusive reliance on it, but then the question becomes what other alternatives are available?

How do people think we can solve that problem, because we don't want to cut anyone out of the information flow, but this is a particular sensitive subject. I know Commissioner Hunt has, even before I arrived, been very concerned about making sure that everybody has access to the information.

Ms. Houlihan: One of my concerns -- and I love to read Michelle's work.

I think you do a great job in talking in a way that people understand, and that's critical. I'm going to have to go back, though, and just -- my biggest concern in this is I want to organize the information. I want to make it reader- friendly, but I am so afraid of sound bytes. We live in a world of sound bytes today. I work with those clients that hear those sound bytes.

If you dummy it down to the point that it is not information -- I teach. I've been teaching investment planning for over 15 years. My biggest fear -- I love the idea of organizing it. I love the idea of layers. I love the idea of the internet. I love the idea of television. I love the -- any way that you can get the word out, get the word out. Any way that you can disseminate the information, do it, but I think that we have to be very careful when we start trying to dummy it down in such a way that it can be misleading, and that's my biggest concern.

Mr. Silvers: I think there's a way to take that concern just expressed about dumbing things down and sound bytes and so forth and putting a really sharp point on it, which is that when you have a disclosure that's oriented toward the average person, which is a very good thing, and I think that we definitely ought to layer it in a way that doesn't diminish the more technical layer, so that disclosure speaks both to -- directly to the individual investor but also speaks to the individual investor's expert advisors and people who are analyzing for the larger market.

But there's a really sharp point here, and this is something that's buried -- was buried in the number of drafts of bills that have been circulating on the Hill from some people in the House. Some people thought it would be a good idea to expand disclosure in a way that exempted the new disclosure-oriented -- the new timely disclosure aimed directly at the individual investor that exempted it from the anti-fraud provisions of the securities laws. What are you doing there? You're creating a situation in which people will be misled by sound bytes.

And so, the challenge here is to improve -- is to improve disclosure across the board and not create incentives for people who will get rich by lying to the individual investor for them to do that.

Chairman Pitt: Let me just say I think there is an important point. I think when people make disclosure, they have to be willing to stand behind it. I think one of the problems that you get to is, today what investors are given is only backward-looking information, so to speak. You're told where the company has come from, but you're not told where it's going. Of definition, however, when you're told where a company is going, that's not hard information. It's what we call soft information.

So, the difficulty is, if you're going to require companies to disclose immediately when certain types of events occur and you're going to require them to disclose trend information, it's not eliminating anti-fraud liability. It's tailoring that so that companies will have a good-faith reason to make the right disclosure but not basically turn forward-looking information into what we have now, which is - - disclosure is, today, written to avoid liability.

But what the game is, is people try to put everything they can somewhere in these filings so that, if they get sued, they can point to a footnote or something else and say, well, see, we told them that, all they had to do was read footnote 236. We want to get to the point where disclosure is made to inform, and the liability question is a very, very difficult one in that composition. There has to be liability, but the question is, at what standards and so on?

Mr. Silvers: To respond to that, I think that, you know, we've had, for about six years, a close to exemption from liability for what's called forward-looking statements. Congress passed that law in 1995, and it's had some positive effects, I would say, and also some negative ones, and what concerns me, I guess, is I've met all these people who sat in a big room very much like this one with Ken Lay in -- I guess it was September of 2001, and Ken Lay made a forward-looking statement. You know, he says I think -- he says I think this company is in great shape and I think the stock's a good buy, to paraphrase, and there are probably people in this room who could quote him directly.

Now, I don't know whether Ken Lay's statement was so sort of out of bounds that he crossed over the forward- looking statement line. I won't express an opinion about that, and I'm sure there are people in this building working on that very question right now, but I'm concerned about an environment in which that kind of thing is encouraged, even by people who are basically not really trying to rip people off but people who are under tremendous pressure from the markets to put out, as one of my co-panelists said, the good news, the good news, not the truth, not all the material facts but just the good news.

Our securities laws, in the last five years, have been too far in the direction of allowing people to put up the good news to a point at which it becomes for individual investors the bad news, all right, and we need to go back on that, and I think one area which we need to go back on that - - and Michelle was talking about, you know, putting people in jail and so forth. One area which we need to really focus on -- and I would put this back on Chairman Pitt -- is the more recent Enron revelations have focused on the people whom I would say are perhaps the aiders and abetters.

You've got the accountants, you've got Arthur Andersen, you've got a whole string of banks who structure very suspicious-looking off-shore transactions for Enron, you've got the law firms, you've got all these people who still have money that could be gotten, but there's this little problem. The little problem is, is that the victims of this catastrophe are barred by the law as it currently stands from suing anybody who merely aided and abetted securities fraud. You just can't go after them.

You know, J.P. Morgan Chase, who structured these transactions, could stand up today under oath and say we aided and abetted Enron securities fraud, and although Chairman Pitt and his fine people in the enforcement division here, who, as we said, are over-burdened, whose entire budget is a third of what these Enron guys made in insider profits just last year -- although they could go after them, the actual victims couldn't do a thing about it if they admitted to aiding and abetting fraud. We at the AFL-CIO think that's wrong and should be changed, and I would throw that back on Chairman Pitt and see what his view is.

Chairman Pitt: You know, one of the things that concerns us is that that proposition about aiding and abetting stems from a Supreme Court interpretation of the laws that were written in 1934.

Now, the issue came up in 1995, and at that point, the SEC was relieved of any burden of going after aiders and abetters. One of the things that -- private litigants were not given the same ability. One of the reasons for that was that the SEC has a regulatory role to play, and it becomes highly critical that the commission make certain that anyone who's been a participant or has influenced wrongdoing or who has gained from it or contributed to it or who let it happen be held accountable by appropriate standards, and we have done so.

In addition, one of the things we've been doing is to try and get much higher levels of disgorgement and recompense for investors even out of aiders and abetters, because there's no inhibition on the SEC requiring a company that might have been an aider and abetter to go after it, but the short answer, I think, is that, since '95, there have been more class actions filed. They have been filed -- it looks like there have been a lot of actions filed against people who might be characterized as aiders and abetters, but they've been sued as principals, and the recoveries have been higher.

Now, in part, some of the reasons why the recoveries are higher is because the damages have been higher, but I think the real question that we need to know is what are the standards and is there a fair basis for those who have participated in wrongdoing to recover? Without addressing liability in Enron, the auditors, the lawyers, all of those groups have been sued.

Now, I mean there are cases pending. I'm not suggesting how they will come out, but I am saying that the question is whether the statutes are precluding meaningful litigation or not, but I would say if investors are not being given a fair shake at those who really should be held responsible, then the law has to be changed.

Mr. Silvers: I'd just like to say that's a fair answer, Chairman Pitt, and I would that we could work together looking at doing some of those things, because I can tell you that there are people out there in the Enron case who have no prospect of getting their money back from Enron, because Enron's gone and Enron's maybe 10 cents on the dollar. I don't know. You know, it's not going to be much to these people. Andersen, as we all know, is in terrible trouble, and there are people -- all kinds of people have been sued. All kinds of institutions have been sued.

The reality is, is that to prove direct involvement is a burden that it seems to me, at least, is just unfair, given that, in all other aspects of our law, if you aid and abet fraud, you're liable for it.

And so, you know, I think that there are nuances -- we agree with you that there are nuances in all these things, there are details, but if the commission was willing to work to try to change in a responsible way the law that flowed out of the Supreme Court case that you referred to, Central Bank of Denver, if there's a way to change it in a responsible way, so that people like the secretaries and utility workers that I know, who have been impoverished by -- and whose only place to look -- the only pocket to look for -- people, probably, who are aiders and abetters. Whether they're direct, I don't know.

If we can do something about it, that would really be the kind of leadership that I think the commission -- that's where the commission should be right now.

Thank you.

Chairman Pitt: There's no question that we'd be willing to work with you in looking at that issue and seeing whether we can do something that meets all of our senses of what the needs are in the area.

Mr. Mann: I wanted to go back to the issue of the disclosure and what types of disclosure do investors need. One thing that I think we need to recognize is that, in the real world, so many people are getting their disclosure or their information from the media.

Now, where is the media getting this information from? They're getting it from the first release that comes from the companies, and that's a press release, and I was very pleased last year when the SEC came out and said beware of what you put in these press releases, because you can be liable for fraud if your pro forma accounting -- we always talk about companies who put in a statement, earnings before expenses. It hasn't been tried yet, though I'd expect it to be sometime.

Really, that's an issue that we need to recognize, that even if the companies are putting out press releases, people are then getting it from the journalists, where you end up with really interesting statements like, we expect a surprise to beat expectations to the up-side. You know, it makes no sense.

I would suggest that, as part of the real English description, that that be required to come out at the same time as the press release, because that is the first information and because that is generally what people are reacting to. They don't see the 10-Q's for several weeks after that, and I would venture to guess that there are many investors out there who think that, when they're getting the press release, that they're actually getting the 10-Q.

Chairman Pitt: I have no question about the latter. That is to say, I think people read press releases or read that a company has made an announcement, and they take that as if it's true, and we have already actually brought a case in the last few months against somebody who did do that with a pro forma, where the -- this was the Trump case, where the pro forma was inconsistent with what the real picture was.

But one of the questions, I guess, I'd ask you with respect to, in effect, requiring companies to put out their press release at the same time they put out the information is that we have tried to do something like that by accelerating the periods for quarterly reports to 30 days instead of 45 and the periods for annual reports from 90 to 60. But what we haven't done is tie the ability to put out a press release to the ability to have information for fear that people will then delay putting out the information.

So, there's a trade-off, and I wonder whether you, Bill, or any other panelists have any reactions to that potential dilemma.

Mr. Mann: Yeah, I do, the first of which is that I think that, when you're talking about a plain English release, that's generally what they're trying to do with the press release at any rate. You're not asking them to give you a full detailed statement of cash-flows at that time. You're asking them to do what they're doing already in that frame of time.

The other thing is that, really, I think what is going to be most important to individual investors -- and this is what I hear from people on our site -- is just so we get the information at the same time and we can trust it's accurate, it doesn't particularly matter that it takes two more weeks for it to come out.

Mr. Borg: Two things.

First, let's go back to the threshold question about all the information that's out there. More information is better. Better-quality information is better. But you know, I still have investors who walk into my office, and they say I've got a problem, and I say, well, bring your records, and they give me a shoe-box with all the account statements, half of them aren't opened, and I say, well, have you looked at these? Well, can't understand them anyway. So, you look at them.

I have staff that spend full time meeting with investors, going through their account statements.

Now, if they can't understand their account statements and they have a fear of that, I'm worried about all this disclosure, which is good, and the quality needs to get better, and the information needs to be out there at the speed of the internet, but perhaps we haven't looked at the basic problem here, and that is, people have not been trained to look at this stuff.

You know, you mentioned earlier your father doesn't use the internet. Mine doesn't either, but you know who does? My daughter, because she grew up with it. So, we're really looking at basic education here.

You know, we have driver's ed, we have phys ed, we've got sex ed in school. We don't have financial ed in school, and one of the things NASA is trying to do is get that into the school system. That's where I think our groups can make an effort. It's a long-range plan. It will take 10 or 15 years. But you know, at the end of the day, we'll have folks who know how to read statements, how to look at the layered disclosure, at whatever level they want to do, have the speed -- have the information at the speed of the internet, and we build into it. This is not an easy fix.

Chairman Pitt: There's no doubt about that. We've been working on expanding course availability for financial education, and I think it has to become, you know, basically an integral part of everybody's education, but James isn't going to let me forget the people who aren't in school anymore, either.

Mr. Parkel: But they need it, too.

Chairman Pitt: Yes.

Ms. Singletary: Can I just say something? My eyes just glaze over when we talk about disclosure. All we're talking about is just telling people what they have, for goodness sakes. I mean, to me, it reminds me of when the food industry didn't want to put on the packages what were in the foods, and oh, people don't know what carbohydrates are, oh my god, they won't know what this fat means. I know what total grams of fat means. It means that my hips are going to grow. This is what we're talking about.

When they get this statement, this is how much money you made, this is how many money I took from you so that you can make some money, and that would be pretty understandable. We're just talking about common sense stuff, and people will understand it if we write it in a way that they can open it up and not have to -- you don't know what your mutual fund is charging you, because you've got to do some sort of calculation and go to the prospectus, and you know, listen, I just want to know how much you took from me to make me -- and that's pretty simple.

When I open up a box of cookies, I know what the carbohydrate means, I know what the fat means, I know if it has 43 grams of sugar and I give it to my four-year-old, he's going to be bouncing off the walls in my house, and that's all we're talking about, and it seems pretty simple to me. Just make it clear. If Enron has -- if they're stretching accounting principles, have the auditors say they are stretching this, folks. I mean here is company A that's pretty conservative and here's Enron, who is out -- you know, way out here in left field, and that's all we're talking about, and I think if you talk to regular investors, they will get this stuff if we make it clear to them.

If we do this right, it is not rocket science.

Commissioner Glassman: Michelle, I just wanted to ask, where is the best place to put that to make it clear? Is it in our filings, the 10-K's, the 10-Q's? Is it in the earnings releases? Is it in some other place that people will read it and look at it? Assuming that it's clear, once you get that clear statement, where should it be?

Ms. Singletary: I think it should be everywhere. It should be everywhere, at the beginning of the 10-K, and it should be in the press release. We should not allow companies to issue press releases that say we made a ton of money but basically we made the money because we sold a business, as opposed to the underlying business itself. If they had an extraordinary year, we ought to know what exactly that means, and they ought not to be able to discount whatever.

I told you, I covered banks, and they, you know, had a great year. Well, it turns out, it was from investments. It wasn't from their actual banking.

So, they weren't actually selling people any banking products. But it took, you know -- I had to go through the forms.

So, I should think that it should be in the press release. Basically, we made money, this is how we made money, and this is what we're doing in terms of our accounting principles, and put it everywhere.

Chairman Pitt: One of the things that we will be coming out with shortly would be a certification from the CEO, the CFO, and so on, I hope, in which what they will say is that we think that everything that's important to us in running this company, we've told to you, and anything that you haven't been told, we don't think you would consider important in deciding if you know how our company stands, and then, of course, that certification would be actionable.

The goal is to make the certification simple enough so that I can read it and understand it and that, when investors read it, they'll know that the CEO is vouching for the fact that everything I know -- I mean it may be the CEO doesn't know something, something's kept from him or her, but everything I know, we're telling you, and anything we're not telling you, don't worry about it. I don't know whether that will help in this thing, but it's certainly one of the things that we're thinking of doing.

Ms. Singletary: Well, I don't know, because we have a time where we have to define what "is" is.

So, I don't know if we can rely on them saying I've told you everything that I think is important, because I think if you talk to the Enron executives, they would have said, well, we didn't really think that you needed to know about these off-the-book partnerships, this really wasn't important, and I think they would have -- under that kind of agreement, I think that would have fit for them. I mean I don't know.

Mr. Silvers: I think there's a question here about -- I think your question was asking about individual company disclosures, primarily, 10-Q's, 10-K's, this sort of thing. A lot of what this comes down to is mutual funds. I mean you're talking about the truth in -- what's inside that mutual fund? A mutual fund is, in a way, a lot like something you buy at the supermarket, some processed food. There's a lot of things in there, and you might not know what's there.

You know, we sent a letter up to the commission before you arrived, Chairman Pitt, asking that there be some rules about disclosing what's inside mutual funds and what they're doing with what's inside the mutual funds. We thought they were pretty modest. We asked the commission to require that 85 percent of the stocks in the mutual fund be what they say they're doing in the mutual fund. You've got a mutual fund that invests in a certain industry; 85 percent of what's in there should be in that industry. Otherwise, you should have to say that it's not really that industry mutual fund but some other kind of mutual fund.

We also said, apropos of what I said earlier, that the mutual fund ought to be telling its investors what it's doing with the assets, including the right to vote the shares and do things like elect more Enron directors to more positions of responsibility or not elect more Enron directors to more positions of responsibility, and since we sent this request up more than a year ago now, before you got here, I thought that it might be helpful to you to come out with another copy of it.

Chairman Pitt: Actually, it's well etched in my brain, and we are in the process of putting something together to deal with the issues you've raised. I think these are very significant issues, and we've actually heard from a lot of mutual fund investors who support the proposals that you have raised, and we're taking a very hard look at it.

Ms. Singletary: You know what would be a great idea, to answer your question -- in marketing, they always have focus groups, and they -- before they introduce a product, they'll bring, you know, real people together, and they -- I mean I think it would be great if all the companies were required to do that, real time, bring the investors -- here is what we want to put out, does this make sense to you?

Chairman Pitt: I have to say I think that's a very ingenious thought. I'm not sure that I'm prepared to react to it, but there is a lot of merit in actually trying disclosures out on real investors. I think that's a fascinating concept.

Mr. Mann: One of the issues is that a lot of the companies that we're talking about -- I mean, face it, General Electric's disclosure statement -- everything about General Electric is going to be complicated, no matter what. I mean, you know, you have companies that have hundreds of subsidiaries. I think what we would like to see is some sort of -- I don't know if -- maybe the focus group is a great way. You see a lot of these disclosures, and we can go back to Enron. It just felt like it was being written with malice. They wanted to make sure that they said everything they wanted to say in as obscure and in as opaque a way as possible.

Chairman Pitt: Well, I think the opaqueness, again, gets to this notion of disclosure being made to avoid liability instead of being made to inform, and while a company like GE or any other company is complex, the people who run these companies very often come there without knowing anything about the company. They know about managing organizations, and then they learn about the company.

It seems to me that that concept ought to be transferrable to what we tell investors, so that we take what's complicated and we try to simplify it, not dumb it down but simplify it, so that people can actually understand what the business is, what the various components are, and what the significance is. That's really where we're headed.

Ms. Houlihan: I'm sitting here remembering the '80s, something called limited partnerships. A reporter asked me a couple of weeks ago, is this the end, have we finally learned our lesson? As long as there's greed, there's going to be another Enron. Maybe I'm too optimistic, but I love what Michelle recommended, and I'm not sure how you would do it, but you know, we can do it ourselves, because when I'm looking at something, I look at it in every way that I can myself, and I ask myself, what would I want to know about it, and you know what? We are all -- if we interviewed everybody in this room, we are a good sample of what's out there.

And so, I absolutely think, for all the lawyers in the world, that it's going to be legal words, because they've got to. I agree with what you say, Chairman Pitt, but again, I go to the common man. If, for one minute, anybody in Enron thought that you could take money off and expense it over here and bring it back in as revenue, if that even remotely sounded right to anybody in that room, then that's -- then how do you legislate -- you said in Chicago -- I read your words, and I thought, yes, how do you legislate morality?

Chairman Pitt: You can't, and you make a good point. One of the concerns that I have is in having expectations be set too high. I think expectations need to be very high, but too high would be basically eliminating greed and the fact that there will always be some people who want to cut corners, and while I think the SEC is very powerful and I think we have a lot of authority, we're not going to eliminate greed and we're not going to eliminate people who try to get away with fraud.

What we want to do is make it incredibly hard for them to get away with it, and then if they actually do do it, make it incredibly hard for them to benefit from it by catching them early and taking away their money, but there will always be people, from time immemorial, before accounting firms, for example, were into consulting, in the '60s and '70s, you had Penn Central, you had Equity Funding, you had plenty of problems that managed to escape the system. Part of these problems require an improvement of the system. Part of them require better checks on the people who are in the system.

But there's no doubt that, as good as the system is, we can do a lot better, an awful lot better, and we have to do better.

Ms. Houlihan: And I guess my question to you is, is it the SEC's responsibility to make certain that good information is out there, that all the information is out there in a timely fashion? Is it, beyond that, to say to the SEC, and now you have to put it in a form that everyone can understand, or is that the job of a lot of organizations working together?

Chairman Pitt: The SEC has to play a leadership role in that. We have to define what it is that we want produced by companies, and we have to make the requirements as easy to understand as we want the disclosure statements to be. If you look at the SEC's rule-book right now, I tell you, if you ever have trouble sleeping, read our rules on net capital for broker-dealers. It will put you right out.

So, people have to know what's expected of them, and they have to know that in plain English first. Then they have to perform it. There will never be enough people or enough money, and right now, I believe we are under-staffed and under-funded, and I've been pushing for more people, but no matter how many people we get, we can't guarantee the accuracy or the compliance of filings. That's going to require a lot of groups and organizations.

It's why, when we commenced this second phase of our analyst effort, we put in a call to Joe and said we want to work with the states, we want to work with the NYSE and the NASD, so that, basically, we can make use of all of the talents, all of the knowledge that's around. We cannot do this by ourselves. There isn't any entity that could do it by itself, and there isn't enough money in the world to enable it to do that. We just have to have better system of checks and balances so that people who attempt to beat the system realize that they have a very high percentage of being caught and being held accountable for it.

Mr. Borg: A couple of things.

Mention was earlier about the greed factor. You can't control greed, but you've got to make the price of that high enough. The cost of doing business has got to go up. If that means more fines, so be it. I think it means -- in some cases, it's going to be mean criminal prosecutions of a greater scale than we've seen before. The cost of doing business is not I steal 10, I give you 5, and I go home.

Chairman Pitt: I couldn't agree with you more, and I might add, the notion that I've done it once and now I'm just going to move on -- one of the things that we have recommended to Congress is that we get legislation that would enable us to say that, when any officer or director commits a serious wrong on shareholders, that we have the power to bar them from ever being an officer or director of any public company. You know, if that becomes the law, we won't have to worry about what gets disclosed, because those people won't be allowed to run. That's something that I think we can use, as well.

Mr. Borg: I think it probably needs to go a little further, even that, because then, if you don't take it all the way and -- then they're still left with that $10 million over in the Cayman Islands. So, it's got to be done.

But I want to pick up on something Bill said earlier, and that's on the disclosures, especially on TV and the talking heads.

Now, I know the commission had the rules come the other day. One of the issues is going to be, because TV is such a powerful medium and you've got the talking heads on TV and now we're going to have them do disclosures about their interest, I guess this is really a question for the media, but if you have a certain limited time, are you going to spend 30 seconds out of a two-minute piece to do the disclosures, and what happens on the re-broadcast, and I guess that's the same question for the print media. Are we going to put all that disclosure out there? How do we insure that? Are we going to scroll it?

The disclosure is important. We support it. We still support it. We'll support it going forward. But I'm curious as to how that's going to work, and I think that's an open question.

The second question is, with all the new disclosures, I am concerned a little bit on the small firms. How does that new disclosure work for the small firms? If you're a big firm and you've got $20 million that you can put in your research and whatnot -- well, I'm not sure how that translates into the small firm, where one guy may be the research analyst and the salesman and the -- we've got to look at that, as well.

So, I think what we -- I applaud what the SEC has done with the new regulations from the other day. I think it's a good floor, I think it's a good start, and I think, as you said before, as we work forward and we see what else is out there, you know, we can look at that and ratcheting that up to where it actually might do some good.

Commissioner Hunt: You should know that we are very sensitive to the costs for the small firm. We talked about it in the press conference we had in this very room. The NASD and the NYSE are also very concerned about the cost of the new disclosure rules on the small firm. So, all of us are going to be monitoring that very closely.

Commissioner Glassman: Harvey, can I just add something to that?

Both of those issues were ones we were concerned about, the monitoring of the disclosures in the media and the issues on the small firms, and as Commissioner Hunt said, we did address those, and we will be monitoring those issues, as well as the NASD and the NYSE.

But the other point that I made at the meeting and I think is particularly important is the disclosure about the performance of the analysts, the distribution of the buy, sell, and hold in equivalent terms, so that the investor understands what those terms mean, and the price charts that will show the performance of the analyst over time given their price targets and hopefully relative to some index, which we're encouraging, will show the investor how well the analyst is performing, despite any other disclosures regarding conflict, and that should be the first thing that the investor looks at.

How well is this analyst performing? Can I rely on their information? And I think that will be critical.

Chairman Pitt: One thing I want to say, also, is we talked at the open meeting we had -- and we're now web- casting those; we're trying to get those to investors -- that one way to solve the problem you raised, Joe, is for TV, or even in print, to have a very simple disclosure that really cannot be evaded, and that would be the analyst would say I really believe the views that are expressed here, that follow, and I am not being compensated, either directly or indirectly, for the views that I express here, and while that won't be foolproof, that you could get out very quickly.

If the person is being compensated, then they would disclose that: Part of my compensation comes from my being favorable about this company. Then the person has really told investors what they need to know. Again, while I'm not interested in dumbing it down, I am interested in getting to the core so that people get the information they really need. That's not to say that what we did the other day would then not be necessary. It would still be necessary and still have to be disclosed, but this will really put it in a very direct form that might adapt better to TV or even newsprint.

Mr. Silvers: Chairman, I have a question about this, because I think the comments that both you and Commissioner Glassman made about disclosure to the customer presumes that the analyst's real customer is, in fact, you know, you and I and the people watching and listening to us out there.

I think there's a lot of evidence that the reality is that the analyst's real customer is the investment banker down the hall in their firm and that -- and I do not see -- and I want to ask you how -- because your rules continue to allow this to happen, and I'd like an explanation as to why you think this is okay, for analysts to receive their compensation based on the performance of the investment banking department within their firm.

Now, I understand that it's unavoidable that an analyst should receive compensation based on the performance of the firm as a whole and that somewhere in there is the investment banking component. You know, I wish we could slice that out, because I think that's still a conflict, but I don't see how to do it. But what I don't understand and, I think, what a lot of other people don't understand is why we continue to allow and why even the rules that the NASD put out and you approved two days ago continue to allow analyst compensation to be based directly on the performance of the investment banking department.

Chairman Pitt: Well, let me say this. The question you raise is one that's of concern, and one of the things we're doing now is we're conducting an investigation, along with New York and the NASD, the states, and the New York Stock Exchange, to ascertain what's going on, what really happened, because what we did earlier this week is a first step. It's not the end of the process. It's only the beginning. But it is interesting, from the moment this problem arose, the only steps that have been taken are the ones that we have organized and led at this moment, and it's important, I think, for us to have the factual predicate.

Whether the compensation should be based on the firm as a whole or an investment banking department, the one thing the rules do do is it prevents compensation based on any particular client or any particular report. I think if we had some of the disclosures -- and both Commissioner Glassman and I discussed this at the -- if we had disclosure of the kind we're talking about, that my views -- you know, I am not being compensated directly or indirectly for my views -- that is to say, the way I have recommended or the way I come out on a particular stock is what I really believe -- I think we may well get to that.

But it may well be that we need something more, and at this juncture -- I can only speak for myself -- I have a completely open mind. If we can do more in this area to give customers and investors a greater sense of comfort, we're going to do it.

Mr. Silvers: Can I just respond for a moment?

I think that -- I mean the AFL-CIO, as a shareholder, brought shareholder proposals to several of the large Wall Street firms on this question before Enron ever happened, and we asked them to separate analysis from investment banking completely, with the exception of compensation based on the whole firm, and we had dialogue with these firms, and we met with Goldman Sachs, with J.P. Morgan Chase, met with Merrill Lynch, and as the month went on and those dialogues proceeded, each one of them said to us, ultimately, we agree with you and our policy is that there is no direct compensation of our analysts by the investment banking department.

And on that basis, we withdrew our shareholder proposals, and you can imagine the way we felt when Elliott Spitzer released his e-mails, because we felt we were dealing with very honorable people at Merrill Lynch who would work with us in good faith, and I continue to believe that we did, but clearly, there's all kinds of stuff going on down the layers of these organizations that even the people at the top, who are setting policy for those organizations, are unable to control or not aware of.

Chairman Pitt: They may not be aware of it, and that's one of the reasons why we've gone to our second phase on this.

Mr. Silvers: I do want to make the point, though, about this, that what there's a lot of evidence for, it seems, is the notion that -- is the relationship between investment banking and analysis, where despite the fact that the analyst has a fiduciary duty to the investor, the individual investor, despite that fact, their true customer is the investment banking department, and I would urge you to act on what you said and make what you've just done, which I, frankly, feel is inadequate, just the firm step and start making the second step tomorrow and cut the tie that binds between investment bankers and analysts.

Chairman Pitt: I also want to raise one other thing for your consideration. Let's take the opposite side. Suppose a firm decided that they wanted to pay an analyst for touting a particular stock, XYZ. That was dealt with in 1933, because the Securities Act says that's permissible, but you have to tell everyone that you've been paid, and in a sense, it reflects a decision that nobody should be misled about what they're getting but that Congress wasn't going to tell firms how they could or couldn't compensate people.

Now, whether that's still applicable today or not, I think is subject to a diversity of views, and many people prefer absolute strict government rules. Governmental rules about how people should be compensated can be very necessary. If they are, then I think people have to look at it, but I think it's a very drastic approach from the way our laws have usually operated, as long as you can get investors the complete protection they need. If you can't, then you have to consider other things.

Mr. Mann: You know, in a lot of ways, I would be more nervous by having a disclosure such as that, because one of the issues that we've come to believe is just intractable with this type of relationship is that we don't -- we believe that this system of having the two linked is so corruptible that it will just remain to be a moral hazard. One of the issues that we like right now is the fact that the free market has decided to lay analysts out in no small way. All of a sudden, people are realizing that they cannot trust this information.

So, if you have an additional regulation that doesn't go all the way, that does just simply try to give some framework under which you can trust the information, I'm afraid that what's going to happen is people are going to say, okay, I can trust this information, where this underlying system has not changed at all.

Chairman Pitt: Just to pick up on that, I'm not sure I follow where that takes you. Are you saying that a provision of law like 17(b), which says, if you tout a stock, you have to disclose that you're being paid to tout it, is the wrong solution or could create a misunderstanding?

Mr. Mann: Not speaking about that specific statute. I think it is to say that, if you were to look at the system where analysts are being compensated based on the -- even if it's the entire investment banking business at their firm, even if they say, well, it's no direct for my opinion, it's still wide enough and it's still broad enough that, if you are the internet analyst at Merrill Lynch and your company ran 400 million in IPOs in a single year, you know pretty directly that -- you know, where that benefit lies for your opinions.

So, if you have a situation where they can say with a straight face I'm not getting compensated for this, but they still know that they are, I think that would raise public trust to a level that might not be appropriate.

Commissioner Glassman: What if you require them to say this information is accurate based on the information that I have and it is the same information that we used -- the same view that we have internally as well as externally or something to that effect, so where they're not disclosing their conflicts or their biases but they're saying we're unbiased in some way and then are accountable for that.

Mr. Mann: The danger, I think, is -- I would rather there be a situation where analysts could -- would be confident in the fact that they could be wrong, you know. I don't think that we want to build a situation where analysts are culpable for their opinions that they have come to from - - you know, from true analysis, but when you have analysts who are serving a role of PR and nothing more, I don't know what that achieves.

Chairman Pitt: Maybe I'm missing this point, but if you said it was okay to be compensated on all of the firm's income but not on solely the investment banking department's income and suppose you have a situation where the investment banking part of the firm contributes 80 percent of the earnings to the company, have you really fixed anything or haven't you really just given the same problem a different name?

Mr. Silvers: I think that's a fair comment. If I could figure out a way to build a viable business that could get information to union members, to working families, to average investors, given the economics of that situation, that didn't -- that detached analysis completely from investment banking, I'd be for it. I just don't -- I don't see how to do it.

So, I think it's no question but what that allowing analysts to continue to be indirectly compensated by investment banking, particularly at a firm where investment banking would be dominant in terms of its contribution to the profits, leaves a problem, all right, and leaves a level of perverse structural incentives in the system, that it's much worse when it's direct, in general, and that, I think, we can fix and still leave analysts in an economically viable business.

And I want to sort of highlight this, the importance of sell side analysts, which is who we're talking about here, for investors, for pension funds, for individual investors, is enormous, because of the problem that so many of us on this panel have talked about today, which is the complexity and the extent of the information that is appropriately an issuer and company disclosure. Somebody's got to chew that through and present it in a form that the individual investor, with limited time and limited expertise, can understand, and what that comes down to is that little recommendation -- buy, sell, hold, right? That's something you can understand.

As Bill pointed out, though, when buy, sell, hold is actually, you know, corrupt, I mean when strong buy means buy and buy means sell and hold means dump and sell means go to bankruptcy court, you know, that is not a tenable situation.

Chairman Pitt: We're going to run out of time, and I thought maybe what we should do is give each panelist a moment or two to address whatever issues you have, or even any questions, and I think, Michelle, this time we'll start with you. So, you get to go first.

Ms. Singletary: This whole last conversation is so interesting. I always think that all of us intrinsically know when we're doing something wrong. I mean our gut tells us that, and these guys know when they're doing something wrong.

They know when their buy means sell, and they know when they're sending e-mails saying this is a dog and publicly saying you should buy it, and I think that if we go back to that level and we do the best that we can to separate all the conflicts of interest on a simple basis, auditors should not be acceptable consulting contracts when they're auditing the company, independent directors ought to be independent, as much as possible, give the auditing committee, the corporate boards more power to control the auditors.

And lastly, we sort of -- kind of just barely talked about it, but the liability for those folks who commit out-and-out fraud, who we know are doing things that are wrong, and I don't mean just taking one or two million of their hundred million. I mean put them in jail. I think a jail cell will certainly make people think twice about doing things wrong, and we ought to treat them like we do common crooks. If I walk down the street and someone snatched my purse, we ought to put them in jail, and this is what these guys are doing.

We want to try to gloss over it, because they're wearing suits and they look nice and they don't look like me, but the fact of the matter is, they're common crooks. They're lying, they're cheating, they're being dishonest. When you say that you've had profits and you've had losses, you're lying, and you can hide it by extraordinary circumstances, you can say pro forma, whatever, but you're lying. We ought to treat them like crooks, and I think, when we talk about changing the rules, we ought to put some teeth in those rules to say -- to discourage them. We do this with common crooks.

We're talking about three strikes and you're out law, the regular folks out there, so let's start treating them like that, and I really do believe that, if we do that, they will think twice about doing some of the things that they're doing, and I hope that we don't gloss over that, because I really feel quite upset about some of these things that these guys are doing and that we don't -- you know, we see them going into the courtroom in their nice suits and they've got their mansions at home and they're still doing quite well, and here are some of these folks sitting at home trying to struggle, knowing that their retirement has been put off for 10 years.

So, I think, you know, if we just step back and look at it on a common sense level, I think we can fix these things, and as I said, I think we ought to look at things that we can do to make sure that we discourage them from being crooks.

Mr. Silvers: I think you have got some support here.

Maybe I could just pass. What Michelle said is just so on point, but I can't resist taking the mike now that I've got it.

Some people have said here in Washington, since the Enron thing came to light, that what Enron was was some bad people. Well, we didn't know this, but down in Houston they have really bad people, and they all happened to be in certain rooms at certain times, and what we ought to do is something to those bad people -- seems to get a little vague then, but we shouldn't change anything systemically, because really, systemically, everything's fine. That was a refrain among a lot of folks who have taken a lot of money from the people who built the system that led to Enron.

Now, what I'd like to say about this is that, without taking away from anything Michelle just said, that good people do bad things when they feel like they have to. You know, people who are good to their kids, people who go to church or synagogue, people who, in every way, really seem to be model folks will do bad things. They will lie and cheat and steal if they feel that they have to. What does "have to" mean? If you don't do it, you'll lose your job.

That's a big "have to" for most people, and what we have is a system right now where, in institution after institution that is supposed to be in charge of making sure that ordinary Americans' retirement money is not stolen and converted into penthouses in Houston and bank accounts in the Cayman Islands, in institution after institution, we have incentives and structures that make people do things that are wrong. That's what all that stuff at Merrill Lynch that Elliott Spitzer has been looking to is about. That's what happened at Enron is about. That's what happened with the board. That's what happened with Arthur Andersen.

And time and time again, there are structures that lead in this direction, and it's not about a couple of people turning out to have terrible, terrible characters. It's about systems that are designed -- that, whether they were designed to or not, end up exploiting the retirement savings and the college savings and the plain old savings of America's working families for the benefit of a small number of folks who have gotten extremely rich by doing so, and I've met some of them personally, unfortunately, some of the folks who got rich, and I met them in the circumstances of having to beg for the severance money of the people they hurt.

And the mission that people here have to do in Washington is to fix those structures, and as we sit here today, the job is not getting done.

Lots of bills have been written, lots of press conferences have been called, but when you get down to the central issue -- are the analysts being paid by the investment banks, are the accountants able to pass on their own work, are the boards of directors in the pockets of the CEOs -- on issue after issue -- can investors sue for aiding and abetting, sue people who aided and abetted their being defrauded -- on issue after issue, the ball is being dropped, and if those of you who are watching and listening today don't do something about it, the ball will be dropped for good, and next time, the person who might have to be for their severance or their pension might be you.

Thank you.

Mr. Parkel: These are tough acts to follow.

I wake up every morning and I intend to wake up tomorrow morning saying we're a great nation and we have great people and they're good people. I mean you can pick up the paper in the morning and get depressed about page three. So, I mean I really believe that, whether it's Enron or anything else, and we need to leave here believing that, but having said that, I think, you know, the commission has a great responsibility, and I applaud them bringing this together today, and they should put "trust" up on the wall for every occasion that they start this discussion, and what we've heard is groupings of different areas.

One is the fact that -- let's get rid of the perceived issues of conflict of interest. Let's address conflict of interest. Let's take it on. Let's get it in place.

What we've also heard is a code of ethics. We had a period of time in the past -- 10, 15 years ago -- where signing code of ethics and what they did, either by profession or by corporations or by institution, but there's ethical issues, and we ought to develop what those are and really focus on them.

And the last one is -- and we've talked about that, too -- it has to be enforceable, and the commission has a great responsibility to make sure -- I think the commission - - Commissioner Pitt talked about the actionable -- I use the word "enforceable," because maybe I understand it a little more, but I think whatever we do to instill this trust, we've looked at this conflicts, we address them, that we've talked about today and that you've already started addressing, and we establish these codes of ethics and we enforce them, and I believe we will all get up in the morning and say we are a great nation and a lot of good people out there.

Mr. Mann: You know, there's a reason why the United States has 5 percent of the world's population but we have more than 50 percent of the value of the world's stock markets here in our country, and it's because of the fact that we are a true meritocracy. This is a place where you can come and invest money or, you know, show up and get off the boat and be a millionaire and you will be applauded for it. I don't know of any other place in the world where it is like that.

Americans, as a whole, take risks, and investing is risky. I don't believe investors should be protected if they take outside risks, but one thing that is wrong is for people to have risk foisted upon them, knowledgeable people, without their consent, and I think that's what we've seen now. That's what we see when you have auditors putting out bad information -- 233 restatements in the last year, again, according to Arthur Andersen, which I find to be very rich, but to my mind, one of the bigger issues is also employee and management stock options. I find it to be a travesty that certain CEOs have better credit ratings than the companies that they run.

And the fact is that these types of compensation are a cost to the company and they are a cost to the company's investors. Stock options have a direct cost, and the complaints now that, by expensing them, you would be hurting the companies bears no merit at all. There is nothing different, from an economic standpoint, between an undisclosed stock option, an un-expensed stock option, and an expensed stock option. The amount of money that is on the company's bottom line is the same.

And then the last issue is, of course, the auditors. I find it very interesting -- I spoke with someone who works with a non-big five or four, how many ever it is today, accounting firm who said that they don't even bother to go after audits for public companies anymore, because there is no money in it for them. Auditors are low-balling their price to get in to do the audits of companies so that they will have access to these consulting revenues, and you can see it now. It's reflected in company proxy statements. You can see the audits are $5 million, $95 million for consulting.

Accounting is all about the pessimistic case. That's what accounting has always been. This is the most conservative way we can think to present these numbers to you. My question is, does the existence of this consulting business make pessimistic accounting impossible?

Thank you.

Ms. Houlihan: The fiduciary word, that's my last thing.

You know, if you have anything to do with advising people about their money, you need to be a fiduciary, because then you have no question. You're not putting your interests first. You're putting the interests of the client first. If you are in this world, there will be conflicts of interest. You must disclose it. It's that simple. I'm looking out for you first. That's what a code of ethics is all about, and you need to work with people that abide by a code of ethics, and we need to make certain that, in all ways, anything that has to do with advice about people and investing for their future has that mandate: code of ethics, fiduciary, put the client's interest first.

Mr. Borg: If you look back to 1920 or thereabouts, our markets have steadily gotten better, often in response to scandals and failures. So, as I said earlier in my opening, I'm very optimistic going forward.

We have to raise the bar for the cost of doing business in the fraud area, absolutely. Michelle has brought that out tremendously. We have to have greater shareholder involvement, whether it's stock options that Jim and Dave brought up or other areas, certainly. The Enron situation -- perhaps there needs to be further audit committee separate consultants to look at who management has chosen for accounting. That's another area.

We always come back to the basics, though, of the investor is the first line of defense and education -- investor education, understanding. Use the information, get the information, make it readily available, and teach folks how to use it.

We're committed to working with the SEC. This is a new partnership we have in going forward. We are looking forward to it. We think there are issues that need to be resolved, bars may need to be raised, standards may need to be raised, but as long as this investigation is going on, we'll address them together, and I hope that's the way it goes.

Chairman Pitt: I'd like to thank all of our panelists. Speaking for myself, I find this quite enlightening, and I hope everyone who's listening did, as well.

We're going to take about a 10-minute recess. While we're doing that, if any of our live audience has questions that they want to write down on a piece of paper and give them to Susan Wyderko, standing up over there, we will try to answer as many questions as we can now, but all questions will be dealt with, even if we don't get to them today.

So, once again, thank you to our panelists.


(A brief recess was taken.)

Chairman Pitt: We're going to get started now, and in this segment, we will answer questions that investors have sent us through e-mail and telephone. Some of these questions came in this week, and some have come in this morning. Our division directors are here, too, and they'll answer as many questions as we can. We've gotten over 600 questions to ask this morning, so we -- the good news is we're not going to try to answer all of them this morning, but we will try to pick ones that are reflective of where we are going, and again, I stress, if people have questions, put them on one of the cards and we'll try and deal with them.

One question LC wrote us to ask is, will accounting rules be more clearly defined for investors in the 10-K and annual reports?

Maybe Bob Herdman wants to answer that one.

Mr. Herdman: There's two elements, I think, to the answer of that question, Mr. Chairman.

The first is the rule proposal that came out just last week, requiring disclosure of the application of so- called critical accounting policies, which we believe would provide investors with a much better view of the most important accounting policies and most objective accounting policies that companies follow and some information about the sensitivity to changing the estimates that are necessary to apply those policies.

The second element of it, I believe, is the ongoing work that we're doing in conjunction with the Financial Accounting Standards Board to work with them to adopt a more principles-based and higher-level approach to writing their accounting rules, which we do think will result in better transparency in financial reports.

Chairman Pitt: Commissioner Hunt, maybe you might want to answer this question from Rosemary, who wrote, "Today, many companies provide free access to their SEC filings through their web-sites, but they use such formidable disclaimers that the investor is afraid to trust the information. What does the SEC plan to do about that?

Commissioner Hunt: Thank you, Mr. Chairman. I think, as you know -- as I hope all of us up here know, the '33 and '34 acts, which we administer, make it a violation of law if any registrants put untrue or misleading information their web-sites.

I think that the questioner was referring to the links to other web-sites, but I think the best perusal of information is to look at the official web-site of the registrants. If you take the example of the dot-com companies, where they all went bust, if people had looked at their official web-sites, their statements filed with us, they would have seen many disclosures of risk that were not, perhaps, in some of the hype material that was put up in other publications. So, I think that perusing the official web-site of a particular company is probably the best source for accurate information.

Chairman Pitt: CA wrote, "With full understanding of Chairman Pitt's long-term association with the current pirates of Wall Street, I would have greater confidence in the actions of the SEC if there was more representation and concern for the individual stock owner. Having the industry self-monitor or regulate itself is not an option that will work." I think I will try and answer that question.

First of all, my career started here at the SEC, for over 10 years. That's where I learned the securities laws. And secondly, when I turned in my private practitioner's hat and took on the position of the chairmanship, I took on the representation of individual stock owners. Any past associations or past affiliations have absolutely nothing to do with my intent to serve public investors. So, I think every commissioner is duty bound to represent and express concern for the individual stock owner, and my hope is that everybody will see that on the part of all of our commissioners.

As for having the industry self-monitor or regulate itself not being an option that works, I think that I partially agree and I partially disagree.

One of the things that I think a form of private sector regulation can do is it can provide greater protection for investors than simply just the law, and by that, I mean that the laws tend to define what's illegal, what's fraudulent, but in terms of private sector regulation, we can also define what's unethical, what's incompetent, what are best practices. Those things don't lend themselves to statutes, but they do lend themselves to rules, and so, in the best sense of the system, it's giving investors even more protection.

The part I agree with, though, on this is that, for far too long, I think the question has been how aggressive and how much oversight has the SEC provided for private sector and self-regulation? I think the point is that private sector self-regulation that is unchecked and unreviewed by the SEC will create exactly the kinds of concerns that this investor CA's question reflects, but I think with proper SEC involvement, we can avoid any of those problems.

And finally, I guess I'd say one ought to look at what we've done in the last eight months. I would compare it to any period in the commission's history for the activity and the effort to solve some very difficult but longstanding problems that were previously left unresolved.

Commissioner Glassman, maybe you would like to answer this question from Barry.

Why are publicly-traded companies allowed to use terms like "pro-forma profit"?

Commissioner Glassman: Well, just for people who may not know what pro forma is, it's basically financial information that's not conforming to the generally-accepted accounting principles, or GAAP. Pro forma financial statements can be very useful in highlighting important information about the company, but they can also be misleading.

The ways in which they're useful, for example, are when they show the results of a merger so that you can see both the past and the current as if the merger had taken place already, so you can compare the previous period with the current period and you have a better sense of what the company will look like going forward, as opposed to how it did look in the past, but they can -- pro formas can be misleading and, unfortunately, in some recent cases, have been misleading. If they leave out important information or they only focus on the positive and not the negative, that creates problems, and we can use our powers to enforce the securities laws against those kinds of pro formas.

As somebody said this morning, the SEC has provided guidance to companies on the appropriate use of pro formas, and we have provided guidance to investors on what to look at in them, specifically looking at what is the company assuming, what are they not saying, and how do the pro forma results compare with GAAP?

So, there are good uses for pro formas. I wouldn't want to disallow them. But it's important for investors and companies to understand and use the appropriate pro formas.

Chairman Pitt: I understand that we actually might even be able, with modern technology -- how modern it is, we'll see -- take some live questions by telephone from people who called in. I think Stanley from Florida has a question about shareholders voting on executive compensation.

Stanley, can you hear me?

(Telephone question.)

Chairman Pitt: Well, I think that basically demonstrates that the technology may not yet be where we like it.

Stanley, the question you asked is at least hard for me to discern, so I'm going to ask whether people can get that question sort of off-line, and maybe we'll see.

So, don't give up, Stanley. We're just going to try and get the question from you.

This may be the question. CEO's and other officers receive huge salaries and compensation packages even when the companies have lost money. Why can't shareholders vote on their compensation?

Caller: That's my question.


Chairman Pitt: Do you want me to start?

Let me say that, very often, what shareholders get to vote on is a function primarily of state law, but it can also be a function of self-regulatory organizations, the New York Stock Exchange and NASDAQ and the like, and of course, the SEC has a great deal of rule-making power with respect to how proxies can be solicited and what rules apply when they are.

Speaking for myself, I will say that I believe that CEOs and other officers should have the stock option plans voted on with respect to any stock options, whether it's a broad-based stock option or a narrow-based stock option. Shareholders should be able to vote on those and express their views, and I believe they should be given full and fair disclosure of the ways in which CEOs and other officers may well receive compensation even if shareholders wind up losing money.

So, we are, at this point, waiting for recommendations and rule proposals from the New York Stock Exchange and NASDAQ, and we have asked both of them to reconsider how far these rules presently go.

With respect to salaries, that would start to get the every-day running of the company into a more formalistic approach, and that may be unworkable. One of the things that we are recommending, however, for companies is that they have compensation committees who are comprised of solely independent directors who have no ties, no affiliation, and do no business with the companies on whose boards they sit and give those companies the ability to deal with compensation issues of all sorts, options as well as salaries.

We got this question from many investors. Elizabeth and William wrote, "As shareholders in many mutual funds, we urge you to help us to become more responsible investors by giving us more information on what our mutual funds are doing and what the businesses are doing. Therefore, we urge you to consider the following. First, require mutual funds to provide full disclosure of proxy voting policies and votes cast, and second, to require greater corporate disclosure on social and environmental risks."

Paul, do you want to take a crack at that?

Mr. Roye: Sure. On the mutual fund proxy voting issue, as Mr. Silvers mentioned earlier, we do have rule- making petitions in front of the commission on that issue, and it's something that we're looking at very carefully.

I would point out, however, the commission's already taken steps in this area in that, one, the commission has emphasized that advisors clearly have a fiduciary obligation to vote proxies in the best interests of the funds and their shareholders. We've made that very clear. Indeed, Chairman Pitt, in some recent correspondence, has emphasized that point, something that we focus on and look at in the inspections process when we go in and review the mutual fund operations and the operations of investment advisors.

But additionally, there is pending a proposal that would encourage additional information regarding proxy voting and the registration form for all investment advisors. You cannot manage a mutual fund unless you are a registered investment advisor, and the Form 80V, the registration form, as is proposed -- and the commission hopefully will be considering this relatively soon -- there will be additional disclosures, perhaps, that will require advisors to describe their proxy voting practices and whether or not they will make their actual proxy votes available to their clients.

So, we are moving to put more disclosure out there available in this area.

Chairman Pitt: Commissioner Glassman, maybe you'd be willing to answer this question from Jim, from Georgia. He asks, "It's my assumption that most of the movement in the stock markets is the result of institutional investments. As such, the judgement of the mutual fund manager may cause a stock to soar or sink. Should mutual funds be greatly restricted in their ability to trade"?

Commissioner Glassman: Well, first I'd like to point out that any investor -- individual investor or entity that has a large position in a stock could potentially move the market, and if such an investor, including a mutual fund, did that illegally, then we could take action against them for manipulating the market.

But with having said that and going to the specific question, with certain regulatory restraints and the rules that we have, our basis for our markets is really free markets, and imposing restrictions on mutual funds to limit volatility could result in distortions of the markets and, in fact, could ultimately harm the shareholders, because their mutual funds wouldn't be able to make the best investment decisions on behalf of the shareholders.

Chairman Pitt: Here's a question from someone named Claus that probably at least the three commissioners ought to take a swing at, and maybe, Commissioner Glassman, you may want to start. The question is, "If Congress granted you, the SEC, three wishes, what would they be?"

Commissioner Glassman: Well, my first wish would be for Congress to support effective programs on financial literacy and investor education, starting in grade school. I think it has been several times this morning, an educated investor is the best defense against fraud, and unfortunately, we have a long way to go on this. There was a recent Jump Start Coalition survey that showed that high school seniors who were surveyed on financial literacy answered the questions right only about half the time and that that percentage, that 50 percent, has been declining over the past several years.

My second wish doesn't have a legislative solution. I'd like to see integrity in all corporate officers and boards and financial advisors so that they truly operate in the best interests of shareholders and investors.

And if these two wishes were granted, we'd have a very easy job, but until that happens, my third wish is to provide us with the funding that we need to attract and retain the sufficient staff of the high quality that we have now, just more of them, so that we can be more proactive in prevention and early detection of financial fraud of all kinds.

Chairman Pitt: Commissioner Hunt?

Commissioner Hunt: I was going to say three simple words: money, money, money. I do agree that, clearly, we should continue to seek, should get from Congress pay parity for our staff, as well as additional funds, as Commissioner Glassman said, to hire more staff of the same quality. I would also like to see us, as was mentioned, I think, earlier this morning, the power to ourselves issue officer and director bars, rather than having to go into court. We can get it through court action. It would be easier for us to punish people more quickly if we could do it through our own administrative processes here at the commission.

And so, those, I think, would be the things I would want, and of course, financial literacy -- I don't think anybody who has ever worked in this field doesn't see the huge need for maybe the states and the educational organizations to do a much better job in seeing to it that our citizenry has much more financial literacy than is presently the case.

Chairman Pitt: Thank you.

I don't know that my list will be dramatically different.

I think first and foremost would be to have a system of direct funding -- that is, the fees that come into the SEC -- be available for SEC expenditure, obviously subject to appropriate review and supervision, but have that direct funding that will enable us greater flexibility to hire more people, to achieve pay parity, and to achieve a lot of our goals. I think, at this particular time, that's a significant issue for us, is getting enough people.

The second would be to get an O and D bar so that the power for the commission to do that administratively -- I think it's something that's critical for us to be able to put serious law violators out of the business of running public companies and, to my way of thinking, in all of the panoply of responses to the Enron -- so-called Enron situation, this is the one that requires legislation, and that's certainly some that I would like to see us have.

And I guess the third request -- and I saved this for last because it's the most fanciful -- would be for us to have the ability to adopt rules expeditiously, not so much without -- not at all without notice and public comment but with respect to some of the multiplicity of hoops we have to jump through to get proposals out. Sometimes, even though we have an idea and even though we have proposals, it takes us weeks and weeks and weeks to satisfy a number of very well- intended requirements, but I believe that some of the things that we need to do should be able to be done even more quickly.

Commissioner Glassman: Mr. Chairman, I just wanted to clarify for the people that are listening that may not be used to our inside-the-Beltway terminology what pay parity is. It's parity with the other financial institution regulators. It's not parity with the private markets, just so people understand that that's what those wishes are about.

Chairman Pitt: Let me raise a question that a number of investors have raised. It's one that an investor named Roger asked. "In my opinion, the shorting game is a negative scenario practiced by a handful of organized investors. Everything about the shorting process has a negative impact on the common good of the stock market and of little benefit to the average investor. If there is any one item that would help cause stability in the market, it would be to outlaw the practice of shorting stocks. Please comment."

Bob Colby, maybe you want to address that?

Mr. Colby: There are some legitimate reasons why you might want to short stocks from a transitional standpoint, and so, outlawing it completely probably would just gum up the markets. What we have instead is a set of rules that try to keep shorting from being done when the markets are falling, to counter problems of people trying to jump on a down trend and try to move the market, and those rules are -- have a very valuable role, and we're looking at how to maintain their currency in changing market conditions.

Chairman Pitt: I also might add -- I think short transactions can add liquidity to the marketplace, and in some cases, they might serve as a natural brake on some of the exuberance that we have seen in the dot-com explosion of some prior years.

I don't know, Bill, whether you want to say anything about that.

Mr. Atkinson: I would just add that, in terms of - - if you place limitations on short selling, you can add to the inefficiency of the market. Obviously, you don't want any market manipulation, but I think that the securities laws well cover that.

Chairman Pitt: A shareholder named Will asked, "What view does the SEC currently take on the increasingly popular floor-less convertible preferred stock being issued by publicly-traded companies? This stock is also commonly known as toxic stock, death spiral convertibles, and simply junk equity. The basis of this type of private placement is that companies issue preferred shares to investors which convert to the company's common stock at a price that resets according to the current market share price at the time of conversion. In many cases, there is absolutely no maximum amount of common stock the preferred shareholders can receive by converting. The effect of this type of toxic stock is well-documented in dozens of cases where shareholder value is basically extinguished."


Mr. Beller: Thank you, Mr. Chairman.

This is a relatively recent phenomenon that I guess one might hope has run its course. I think a lot of the earlier issuances of death spiral preferreds were due in part, frankly, to an under-appreciation of their consequences to issuers and in the marketplace. I think those consequences are now much better understood, and our anecdotal evidence, at least, is that one is seeing less of this.

I guess the other thing I would say is that there is an important role for the disclosure laws and our disclosure rules in this kind of a situation. Private issuance -- I think, without exception, death spiral preferreds have been done in the private market, and our current rules require only quarterly disclosure of that kind of an issuance, and it is a fair observation that, in some cases, the damage has been done, and it is also a fair observation that some companies have entered into those kinds of transactions without current disclosure.

One of the things we announced in February and one of the things I think you will see a rule-making proposal on very shortly -- we'll certainly have one up to the commission -- would make unregistered issuances of equity securities, which would include death spiral preferreds, something that would have to be disclosed to the market immediately, and to the extent there's still a desire to do those, I would hope that immediate disclosure would temper it.

Chairman Pitt: Several investors inquired about this topic, although this person did not sign his or her name. Is it time for the SEC to go back to the recommendations of the Tully report and require better disclosure of the compensation incentives of the registered representatives who actually sell securities to clients?

Commissioner Glassman?

Commissioner Glassman: Sure. Just to explain what the Tully report is, it was a report prepared by the -- an SEC-appointed industry committee in 1995, and it recommended a set of best practices for brokerage firm compensation, and the purpose was to align the interests of the client, the broker, and the brokerage firm. The specific best practices included paying identical commissions for proprietary and non-proprietary products, paying a portion of broker compensation based on client assets in an account, regardless of transaction activity, prohibiting sales contests on single products, linking a portion of compensation to a clean compliance record, and other practices of that nature.

Is it time to go back to Tully? I think we've been evolving toward Tully, but yes, the core of the report and the recommendations, identifying and rectifying conflicts of interests between brokers and their customers, is very timely, and I think it's important for us to re-emphasize the importance of those best practices.

Chairman Pitt: Bob Colby, we got several telephone calls from individuals who asked us about after-market trading. One person's message was, "Before and after trading hours are unfair to the majority of investors. Only the very few can purchase stocks before the market opens. This opportunity should be made available to everyone or no one. Can you please comment?"

Mr. Colby: Well, I'd be glad to comment on this. In fact, most people can, via different routes -- they can buy stocks before and after open. The question is, why would you want to, because the greatest liquidity is during the regular trading hours, and people that are trading before and after hours -- and there has been strong encouragement from the commission -- to make sure that customers understand the consequences, that it's been shown that the prices typically are not very good, and so, rather than rushing into that market, I think you'd want to think about trading when the prices are good.

Chairman Pitt: The next question is from someone named Bruce, and maybe Bob Herdman, this would be a good question for you. How do we justify relying so heavily on producers of financial information in determining and monitoring accounting standards, accountants, as on the the FASB AICPA, while users are mostly or entirely outside the loop? Are government lawyers and accountants, as at the SEC, really qualified to supervise, regulate reporting standards?

Mr. Herdman: Well, the short answer to that is I think that we are, as a matter of fact. The establishment of accounting standards is something that comes under the statutory authority of the SEC.

For almost the entire time of its existence, the SEC has relied on the private sector to do the heavy lifting with respect to establishing accounting standards, and today, that's the Financial Accounting Standards Board, which is principally comprised of accountants but does have on its membership -- there are seven members on the board -- a financial analyst, and that's been historical, that the FASB has had a so-called user of financial information in the involvement of the development of accounting standards. It also actively seeks to get input from the users of financial statements on its proposals, and this really has been one of the challenges that it's had over time.

The analyst community, I think, has increased its participation and cooperation, but they're always eager to get views from users of financial information, and I'm sure they'd be eager to get views from individual investors, for that matter, and so, I think it's a balancing act, Mr. Chairman, between people with the requisite expertise to understand what the framework of accounting principles are, to do most of the development of accounting principles, but they need to get input from users and investors, and frankly, our oversight of the FASB's activities has very much of an investor protection element to it.

When we see things, either new types of transactions or events that are occurring in the marketplace, that aren't covered by existing accounting standards or if we see instances where existing accounting standards for traditional kinds of transactions just don't be standing up to the test of time, those are absolutely candidates for projects that we believe the FASB should be working on, and we're not reluctant to work with them to make sure that those are the kinds of things that they do deal with on their agenda.

Chairman Pitt: An investor named Allen asked, "Can you tell us why brokerage firms should not be forced to divest themselves of analysts creating separate companies that they may contract with to provide advice for their institutional and retail customers?"

I might start on that, and perhaps some others on the panel may want to add in.

The notion of government requiring divestiture is a very serious step and one that should only be taken when there is no other potential solution to the problems that cause it. In 1933, Congress decreed that investment banking had to be separated from commercial banking, and over the next 65 years, Congress wrestled with legislation to try to undo that divestiture.

So, I guess I would say -- I start by saying, if there's a problem -- and obviously, in the analyst area, we think there is, because we've already approved SRO rules, and we've commenced our own investigation -- separation or divestiture and creating separate companies is a very drastic remedy and one that I think would be considered, if at all, as a last resort.

Commissioner Glassman?

Commissioner Glassman: The only thing I would add to that is, with the disclosures that will be instituted under the new rules that we approved last week, the market will know, even more than they did before, where there might be potential conflicts, and if the investors and the investment banking clients and the other customers of the firms are concerned with the conflicts, they will walk with their feet and use companies that don't have those conflicts. So, the market should, once the disclosures are made, make the choice, and the market structure will evolve appropriately.

Chairman Pitt: Alan Beller, an investor named Turner wrote to ask, "Why do you allow companies to release their earnings in flat, non-hypertext form? The internet makes this obsolete and the earnings unnecessarily difficult to interpret. Why don't you require 10-K's to be in HTML?"

Mr. Beller: I think that's an excellent question, and in fact, I think the commission and the division agree that better use should be made of issuers of the internet and the flexibility that the internet provides in layering company disclosures, as well as providing them in the most convenient form.

Technology gives us the opportunity to have disclosure that starts with meaningful summaries and then allows investors to drill down into more detail. It makes it much easier to leave nothing out of reports but to layer them in ways that are more sensible and easier to understand. HTML would be one of -- I'm not enough of a technologist to know whether it's the only format that would permit that, but certainly it is one of the formats that would permit that, through hyper-linking.

One of the things we have done in the last month, in fact, is to mandate disclosure by companies with respect to whether their 10-K's and other periodic reports will be on their web-sites. The vast majority of companies already put their periodic reports on their web-sites. I think it's a number in the 80s. We would like to see that number be 100.

We are encouraging issuers to do that, and I think if they will put the 10-K's up in that fashion, the vast majority of them will use or should make available HTML, as well as PDF. We would hope -- PDF being the format for final documents that you cannot manipulate as easily, but I think this question raises a very good point and something that we should be working towards and working with issuers towards.

Chairman Pitt: I guess the answer, then, is PDF, HTML, okay.

A shareholder present here named Evelyn -- I'll give you two guesses as to who it is -- raises this question, and Alan, I guess you ought to take a crack at this one. The SEC has become politicized and does not wish to offend major institutional investors in unions and rules favorably on most of their resolutions. Individuals without clout in politics have many of their resolutions omitted.

Mr. Beller: I have absolutely no empirical statistics as to how many individual shareholder -- this question relates, I believe, to treatment of shareholder proposals and whether or not they're included in proxy statements for annual meetings. I have no information as to what percentage of individual shareholder proposals we rule on in which way and what percentage of institutional shareholder proposals we rule on and in which way, but I can tell you in the strongest possible terms that we look at them on their merits and do not look at who the proponent is and do not think about their political clout.

Without naming names, I will tell you that one of the hardest proposals we think we had to deal with this year came from an institution. We ruled against them. They are very unhappy. I suspect the commission will hear about it in a formal way before it's over, if they haven't already. We call them the way we see them, both for institutions and for individuals.

Chairman Pitt: I'm sure it will be assumed that whatever it is was my fault.

We have a question from Debra in California, who says, "Why isn't it a requirement for a material insider trade to be reported to the SEC simultaneously with the trade being completed?"

I guess that's you again.

Mr. Beller: I actually think there are two issues that insider transactions raise.

One is a corporate governance issue in terms of whether boards of directors should, by virtue of codes of conduct or whatever, limit transactions by insiders to certain periods or in certain ways or require that the corporation be informed.

The second issue is a disclosure issue relating to investors understandably wanting to know whether insiders are buying, selling, what else they're doing with their securities.

I think the simultaneous or even pre-clearance of trades really relates more to the corporate governance issue, and I would leave that, in the first instance, to boards. I think boards should think very seriously about insider transactions in that way. I think, for our purposes, disclosure as a way of giving investors information which they can evaluate as they deem appropriate, if we can get information out either at or very shortly after the time of the trade, I think we are achieving the fundamental disclosure purpose.

Trying to get the information out simultaneously, while it might be a laudable goal, I think is not currently a workable goal. We're out there having suggested two business days for the largest transactions. I think when you evaluate the benefits of giving companies a little bit of time to get information and a little bit of time to make sure that information is correct before they put it out publicly, a couple of business days seems to us to be a sensible place to be.

I understand, theoretically, the desire to do it simultaneously, but I guess I would think we'd rather get it right in a business day or two than get it wrong immediately, and I think the error rate would be very substantial if we moved to something like simultaneous reporting.

Chairman Pitt: Bob Herdman, one of our live audience question is, "I've heard talk about a new PAB. What do you think about having the PAB rate the relative aggressiveness of companies' accounting?"

Mr. Herdman: The PAB stands for the Public Accountability Board, which is what we envision will take over the oversight of the auditing profession. Any attempts to rate an individual company's relative aggressiveness or conservatism in their accounting, I think, would have to be done by individual auditors, as opposed to a board which oversees auditors, and in fact, it is something that auditors do communicate to audit committees about today, under existing audit standards, and I think that that is the appropriate place and format and method for that communication.

Chairman Pitt: An investor named Erica sent this question in: "Investors get much of their information from the media. What do they need to know about these folks and the roles they play in order to be able to correctly hear what they are saying?"

Anyone interested in tackling that? Or maybe we should ask the press to leave first, the TV folks.

I think that a lot of this really relates to recommendations of buys and sells with respect to securities, and I think the answer really is that, if you get advice from someone, you ought to make sure you know whether they have any predisposition with respect to that advice, and if you don't know, then perhaps you shouldn't rely on it, but we have enough difficulties with the things we have in our hands with also repealing the First Amendment.

Another question that we have is from an investor named Joseph, who says, "Stock options are the single most important reason why there is so much fraud and corruption on Wall Street. CEOs resort to all kinds of accounting gimmickry to boost the stock price so they could cash out their options at handsome gains, and they are never punished for this."

Anyone have a reaction to this?

I guess I would say there is -- there have been, unfortunately, instances both of fraud and corruption. I do not believe that one could say that stock options are the single most important reason why there is so much of that, as this question reflects. The notion of CEOs resorting to accounting gimmickry to boost the stock price is, however, a problem that we have identified.

There are a lot of pressures that are put on corporate managers to make sure that the price of their securities in short-term increments is as high as possible. One of the things that we are attempting to do with the disclosure of critical accounting principles and estimates that we have put out for comment is to try to wean people off an excessive reliance on what is perceived to be a magic number, namely earnings per share, and to get the focus to be much more on what is the company's position, where is the company likely to be headed over the next short term, and the like.

Here's a question from an investor named Rebecca, and she asks, "How does the SEC plan to ensure that corporate boards of directors properly attend to their fiduciary responsibilities rather than to rubber-stamp all of management's plans?"

Do we have any takers on that?

Mr. Beller: I'll take a shot at that one.

I think we need a concentrated effort in at least two areas. I think boards of directors who are trying to do the right thing would, I think, be more robust in doing so if, one, we had clearer corporate governance rules that gave them clearer responsibilities and clearer accountability in areas like nominations and in areas like compensation, going back to the stock options question that we just had.

I think independent directors who sit on those kinds of committees have a real responsibility to think in shareholder terms about what they are approving. Appropriate compensation packages, appropriately attuned to generation of long-term shareholder value should be rewarded.

My own personal view is that compensation committees shouldn't much be rewarding one good quarter of performance, and I think that's probably pretty widely shared.

In addition to corporate governance, I think there is a disclosure function, and I think we will have some interesting things to think about following the New York Stock Exchange and the NASDAQ bringing us proposals, because I think one of the issues we should appropriately deal with more at that point is how do we reinforce some of those governance efforts by additional disclosure. If there are practices that a company should be following according to the exchanges, shouldn't there be a disclosure requirement as to whether or not they are following those standards?

So, I think there's a combined governance and disclosure approach to board performance that I think can achieve some improvement.

Chairman Pitt: Bob Colby, here's a question from an investor named Paul, who asks, "Shouldn't margin loans be prohibited? If you have the money, invest it. If you don't, work hard to save up the money you need to invest."

Mr. Colby: No one would ever loan me any money, so I don't know anything about that directly, but you know, the country is built on people taking chances and getting other people to help them do it, and the stock markets are different. We do have a set of regulations that say that you have to come up with at least half of what you buy, which is designed to prevent undue volatility, and so far, it's worked pretty well over the years.

Chairman Pitt: Bob Herdman, maybe you and I can collaborate on some questions from one of our audience relating to auditors.

How do you keep auditor incentives in line when their duty is to protect public trust in financial statements, yet they are being hired, fired, and paid by the management, whose incentives are earnings?

Mr. Herdman: I think that's a very good question.

I think, first of all, it's important to understand that auditors function under a code of ethics, they function under very detailed independence rules that we and the accounting profession have set forth, and I think it's also important to recognize that large accounting firms are very intent on making sure that they have appropriate controls in place so as not to cause a loss of credibility in their work.

Nonetheless, it does seem that there are situations where pressures could be felt by individual engagement partners leading audits, pressures to maintain client relationships, pressures to expand client relationships, and to the extent that those pressures would lead people to make decisions that they otherwise might not, then it's important, I think, that we take a look at whether there might be some different approaches that we ought to be taking in our independence rules with respect to matters such as partner compensation and things of that sort.

But I do want to emphasize that reputational risk is something that I believe is very carefully considered, and I believe, in the light of recent events, it's only logical to assume that audit firms are considering it even more than ever.

Chairman Pitt: Another member of our live audience asked a question. Why is it that this agency, meaning the SEC, has industry people and their lawyers in the building on a daily basis, working the staff on rules, policies, and interpretive matters, but no investor representatives? For example, the accounting release on MD&A was written by the accounting firms without a single change.

Anybody want to start with that?

Commissioner Glassman: I'll start. As the newest member of the commission, I think it's important that we get input from all perspectives, and I certainly have made a policy of doing that. Regarding the specific MD&A release, I know I saw a number of drafts and had input on a number of drafts, and it certainly didn't look the same at the end as it did at the beginning, and there were a lot of people at the commission, in the commission, that we working on that draft. So, I think that was the work of the commission.

Chairman Pitt: Let me just say that, with respect to the release, for what it is worth, I would echo what Commissioner Glassman said and make certain that the release was not written or drafted by the accounting firms. It is a staff product. Depending on how people react to it, that may be a good thing or a bad thing, but it is a product of the staff, and as Commissioner Glassman said, it went through many changes.

However, I think the question that precedes this example -- namely, why is it that the agency has industry people and their lawyers in the building on a daily basis, working the staff on rules, policies, and interpretive matters, but no investor representatives -- let me just say that people in affected industries who have to deal with and comply with rules and regulations do make a considered effort to make sure that we are aware of specific issues and problems that may affect them, but we also meet with and hear from and solicit the views of investor representatives, as well.

The purpose of this particular summit is to open this up to people who don't have representatives but to let individual investors talk to us, as well, and part of what we're trying to do is encourage those investors to make sure that their views are made known to us on whatever subjects. Whatever we may think of the issues, we welcome your comments, we welcome your criticisms, and we will try and deal with them as best we can.

Commissioner Hunt: Mr. Chairman, I think that we should also mention that we have had investor town meetings around the country which we've been inviting investors to, in which they could ask us any question they wanted to with respect to our work or things we're trying to do, and I suspect we'll have more of those, and people out there listening to this perhaps should look for them in their communities.

Chairman Pitt: I guess another question -- and Bob Herdman, you may want to try and respond to this initially -- is how will the PAB reform the accounting industry specifically, help restore the public's trust in the integrity of financial statements?

Mr. Herdman: Well, those are certainly the objectives of creating the PAB, and we think that it will do so in two principle fashions, although there are other aspects of it.

The two principle fashions are, first of all, for the largest firms to get away from the idea of triennial peer reviews, where one firm reviews another firm's work, and instead to go to an annual quality control type of review that will be directed not by people from other accounting firms but would be directed by experts who are full-time employees of the Public Accountability Board, we think that that will alleviate any questions about whether the reviews fail to divulge shortcomings in funds' practices, we think that it will alleviate any concerns about whether recommendations for improvement that need to be made are, in fact, made, and that will be one of the ways that it achieves improvement.

The other way will be by virtue of the Public Accountability Board have real disciplinary powers to discipline accountants who have demonstrated that they have shortcomings either in ethics or in technical competency. The board will, again, have a staff that will be able to conduct investigations. The board would be -- its membership would be dominated by people representing the public, and it will have a wide range of sanctions that it can impose on both individual auditors and auditing firms.

Chairman Pitt: An investor named Jim said, "Does the SEC expect corporations and auditing firms to be self- regulating, or will there be government oversight agencies to ensure the new SEC rules are abided by?"

I might take a crack at that.

First of all, with respect to auditing firms, we do not expect them to be self-regulating at all. We do expect them to be subject to rigorous private-sector regulation but not to self-regulation. There will be an effective body that we propose, the PAB, that will oversee not just any violations of ethical and competence standards but will also do quality control reviews to make sure that these firms operate in the best interests of public investors.

With respect to corporations, the SEC does not directly regulate corporations. We do regulate their disclosure functions and the trading of their securities, but we don't, as a direct matter, regulate the conduct of corporations. That has traditionally been left to state law, with the exception, of course, of investment companies, where we do have more direct regulatory powers.

Nonetheless, as many of may be aware, over the last several months, we have been engaged in putting out a number of rules relating to disclosure by public companies that, candidly, have the effect of, certainly, causing corporations to look at their conduct and make sure that their conduct conforms to the kind of disclosures that they will be required to make. We do believe that, in the corporate world, looking beyond legal requirements, looking to ethical standards, competence standards, and best practices, is very, very critical, and there are a number of organizations that are trying to do that.

But we are on top of how corporations are being managed, how they are disclosing what their processes are, and as we have indicated, we are being quite aggressive where we think that there has not been appropriate disclosure made to investors.

I don't know if anyone wants to add anything to that.

A comment that came in from an investor named Lenny which may engender some comments from one or more panelists is, "Use of plain English is good as long as the more complex portion of financial statements and periodic reports is not an opportunity to contradict or negate what was presented in the plain English."

In a sense, that both relates to pro formas and it also will relate to summary disclosures. So, I don't know, Bob Herdman and Alan Beller, whether you want to take a crack at that.

Mr. Herdman: I'd be glad to.

I think that the idea of summary disclosures creates a very tangible opportunity to introduce plain English into the financial statement area and it will do in a size of disclosure that people will actually have the time to read, and therefore, we'll find out that it's in plain English. That's not to say that we shouldn't continue to encourage efforts to improve the plainness of English in the full text of disclosures. That's very important, and there certainly shouldn't be anything that's not clear in the full text, but in terms of what's doable in the shorter term, improving the clarity of disclosure in these more abbreviated statements, I think, is much more likely.

Commissioner Glassman: Just to add to that, we also expect that the abbreviated statements are consistent with the rest of the report, and that's an important component of what we're doing.

Mr. Beller: We do not expect summaries to be unbalanced. We expect them to be summary but not unbalanced, and I think that's something we feel quite strongly about.

The other thing I feel quite strongly about -- I know the commission does -- is there's no place for incomprehensible or unreadable disclosure anywhere in a disclosure document, including in the financial statement footnotes, and so, as Bob has pointed out, this may be a longer-term project, but I think there is a commitment to clarity, not just in short summaries but also throughout documents. It is an absolutely fair comment, it seems to me, that too much current disclosure is too difficult to understand. Plain English was a good first step at addressing some of those issues, but there is more work to be done.

Chairman Pitt: We have reached the bewitching hour of this summit. I'd like to particularly thank all of the investors who have been listening, watching, who have written in questions, given us questions live, and you have our assurance that we want to work with you to get the job done. We welcome your suggestions. We welcome your criticisms. Together, we are going to take a great system and make it better.

I'd like to thank Commissioner Hunt and Commissioner Glassman, and I'd like to thank the division directors, and once again, I'd like to express my enormous thanks to Susan Wyderko and the rest of her staff for putting this all together.

We thank you for coming, and that concludes our first annual investor summit.


(Whereupon, at 1:05 p.m., the meeting was concluded.)



Modified: 10/20/2003