Speech by SEC Chairman:
Gramm-Leach-Bliley Seven Years Later
Chairman Christopher Cox
U.S. Securities and Exchange Commission
Financial Services Roundtable 2006 Fall Conference Leadership Lunch
September 21, 2006
Thank you, Bill [Walton], for those kind words. It's a pleasure to get back together with this group, who together are responsible for financing 60% of the U.S. economy from mortgages to credit cards to commercial credit. As you know, a little over a year ago, I gave my maiden speech as SEC Chairman to the Financial Services Roundtable. It was kind of you to extend that early opportunity, but of course, since I'd been on the job only a few weeks, I didn't have a great deal to report. This time, I've got a lot more we can talk about.
But first, let me offer a word of praise for your leadership Jim Blanchard, Tom James, Steve Bartlett and their excellent staff. They're doing a superb job here in Washington, both in the regulatory and legislative arenas.
They've certainly done a good job scheduling this conference for early autumn, one of the most beautiful times in the nation's capital. As you know, today is officially the first day of autumn. And of course now, as Congress is coming close to the end of session, there'll be a flurry of last-minute bills and plenty of action to keep your eye on. With any luck, the end result of all of the politics, logrolling, debate, and horse-trading will be good public policy. (I'm told it's actually happened once or twice before.)
Two of our national leaders who are personally responsible for more than their share of legislative successes are the gentlemen you'll soon hear from, Rep. Spencer Bachus and Sen. John McCain. You've got an excellent lineup here today.
Today, as it happens, isn't just the first day of fall, but also the anniversary of a unique record set by the New York Yankees exactly 50 years ago. That year, 1956, was an excellent one for the Yanks. They beat their cross-town rivals, the Brooklyn Dodgers, in the World Series and in that World Series, Don Larsen pitched a perfect game. It's not the World Series, however, but the record set on September 21, 1956, that I'm talking about.
It's a record the Yankees would rather forget: They stranded 20 men on base up in Fenway against the Red Sox. And despite a 500-foot mammoth homerun by Mickey Mantle, the Yankees lost 13-9.
Any of you who follows baseball knows it takes a lot to leave 20 men on base. Well, that's how I feel sometimes about something very important to you in the financial services industry.
Seven years after passage of the Gramm-Leach-Bliley Act, we still don't have the bank broker exceptions we need to implement the legislation.
I'm committed to completing that important task. Congress intended that the SEC write rules to implement this legislation. (I can say that with some authority, because I was a member of the House-Senate Conference Committee that wrote the final version of Gramm-Leach-Bliley.)
The rules are important because Congress fully understood that reasonable exemptions would be necessary to promote competition and efficiency, and to protect investors the very purposes of the legislation in the first place.
For the last six months, I personally have been chairing meetings with senior representatives from the federal banking agencies to discuss the details of rules that will achieve these objectives.
One of our goals is minimizing compliance costs and preventing the disruption of banks' existing business practices. In these meetings, we've all rolled up our sleeves and delved into the details of the statutory provisions and the legislative history. It's all part of a joint effort to develop a practical and workable implementation of this landmark legislation.
I don't think there's any question that this can be done. And despite the history of inaction over the last seven years, it's abundantly clear that all of the stakeholders are committed to seeing to it that it will be done.
As I said, I well remember the extensive process that went into writing Gramm-Leach-Bliley in the first place. In my House committee, and in the Senate, we had extensive hearings covering several years. The conference on the final bill was one of the largest ever, because so many committees and interests were involved. And unlike many conferences, this one was fully attended by all the participants, who stayed in their seats for hours on end, and participated in many votes on critical amendments.
The end result was a milestone in the history of U.S. financial regulation. Here's what the bill's chief author, then-Banking Committee Chairman Phil Gramm, said about it at the White House ceremony when President Clinton signed the bill into law:
"The world changes, and Congress and the laws have to change with it.
"Abraham Lincoln used to like to use the analogy that old and outmoded laws need to be changed because it made about as much sense to continue to impose them on people as it did to ask a man to wear the same clothes he did when he was a child.
"In the 1930s, at the trough of the Depression, when Glass-Steagall became law, it was believed that government was the answer. It was believed that stability and growth came from government overriding the functioning of free markets.
"We are here today to repeal Glass-Steagall because we have learned that government is not the answer. We have learned that freedom and competition are the answers. We have learned that we promote economic growth and we promote stability by having competition and freedom.
"I am proud to be here because this is an important bill; it is a deregulatory bill. I believe that that is the wave of the future."
As Chairman Gramm accurately noted, the history of this issue, like that of the SEC, goes back to the Depression. When Congress separated commercial and investment banking in the Glass-Steagall Act, it did three big things: First, it said banks couldn't underwrite securities or be dealers in securities. Second, it said banks couldn't affiliate with underwriters and securities dealers. And third, it said that underwriters and securities dealers couldn't take deposits.
As we all know, the changes in financial markets that have taken place over the last half-century, and particularly in the last 20 years, have dramatically changed commercial banking, investment banking, and insurance from what they were before the Depression. In a world where most American households now own securities, and in which demand deposit and savings accounts are rapidly being replaced by investment portfolios, the complete exclusion of banks from the securities business simply made no sense.
Even before Gramm-Leach-Bliley, the Citigroup merger in 1998 sounded the death knell for the Glass-Steagall separation of financial services. But the importance of Gramm-Leach-Bliley is that it not only formalized this transformation, but rationalized it. And that's where the need for implementing rules comes in because without them, we won't fully achieve Congress's intended objectives.
The reasons for doing away with Glass-Steagall's separations in the modern world were obvious. A customer should be able to walk into a financial institution and get any financial product he or she needs securities, insurance, banking, or trust services. Congress agreed. At the same time, Congress sought new ways to safeguard investors that would be consistent with continued innovation in the financial services industry.
The Securities and Exchange Commission, through a number of different chairmen, supported the repeal of Glass-Steagall, so long as Congress also rationalized the regulation of the securities activities of banks. And in the end, Gramm-Leach-Bliley tasked the SEC with writing the necessary rules to implement many of the law's detailed provisions.
Congress recognized how difficult this whole process could prove to be for some banks, and included an 18-month implementation deadline. That was supposed to end in May 2001 more than five years ago.
In fact, the Commission did attempt to define some of the key terms used in the Act in May 2001. And in order to address some situations that were not clearly exempted by the statute, the Commission also granted additional exemptions for banks' securities activities. As we all know, the Commission received a lot of critical comment from the banking industry and the banking regulators. In order to allow the Commission more time to consider the industry's comments, and to modify its interpretations, the Commission ultimately suspended the rules and divided the rulemaking process into two separate parts.
The SEC addressed bank "dealer" issues first, in rules adopted in February 2003. Those rules actually went into effect in September of that year.
But the "broker" exclusions proved far more difficult. In order to continue to seek input from all interested parties, the Commission extended the blanket exception from the definition of broker, and has continued to do so to the present time.
And then the SEC attempted to address the issue of bank broker securities activities once again, in 2004. That proposal was called Regulation B, and it has never gone into effect. The comment period ended more than two years ago on September 1, 2004. The Commission received over 120 comment letters. You'll be pleased to know that includes formal comment from the Financial Services Roundtable, for which we are very appreciative. But still, there are no final rules.
All in all, the seven-year stretch from enactment of Gramm-Leach-Bliley until today is a disappointing record of indecision and inaction. We've made several efforts to cross home plate, but all our runners have been left stranded on base. What's at stake in the modernization of financial services for consumers, for business, and for our economy demands more. If clarity, consistency, and predictability are to be the hallmark of sound regulation, then it's high time that clear, final rules are issued under Gramm-Leach-Bliley.
The good news is that the new process I've been leading this last six months is entirely different from what's gone before. To be sure, just as before, we are all committed to implementing the law as it was written, and to providing the reasonable exemptions to promote competition and protect investors that Congress intended. But more than that, this time we are all committed to getting the job done.
I fully intend to complete work on a proposed rulemaking this year, and I expect a final rule to be completed within six months. Finishing this work is vitally important to investors, to capital formation in America, and to our nation's competitiveness in the global economy.
There's one other area where global competition is pressing: technology. As many of you know, I have been encouraging the use of interactive data for SEC filings, to give investors and analysts faster access to better information, in a form they can readily use. Interactive data can also make company filing cheaper, more efficient, and more reliable.
The payoff for users of financial information is significant. Instead of digging separately through annual reports, 10-Qs, or 8-Ks for a specific fact or number, an investor armed with interactive data can easily find exactly what he or she is looking for and then immediately download it into a spreadsheet or other application software. In minutes, the data can be put to work to compare and analyze a company's performance across time and across industries.
Interactive data works by assigning every number in an annual report, every number in a company's financials, a specific computer tag. That allows investors, using standard software, to immediately pull the information they want out of a dense document.
The technical term for this computer labeling is XBRL. That's short for Extensible Business Reporting Language. It's already used extensively elsewhere in the financial services industry. In particular, banks use it in their reports to the FDIC, to the Fed, and to the Comptroller of the Currency.
As a matter of fact, the transition to interactive data has gone so smoothly in the banking industry that many of you may not even realize that you're technology pioneers. That's the result we always hope for with innovation. Interactive data has proven to be a painless, productivity-enhancing improvement that helps people get their work done faster, cheaper, and better than before.
For about a year now, 8,200 U.S. financial institutions have been using XBRL to submit their quarterly Call Reports to U.S. banking regulators. As a result, the investing and lending public have faster access to the financials of U.S. banks.
And there's been another important dividend: The error rate has also dropped way down, to nearly zero. Before the introduction of interactive data, fully 30% of banks' quarterly filings included basic math errors. Now those errors are gone.
And now banks can even provide narrative, because that can be XBRL-tagged as well. As a result of this improvement, today only 5% of original reports need additional work. Before, as much as 34% of bank call reports were returned to banks for additional clarification. The old system lacked the technology to submit notes.
Better, faster, more efficient sharing of data is the story of XBRL and interactive data when we look at bank Call Reports. We're working now to see to it that every public company uses interactive data in reporting to the SEC.
Already, a growing number of companies are filing their reports in this new format. Today's XBRL filers with the Commission represent more than a trillion dollars of market cap, spread across various industries companies large and small, foreign and domestic. I'm pleased to note that GE has recently joined this group, and I understand that Mark Begor, who runs GE's consumer finance business, is here. Mark, please pass along my thanks and encouragement to your colleagues.
I think if you talk to these companies, they'll tell you it's been surprisingly painless and inexpensive a "non-event" is the phrase that keeps coming up. And companies are excited to be on the cutting edge of financial reporting. If you're not already filing using interactive data, I urge you to consider doing so. You'll find that the benefits can extend well beyond easier SEC filing to such areas as receiving reports from your large customers. Just as banking regulators are now enjoying clean, real-time, comprehensive data from their reporting banks in a readily digestible format, XBRL can be used to allow banks to enjoy the same advantages vis-à-vis their customers when they're focused on assessing counter-party risks.
The rest of the world is moving on from the static-data system that has been around in one form or another since Guttenberg. Our financial reporting shouldn't be left behind.
All of us at the SEC are doing our best to sharpen our markets' competitive edge in this increasingly global world of finance. As regulators, we know there are really only two fundamental ways for us to improve: reduce the cost of regulation, and improve the quality of the product. Interactive data lets us accomplish both.
And I know that each of you in this room is working hard every day to sharpen your firm's competitive edge in your industries. It's because of your dedication that America's financial services industry has become the best in the world. I want to thank you for your work in making our markets competitive, for facilitating capital formation in this country, and for helping families and individual American investors achieve their dreams. That's the SEC's mission, too, and we're proud to be your partners.