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U.S. Securities and Exchange Commission

Statements by SEC Chairman:
Opening Statements at the SEC Open Meeting


Chairman Christopher Cox

U.S. Securities and Exchange Commission

Washington, D.C.
December 13, 2006

Good morning. This is a meeting of the Securities and Exchange Commission under the Government in the Sunshine Act on December 13, 2006.

Today, the Commission is going to tackle an ambitious agenda that includes a half-dozen of the most pressing and vital securities regulatory issues of our time.

There's a theme to the collection of issues we're tackling today. From establishing rules under the landmark Gramm-Leach-Bliley Act, to deciding when and how foreign firms can leave our markets, to making Sarbanes-Oxley work for investors at the right price, to addressing the rapid growth of hedge funds, to improving the quality of disclosure in proxy materials, and to making sure that mutual fund governance protects investors in those funds—each of these topics goes straight to the heart of our central mission of serving investor needs.

If America's markets aren't competitive, investors lose. If America's markets aren't transparent and open, investors lose. And if investors can't trust that the stewards of their money will have to follow sturdy and clear rules against fraud, they won't invest—and we all lose.

These are all tough issues that we've got on our plate. And the contestants in each of these disputes are well represented. The financial firms, issuers, hedge funds, and mutual funds have lawyers, economists, and accountants who all professionally weigh in with the Commission to ensure that their concerns are taken into account.

But the same can't be said for the average investor. The retail consumer doesn't have the wherewithal to hire professional advocates to put his or her issues before the SEC. It's true that we receive hundreds of letters from regular Americans who want to share their concerns. But in most cases those "pro se" efforts are at a serious disadvantage to Wall Street lawyers—not because the concerns lack merit, but because of the information gap, the overwhelming complexity of issues, and the specialized knowledge that's often necessary to participate in the debate.

That means that every day we at the SEC—all of us—have to re-dedicate ourselves to the mission of protecting the individual investor.

One of the issues we'll take up today is improving the quality of the SEC-mandated disclosure that every company makes to every shareholder. The truth is, today's shareholder disclosure documents aren't designed with the retail consumer in mind. They're dense, prolix, complicated, and so encrusted with legalese they're barely readable, even by lawyers. No wonder that most individual investors don't read them at all; they just throw them away.

A proxy statement today may well contain all the required information, and yet still not tell anybody much of anything. Is it really disclosure if the investor has to sort it out and piece it together? Imagine your reaction if I met your request for a transcript of every word in this open meeting by plunking down a dictionary. "There ya go. It's all in here somewhere." Technically, I'd have complied. In fact, I'd have provided nothing at all of value. The message from that kind of disclosure is "You do the work." And at worst, it looks like "somebody's trying to cover something up." Both messages are unacceptable.

Ordinary investors have a right to the information in a form that's complete, clear, and comprehensible. If someone orders a steak, you don't give them a cow and a meat cleaver. Investors should get the information they need in a form they can actually use.

But so long as the form of presentation is a lengthy black and white printed document that can't be searched, that hides information instead of illuminates it, that doesn't promote third-party simplification of the material for retail consumption and that doesn't allow for individual investor tastes and preferences—that can never happen.

Today, the status quo is defended by an army of lawyers and lobbyists who claim to represent the little guy. One company that dominates proxy delivery by mail is understandably intensely interested in protecting its market position. But our responsibility is not to a single company—rather, it's to the investors for whose benefit the disclosure regime exists in the first place.

Today, as we tackle this and other issues including hedge fund regulation, and the way that Sarbanes-Oxley will work to protect investors, we'll be challenged repeatedly to keep the interests of the ordinary investors paramount. I know that each of my colleagues, and all of the professional staff of the agency, are committed to that goal.

And before we begin with the formal agenda, let me add just a word about our professional staff. In my travels to other nations not just since I've been Chairman, but over the past two decades of my government service, there has been a recurrent theme: almost every nation I've visited seeks to emulate America's success in building the largest, deepest, and most liquid capital markets in the world.

A big reason for that is the exceptionally capable and professional staff of this agency. You have helped make our markets the envy of the world. The world has faith in our markets in large measure because it has faith in the integrity of the people minding the store. Most investors will never know your names, but the world knows your work. Each one of you is part of this agency's stellar reputation, and I want to thank each of you in particular for the outstanding work you have done in preparing a nearly unprecedented number of recommendations for today's open meeting.


The first item we have on our agenda today comes from the Division of Market Regulation. The Commission will consider whether to jointly propose Regulation R with the Board of Governors of the Federal Reserve System.

Regulation R will, at long last—more than seven years after the passage of the landmark Gramm-Leach-Bliley Act—establish clear rules under which banks and securities firms can compete for the customer's investing business.

The promise of the Gramm-Leach-Bliley Act all along was that it would stimulate greater competition in the financial services industry, and give investors a wider array of choices of more services at lower prices.

Since the passage of the Gramm-Leach-Bliley Act, much of that has occurred, but not as much as some expected. Retail banks and brokerage firms have had only limited success in integrating banking and investment offerings—in part because the legal rules are still somewhat fuzzy.

But the Gramm-Leach-Bliley Act is in fact one of the most important legislative changes to the structure of the U.S. financial system since the 1930s. By doing away with Glass-Steagall's separations, a customer should be able to walk into a financial institution and get almost any financial product he or she needs—securities, insurance, banking, or trust services.

At the same time, Congress sought to rationalize the regulation of financial institutions in order to promote continued innovation in the financial services industry. The Commission, through a number of different chairmen, had supported the repeal of Glass-Steagall, so long as this rationalization of the regulation of bank's securities activities was a key component.

In the end, Gramm-Leach-Bliley was mostly successful in achieving those objectives. And the law, signed by President Clinton in 1999, tasked the SEC with writing the rules to implement many of the law's detailed securities provisions. Congress recognized how difficult this whole process could prove to be and so allowed for an 18-month implementation deadline. That ended 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 to address some situations that were not clearly exempted by the statute, the Commission granted additional exemptions for banks' securities activities. But to allow the Commission more time to consider the industry's comments, the Commission ultimately suspended the rules and divided the rulemaking process into two parts.

The Commission addressed the bank "dealer" issues first, in rules adopted in February 2003 that went into effect in September of that year. The bank "broker" exceptions proved far more difficult. To continue to seek input from all interested parties, the Commission extended the blanket bank exception from the definition of broker. And that temporary exception continues to the present.

Then the Commission attempted to address the issue of bank broker activities once again in 2004, by proposing Regulation B. But that proposed regulation never went into effect. Indeed, the comment period on Regulation B ended more than two years ago.

All in all, the seven years from the enactment of Gramm-Leach-Bliley until today has left the promise of that legislation unfulfilled.

What's at stake in the modernization of financial services—for consumers, for business, and for our economy—demands that we bring closure to the process. And if clarity, consistency, and predictability are the hallmarks of sound regulation, then it's high time that clear and final bank broker rules are issued under Gramm-Leach-Bliley.

In March of this year, I began leading a series of principal-level meetings with the Federal Reserve, the Comptroller of the Currency, and the FDIC, which were later joined by the Office of Thrift Supervision. In these meetings we determined to take a fresh look at the issues that separated the Commission and the banking regulators and to commit ourselves to resolve them. I have personally attended over a dozen meetings with the top banking regulators in order to see to it that we get this job done for America's savers and investors.

The proposal we have before us today is the product of these meetings as well as many others between the agencies' staffs. In the principals' meetings, we went through each of the areas at issue in detail. We sought to understand the practical, administrative, and regulatory concerns that are necessarily raised by implementing functional regulation.

We were committed to implementing the law as it was written, and to providing the reasonable exemptions to promote competition and protect investors that Congress intended. Through the spring, summer, and into the fall, we laid a firm foundation of common understanding of the issues and made steady progress on resolving them.

In October, President Bush signed into law the Regulatory Relief Act of 2006. The Regulatory Relief Act required the Commission and the Federal Reserve to jointly issue proposed rules on these topics within 180 days of its enactment. And happily, that deadline couldn't be easier for us to meet, because we were already so far along in the process.

So upon the adoption of the Regulatory Relief Act, Federal Reserve Governor Sue Bies and I decided to do Congress one better by setting ourselves the ambitious goal of getting the joint rulemaking done this year. We're now in position to meet this goal—thanks in large part to the truly heroic work of the professional staff of the banking regulators and the SEC.

The joint rule proposal we will consider today would create a new set of rules dubbed Regulation R. Reg R contains provisions that give effect to the Gramm-Leach-Bliley bank broker exceptions in four key areas:

  • third-party brokerage arrangements (commonly known as "networking" arrangements),
  • trust and fiduciary activities,
  • sweep accounts, and
  • safekeeping and custody activities.

With respect to networking arrangements, Regulation R would define certain terms that are used in the networking exception. The definitions are intended to give meaning to the statutory limits while providing banks of all sizes with flexibility to compensate their employees for securities referrals in a manner that fits with their overall compensation plans.

It would also provide a conditional exemption that would permit a bank to pay an employee a contingent referral fee of more than the statutory nominal amount for referring an institutional or high net worth customer to a broker-dealer.

Gramm-Leach-Bliley's trust and fiduciary exception permits a bank to effect securities transactions in a trustee or fiduciary capacity under certain conditions. Most notably, a bank must be "chiefly compensated" for these transactions on the basis of specific types of fees, which are referred to as "relationship compensation" in the proposed rules.

Under proposed Regulation R, a bank would meet the "chiefly compensated" condition if its ratio of "relationship compensation" to "total compensation" for each trust or fiduciary account is greater than 50 percent. The rules also include an exemption that would permit a bank to alternatively calculate its trust and fiduciary compensation on a bank-wide basis as long as that ratio is at least 70 percent.

The rules also provide examples of fees that would be considered relationship compensation. In a significant change from proposed Regulation B, Regulation R would consider 12b-1 fees to be relationship compensation.

As to Gramm-Leach-Bliley's sweep accounts exception, proposed Regulation R would define terms used in the exception and provide banks with an exemption for money market fund transactions with their customers.

Under Gramm-Leach-Bliley's safekeeping and custody exception, banks are permitted to perform certain securities-related services if they are part of "customary banking activities."

Proposed Regulation R would provide banks with a conditional exemption to permit them to accept orders for securities transactions from employee benefit plan accounts and individual retirement and similar accounts. It would also permit banks to accept orders for securities transactions for other types of accounts on an accommodation basis.

The joint rule proposal also includes other exemptions for banks that are not tied to a specific exception from the statutory definition of "broker." Many of the proposed rules in this category are intended to reinstate, or provide technical changes to, existing or previously proposed rules—because Regulation R, if adopted, would supersede the Commission's prior rulemaking.

The joint rule proposal also would withdraw proposed Regulation B. And it would extend the time that banks would have to come into compliance with the bank broker provisions of Gramm-Leach-Bliley. Under Regulation R, a bank would be exempt from the definition of "broker" until the first day of its first fiscal year commencing after June 30, 2008.

In addition to the action we're taking today on proposed Reg R, the Commission is also considering an SEC-only companion proposing release that will amend an exemption from the definition of "dealer" for banks' securities lending activities. It would also repropose a conditional exemption from the definition of "dealer" for banks' Regulation S transactions, and repropose an exemption for banks effectuating transactions in investment company securities under Section 3(a)(4)(C) of the Exchange Act. And finally, it would make a technical amendment to align Rule 15a-6 with the bank broker and dealer exceptions of Gramm-Leach-Bliley.

I'd like to thank all of the leaders of the banking agencies that participated in this effort. They showed an unwavering commitment to the protection of investors and the integrity of our markets.

I'd especially like to thank Federal Reserve Board Governor Susan Bies; Scott Alvarez, General Counsel of the Federal Reserve; Comptroller of the Currency John Dugan; and Julie Williams, Chief Counsel of the Office of the Comptroller of the Currency; FDIC Chairman Sheila Bair, and Deputy Chairman Marty Gruenberg; and Office of Thrift Supervision Director John Reich and Deputy Director Scott Polakoff.

I would also like to thank the SEC staff for your absolutely outstanding and tireless work—particularly Erik Sirri, Bob Colby, Caite McGuire, Linda Sundberg, Richard Strasser, Haime Workie, and John Fahey—all from the Division of Market Regulation; and Brian Cartwright and Andy Vollmer from the Office of General Counsel.

I will now turn it over to Erik Sirri, the Director of the Division of Market Regulation to hear a more complete description of the proposals.


The next item on our agenda is our proposed interpretative guidance for management regarding its evaluation of internal control over financial reporting as required by Section 404 of the Sarbanes-Oxley Act.

This is a joint proposal, prepared at the Commission's request, from the Office of the Chief Accountant and the Division of Corporation Finance.

It's an important part of the Commission's roadmap to improve the implementation of Section 404, which we announced in May, following our second full-day roundtable devoted to Section 404 implementation issues.

Since then, the Commission and its staff have been working diligently on the next steps that were laid out in the roadmap. This work has included considering the additional guidance from COSO that was issued in July; working with the Public Company Accounting Oversight Board on its new internal control auditing standard; proposing additional extensions of time for non-accelerated filers, certain foreign private issuers, and newly public companies; and issuing a Concept Release for public comment in contemplation of the proposal before the Commission today.

Section 404 probably has posed the single biggest challenge to companies under the entire Sarbanes-Oxley Act. And without question, it has imposed the greatest costs. And up until now, the Commission's rules haven't provided any guidance for management to evaluate and report on its internal control—or any specific method or set of procedures for management to follow in performing its evaluation.

When the PCAOB first published its auditing standard in this area, Auditing Standard No. 2, it directed auditors in how to evaluate the process management used. But because the PCAOB is responsible for the supervision of auditors, and not companies, this did little for issuers who have the first responsibility under Section 404.

The combination of this requirement in the auditing standard and the lack of separate guidance for management resulted in management conducting their evaluations using the auditing standard as their guide. This approach failed to recognize the difference between the types of procedures and documentation that are needed by those who are coming in from outside a company to audit and report on its internal control, as compared to the insiders who created the internal control system and interact with it on a daily basis—and resulted in considerable cost being incurred by companies to comply with the evaluation requirement.

As a result, today, we are proposing separate guidance for management to follow in evaluating internal control under Section 404. This proposed guidance sets forth an approach by which management can conduct a top-down, risk-based evaluation of internal control over financial reporting—and do so in a flexible and principles-based manner.

This will promote efficiency by allowing management to focus its evaluation on only those controls that are needed to adequately address the risk of a material misstatement in its financial statements.

We believe that companies of all sizes and complexities will be able to conduct their evaluations more effectively and efficiently by following the proposed guidance. As smaller companies have less complex internal control systems than larger companies, the new guidance enables smaller companies in particular to scale and tailor their evaluation methods and procedures to fit their own facts and circumstances.

We encourage all companies to take advantage of the flexibility and scalability of this approach to conduct an efficient evaluation of internal control over financial reporting.

While each company's individual facts and circumstances should be considered in determining size and complexity, the proposed guidance creates a presumption that companies that meet its market capitalization and revenue thresholds, which are based in part on the Commission's rules defining "accelerated filers" and "large accelerated filers" as well as on the recommendations of the Commission's Advisory Committee on Smaller Public Companies, are smaller companies.

The guidance being proposed today reflects the consideration of a tremendous amount of feedback from a number of sources, including:

  • our roundtables;
  • the Commission's Advisory Committee on Smaller Public Companies;
  • the Government Accountability Office report on the implementation of the Sarbanes-Oxley Act as it relates to smaller public companies; and
  • comments received on our Concept Release.

As part of this proposal the Commission is considering amendments to Rules 13a-15 and 15d-15 under the Exchange Act that would make it clear that a company choosing to perform an evaluation of internal control in accordance with the proposed guidance would satisfy the annual evaluation required by those rules.

In order to retain the flexibility that was desired by the 2003 rules, the amendments proposed today would afford management the latitude either to follow the proposed guidance or to use other methods that achieve the objectives of the Commission's 2003 rules.

Finally, also included in the proposal, is a proposed amendment to Rule 2-02(f) of Regulation S-X to clarify the auditor reporting requirement pursuant to Section 404(b) of the Sarbanes-Oxley Act.

Over the past three years we have received feedback that the current form of the auditor's "dual" opinion in Auditing Standard No. 2—one on management's assessment and the other directly on the effectiveness of internal control—is unnecessarily complex and may have caused confusion about the auditor's responsibility in relation to management's evaluation process.

Therefore, we are proposing to revise the rule to require the auditor to express one opinion on the effectiveness of internal control over financial reporting, which subsumes and includes within that one opinion the attestation (or audit) of management's assessment required by Section 404(b).

We expect that the PCAOB will be proposing a conforming change to auditor reporting requirements when it proposes its new auditing standard next Tuesday that would supersede its current auditing standard, Auditing Standard No. 2, on internal control audits.

I would like to thank the staff for all of their work to improve the implementation of Sarbanes-Oxley 404. In particular, I would like to thank Conrad Hewitt, Zoe-Vonna Palmrose, Nancy Salisbury, Brian Croteau, Michael Gaynor, Josh Jones, and Bob Burns from the Office of the Chief Accountant; John White, Carol Stacey, Betsy Murphy, and Sean Harrison from the Division of Corporation Finance; Brian Cartwright and his staff in the Office of the General Counsel; Tom Kim and Mike Halloran from my office; and all of the Commissioners and their counsel for their constructive comments and suggestions.

I will now recognize John White and Conrad Hewitt for a description of the proposal.


The next item on the agenda is a recommendation from the Division of Corporation Finance to propose new rules governing when and how foreign private issuers can exit from SEC registration.

Under the Commission's current rules, it's exceptionally difficult for foreign companies once they've accessed the U.S. capital markets to change their minds. Under our decades-old standard, a foreign company can end its reporting obligations only if it has fewer than 300 U.S. shareholders.

So an issuer may find itself in the unfortunate situation of forever being unable to exit from the SEC's requirements. And this can be true even if it has de-listed from U.S. exchanges and even if there is little investor interest in the company in the U.S. market.

We have listened carefully to the concerns expressed by foreign issuers and overseas regulators on this important subject, and we have received many thoughtful comments in response to our prior proposals. In particular, I would like to thank Commissioner Charlie McCreevy and David Wright of the European Commission for their very helpful observations and suggestions.

All of us here today recognize the enormous benefits to U.S. investors that are provided by foreign companies listing and publicly offering their securities in the U.S. We also recognize that an overly rigid system of rules can serve as a disincentive to foreign companies coming to the U.S. in the first place, and that ultimately reduces the opportunities for America's investors.

So today's proposal would modernize the deregistration structure to ensure that America's investors and America's capital markets gain the benefits of foreign participation in our markets—while striking a balance that continues to protect U.S. investors with current disclosure even when a company later leaves the U.S. market. The proposal would establish a new standard, based on relative U.S. trading volume in shares of a foreign private issuer, rather than on the number of shareholders in the U.S.

Under the proposed standard, a foreign private issuer could terminate its Exchange Act registration and reporting obligations if the U.S. trading volume of its equity securities falls below 5 percent of the trading volume in the issuer's primary market during a recent 12-month period.

This trading volume standard should represent a significant improvement over both the current rules, and the proposals we made last year—which were primarily based on an issuer's relative U.S. public float.

Today's proposed standard will provide a more direct gauge of U.S. market interest in a class of securities. And importantly, it will be much easier to apply in practice. That's because trading volume data is easier to obtain than "public float data." And it's also much easier to find than "U.S. shareholder data," which often requires searching through layers of intermediaries and custodians.

With the revised standard, we should have a simple, targeted measure of U.S. interest, and get it at significantly lower costs to issuers and investors. The proposed rules will also benefit U.S. investors by ensuring continued reporting by companies that have significant trading activity in the United States. The rules will require most foreign companies that are exiting our reporting system to post their home country disclosure materials on their websites, in English. And most importantly, the rules will remove a significant disincentive to foreign companies listing in the U.S. in the first place.

I would like to thank the staff in the Division of Corporation Finance for their excellent work on this proposal, particularly John White, Mauri Osheroff, Paul Dudek, and Elliott Staffin. I'd like to also thank Brian Cartright, Alex Cohen, and the staff of the Office of the General Counsel, and Chester Spatt and his staff in the Office of Economic Analysis. Finally, I'd also like to express my thanks to Ethiopis Tafara and the staff in the Office of International Affairs.

I will now turn it over to John White and his staff to provide us with the details of this proposed rule.


The next item on our agenda this afternoon concerns three rule proposals for hedge funds and other pooled investment vehicles.

The proposals are needed as a response to the Court of Appeals decision in Goldstein v. SEC, which overturned the Commission's rules of two years ago. Those rules required that advisers to hedge funds register with the Commission. Beyond its central holding, the court ruling had some unfortunate side effects, which the Commission has clear authority to fix. And so today, we're considering three separate rules to accomplish that objective.

First, we will consider a new rule under the Investment Advisers Act that will prohibit advisers to hedge funds (and other pooled investment vehicles) from defrauding investors in hedge funds. This would reverse the side effect of the Goldstein decision that the antifraud provisions of Sections 206(1) and 206(2) of the Act apply only to "clients" as the court interpreted that term, and not to investors in the hedge fund.

The new rule that the Investment Management Division recommends we propose is authorized under the law because another antifraud provision, Section 206(4) of the Investment Advisers Act isn't limited to fraud against "clients." The result of placing reliance on this provision is a rule that can withstand judicial scrutiny, and which clearly protects the investors—the clients—by stating that hedge fund advisers cannot defraud the investors in a hedge fund.

The companion proposal from the Division of Investment Management that we're considering today consists of two new rules under the Securities Act of 1933 that would update the definition of "accredited investor" for the 21st century, to accommodate both inflation and the significant expansion in the number and size of hedge funds in our markets.

Currently, the definition of accredited investor that determines whether an individual meets the wealth threshold for investing in a hedge fund rests completely on the individual's net worth or income. That definition is inadequate to measure the sophistication of individuals to invest in most hedge funds.

The new rules would therefore revise the accredited investor standard to require an individual who seeks to invest in certain private funds to own at least $2.5 million of investments. This is a measure not just of net worth—which could include, for example, the value of one's home—but specifically of money that he or she has already set aside as an investment at the time of the person's purchase of an interest in a private fund. In addition to the new standards, an individual would continue to be required to meet the current tests to be an accredited investor.

The proposed rules do a much better job of assuring that individuals investing in private funds are likely to have the knowledge and sophistication necessary to evaluate the merits and risks of these investments.

I would like to thank the Division of Investment Management and its Director, Andrew Donohue, and in particular thank Elizabeth Osterman and Tara Buckley—who worked on the accredited investor rules. I'd also like to thank Bob Plaze, Jennifer Sawin, and Daniel Kahl who were responsible for preparing the antifraud rule recommendation. Special thanks also are due to the many people in the Divisions of Corporation Finance, Enforcement, and the General Counsel's Office who contributed to the effort.

I will now turn it over to Andrew Donohue, to hear a more detailed description of the proposal.


The next item on our agenda is a recommendation from the Division of Corporation Finance to enhance the quality of disclosure that investors receive in proxy statements by approving a voluntary program for Internet-based delivery.

It's hard to imagine in 2006 that investors aren't getting the benefits of the Internet and its capacity to search through, organize, and simplify complex material when it comes to understanding the complexities of the public companies in which they invest. But as of now, most public companies aren't providing investors with SEC mandated disclosures in this more useful way.

Nor are they required to do so. Instead, they are required to provide information in the same way the government has made them do it (and made investors receive it) since the 1930s: On paper. Through the mail. With no interactive features. No way to look up information easily. No way to create graphs and charts, or to do comparisons with other companies. Not even any good way to link to third-party websites that have synthesized and analyzed the disclosure in the proxy statement in ways that might be more easily understood by individual investors. And until the SEC allows for this flexibility in our rules, that will continue to be the case—and investors will be the worse for it.

At about this same time last year, we proposed amendments to the proxy rules that would permit issuers and soliciting persons to post their proxy materials on an Internet website. The purpose of this proposal is not just to take the same old disclosure that investors can't read and can't understand and put it in electronic form, but rather, by moving to Web based disclosure, to fundamentally improve the quality of information that investors get, so that all the work that companies go through in preparing this information isn't for naught, and doesn't end up in the wastebasket.

Investors—and the financial intermediaries who work for them—should be able to better use the information in proxy statements, to do comparisons with other companies to put things in context, and make looking for what investors really want far easier than it is today.

As part of our proposal, we provided that the company would deliver a simple notice advising shareholders that the materials are available either on the web, or in printed and mailed form as usual. That way, shareholders who prefer to receive their proxy materials in paper will continue to get them that way. And shareholders who want the added features of Internet info can have it too.

Our overarching purpose in issuing this proposal is not merely to realize the substantial cost savings that surely will result—even though these cost savings would directly benefit the shareholders who own public companies. Nor is it that the proposal could provide soliciting persons other than the issuer with a far more cost-effective means of undertaking their own proxy solicitations—even though empowering shareholders, and enlivening the market for corporate control, is a good thing for investors and the marketplace.

Rather, it was to exploit the potential of the Internet to provide investors with interactive online disclosure that can be easily searched, analyzed and customized—and to stimulate issuers to revamp their disclosure to begin to take advantage of these powerful new possibilities.

Our expectation is that even for investors who don't themselves use the Internet to access information in their company's proxy statement, the opportunity they'll have to benefit from the processing of that better information by third-parties who interpret it for retail customers will yield significant benefits as well.

We received about 150 comment letters on this proposal, from a variety of commenters. The public comments included a good deal of very useful survey data and academic research about online behavior, about differences between "opt-in" and "opt-out" models for establishing investor preferences, and about the levels of Internet access among various demographic groups in the United States.

We were especially pleased to draw comment from a significant number of individual investors.

Some of these investors expressed a preference for the new tools and greater insight into corporate information that interactive disclosure would provide. Others expressed a preference to continue receiving their proxy materials in paper—and that wish is our command.

For investors who don't like the Internet or can't access it, or for whatever reason prefer to receive their materials on paper and in the mail, today's proposal makes clear: the SEC will always guarantee your right to printed document delivery—and that's for any investor who wants it.

Some companies liked the fact that mailing printed materials only to shareholders who actually want them would save considerable time and expense. Other companies questioned the extent of the cost savings that they might realize if large numbers of shareholders request paper copies.

A few also expressed concerns that the proposal might adversely affect voting returns, if retail shareholders don't ask for paper, don't go online, and don't vote their shares.

For these reasons, the Internet access rule we're adopting today will not only be completely optional for investors—it also will be completely optional for companies.

The truth is, while the anticipatory support for this proposal is heartening, and the skeptical questions are reasonably put, we'll never know the answers to these questions until some issuers and some shareholders give interactive disclosure a try.
There are some aspects of the original proposal that have already been improved based on suggestions we received during the comment period. Some institutional investors, for example, questioned the wisdom of delivering the proxy card separately from the electronically posted proxy statement. We shared that concern, and have modified the proposal accordingly.

Finally, some companies in the paper and printing industries feared what they called "collateral damage" from a major shift to online delivery of proxy materials. But that concern was more than balanced by the views of those who saw great benefits from saving paper and preventing waste. For example, one nonprofit organization predicted that this proposal could save 800,000 trees from being cut down each year, and prevent 100,000 tons of paper from being dumped into our country's landfills annually.

We don't often have the opportunity to benefit the environment from our work at the SEC, so perhaps we should relish this opportunity with the amendments currently under consideration.

I will now turn things over to John White for a description of the two different releases that are before us.


The final item on today's agenda involves investment company governance.

The Commission has received a recommendation from the staff to re-open the comment period for our June 2006 request for additional comment regarding the fund governance provisions, in order to permit comment on two economic papers on this topic prepared by the Office of Economic Analysis that will be published as part of this action.

I am hopeful that the additional comments we will receive on these economic papers, specifically, and on the economic impact of any rulemaking in this area, more generally, will give the Commission a more comprehensive record on which to evaluate the public policy choices we face in considering possible courses of action in this area.

I am also confident that the public exposure of the work of our Office of Economic Analysis will advance the public discourse on these topics, and that we ourselves will benefit from public review and commentary on their analysis and conclusions.

The staff has made its recommendation to us, and we have approved it earlier today through the seriatim process. As a result, the re-opening of the comment period will be announced on the Commission's website and in the Federal Register, and the item is removed from the agenda at this meeting.

This has been a long meeting, and a solid day's work, so I wanted to end as we began: To the SEC staff, thank you for the extra effort and the exceptional good work in preparing a very meaty agenda for the Commission's consideration today. And I want especially to thank each of the Commissioners not only for your long and hard work today—but also for your painstaking efforts over weeks and months in crafting these proposals, to bring them to the point where we can, seemingly effortlessly, approve them unanimously today. Our nation's investor and our capital markets are much the better for your wisdom and your leadership.

And at this point, there is no further business. The meeting is adjourned.


Modified: 04/27/2007