Speech by SEC Commissioner:
Remarks Before the SEC Speaks in 2007
by
Commissioner Paul S. Atkins
U.S. Securities and Exchange Commission
Washington, D.C.
February 9, 2007
Thank you, Linda, for that kind introduction. It is always an honor to be a part of the SEC Speaks program. This audience - full of alumni, practitioners, and current staff - is one of the most knowledgeable and engaged that I have experienced over the years.
With that in mind, it seems like the perfect opportunity to publicly announce for the first time a few of the current initiatives at the Commission, some more substantive than others:
- On the regulatory side, we have decided to undertake the following in the first quarter of this year:
- First, to respond to industry concerns regarding Securities and Exchange Act Rule 15a-6, we plan to amend the so-called "chaperone" requirement to clarify that all foreign broker-dealers must be returned to their home jurisdiction by 10 p.m. We will also ask for comment on whether to provide an exception to the chaperone requirement if both the foreign entity and the U.S. investor are consenting adults under applicable law.
- Second, we will address the uproar surrounding Investment Advisers Act Section 206(3) - the principal trading prohibition - by adding a prohibition on agency trading as well. We feel that this will provide the needed balance and regulatory certainty that the industry is looking for.
- Third, we have finally decided how to resolve all of the tricky corporate governance questions before us. We will apply lessons learned from the reality TV show Survivor. Anyone can get onto the proxy - but the question is -- can you stay on the proxy?
- Turning to internal budget matters, we plan to announce the following in order to bolster our bottom line in the wake of the embarrassing deficit that Chairman Cox inherited in 2005:
- First, following the lead of the airlines, we will institute a "preferred visitor program" in our lobby security system. The program will be marketed primarily to SEC practitioners and recidivists. Members of this new program will pay an annual fee, and in return will be provided with permanent picture IDs. Members will also be able to use a special "express" line through our metal detectors.
- Also, we will be selling the naming rights to our building. Right now, we have healthy bidding going on between NASDAQ and the New York Stock Exchange (NYSE), and we expect that some "dark pools" will come out of the shadows to bid! We will also be selling seat licenses for the open meeting room. And, we have added an additional 500 seats and replaced the press box with luxury skyboxes! Get them while they're hot!
Of course, I am just joking - none of these initiatives is real. You see - I have been critical of rulemaking or policymaking "by speech" for so long now that I decided to give it a try. I wanted to understand what the attraction is, and I must admit -- it feels great!! But, to stay true to myself and to avoid running afoul of Presidential Executive Order 12866, I will make this a one-time affair.
I suppose that this would be an appropriate time to say that the views that I express here today are my own and do not necessarily reflect those of the Securities and Exchange Commission or of my fellow Commissioners.
When I spoke at this event last year, I remarked about the positive changes at the SEC following the arrival of Chairman Cox. I am happy to report that the trend is continuing, and that is due in large part to the extraordinarily talented and energetic Senior Staff that the Chairman has attracted to the agency, including General Counsel Brian Cartwright and his deputies Andy Vollmer and Alex Cohen; Division Directors Erik Sirri, Buddy Donohue, and John White; Chief Accountant Con Hewitt and his deputies Zoe-Vonna Palmrose and James Kroeker; Executive Director Diego Ruiz; and Chief Financial Officer Kristine Chadwick.
But in order for the SEC to continue improving, we must identify, analyze, and learn from our mistakes. All too often, our mistakes stem from faulty internal processes or an "end justifies the means" approach to decision-making. As I said here last year when discussing enforcement issues, the Commission must be constantly mindful of improvements that can be made. I think it is appropriate this year to take a broader look at the problems that can arise.
With respect to rulemaking, we learned in 2006 that other branches of government will not be shy in holding the SEC accountable. The D.C. Circuit, for example, last year overturned two Commission rulemakings, both of which proponents billed as "centerpieces" of our regulatory program. The first of these was the rule that would effectively have mandated that mutual fund boards have independent chairmen and no less than seventy-five percent independent directors. It took two decisions from the Court of Appeals to make the Commission realize that the process for adopting that rule was deeply flawed and violated the Administrative Procedure Act (APA). And it appears that the Court and many of us did not know the entirety of the flawed process. We recently discovered and published for comment two Office of Economic Analysis studies that the rule's proponents had not made public in the original rulemaking, probably because the studies did not help their position. This latest revelation is further evidence of a fundamental disrespect for the letter and spirit of the APA throughout that rulemaking process.
The Court also vacated the rule requiring hedge fund advisors to register with the Commission. In a well-reasoned opinion, the Court found that the approach embodied in the rule was an awkward and inadequately justified departure from the Commission's prior approach and that of the underlying statute.
Interestingly, in 2006 the SEC was also taken to task for the rules it neglected to make. In the Credit Rating Agency Relief Act and the Financial Services Regulatory Relief Act, Congress mandated that we issue carefully-prescribed rules within very specific timelines. These were very public rebukes by Congress, and they were driven by a perception that the SEC was intransigent for years when called upon to provide clarity in the areas of credit rating agency oversight, bank broker-dealer activities, and broker-dealer and advisory activities by thrifts.
Now, I can assure you that the Commission has taken these rebukes to heart. In fact, Chairman Cox publicly turned the two judicial reprimands into an opportunity to look with fresh eyes at our rulemaking processes to see how we can improve them. He directed our General Counsel to carry out a "top-to-bottom review" of our process for assessing the economic ramifications of our rulemakings. With respect to the congressional actions, they certainly fall into the "lessons learned" file. Milton Friedman once said that "Governments never learn. Only people learn." I would not dare challenge Milton, but I am certainly hopeful that the lessons meted out to us in the Credit Rating Agency and Regulatory Relief Acts will be remembered by enough people at the SEC that we do not face a similar situation in the future.
The SEC was recently admonished in other, less publicized -- but no less important - proceedings. In one, the Siebel case, we learned that even well-intentioned, properly promulgated rules, as well as the misapplication of such rules, can lead to public embarrassment. In Siebel case, the District Court dismissed the SEC's claim that the company and two of its senior officers violated Regulation FD. In so finding, the court noted that our approach placed an "unreasonable burden" on a company's personnel to become "linguistic experts, or otherwise live in fear of violating Regulation FD should the words they use later be interpreted by the SEC as connoting even the slightest variance from the company's public statements." We took off our amateur psychologist hats, put away our microscopes, and went home rather than appealing that decision.
Exactly one year after the Siebel case case, in the Heartland Advisors case in the Eastern District of Wisconsin, the court dismissed an SEC insider trading case on summary judgment, finding that there was no evidence to support the claim. Among other more pointed comments, the judge compared a suit by the SEC to a criminal prosecution in that the SEC is accusing a private individual of wrongdoing. The judge also reminded the SEC that its objective should never be to win a case, but to ensure that justice is done.
I do not believe that these cases are a sign of a systemic problem at the SEC. Indeed, we have an excellent track record of bringing solid, well-founded cases. I stress here that these cases are lessons for the Commission and its Senior Staff, who ultimately bear the responsibility to decide which cases are strong enough to take to trial. These cases should not be construed as criticisms of our Staff - their job is to make the case in court once the Commission and the Senior Staff have decided to go forward. In fact, it is incumbent on the Commission and the Senior Staff to acknowledge the decisional and managerial errors that we make and to shield the rest of the Staff from misplaced second-guessing.
Regardless of rank or title, however, all of us at the SEC need to be constantly cognizant of the due process rights of those we investigate. Indeed, the Commission many decades ago was so concerned about this issue that our Canon of Ethics contains the following, timeless warning: "The power to investigate carries with it the power to defame and destroy."
When discussing the rights and privileges of those we investigate, few topics generate as much debate as the waiver of the attorney-client privilege. Twenty five years ago, a unanimous Supreme Court in the Upjohn case articulated the importance of the attorney-client privilege and work product doctrine, which serve "to encourage full and frank communication between attorneys and their clients and thereby promote broader public interests in the observance of law and administration of justice." Unfortunately, we are experiencing now what has been dubbed the "culture of waiver." Although the bulk of the attention has been directed towards the policies and practices of the Department of Justice (DOJ), the SEC has been no stranger to the invective.
It is easy to understand why government investigators want respondents to waive. A waiver might help speed up the investigation and free up resources. This is particularly true if a corporation has hired a law firm to conduct an internal investigation. From a public policy perspective, however, this shortcut has serious flaws. Due process protections do not attach in internal investigations, and the findings could be misleading or wrong. And, there is no privilege or protection that will ensure continued employment, so employees feel compelled to talk to interviewers. Also, invariably as people learn that internal investigations will not ultimately be privileged, the effectiveness and usefulness of internal investigations will be undermined. This also pertains to requests or demands by our examiners of broker-dealers and investment advisors for waivers. In those cases, the Staff is acting without direct supervision of the Commission. I personally would take a very critical view of such requests and would seriously question their appropriateness.
My oath of office and the rules of the SEC require me as a Commissioner to guard against any infringement of the constitutional rights, privileges, or immunities of those who are subject to the jurisdiction of the SEC. With that in mind, I have been carefully following the privilege waiver debate. As you know, DOJ recently revised its policies for determining whether to indict a corporation. In its latest policy statement, DOJ elevated the approvals needed before a privilege waiver can be requested. Now, a Presidential Appointee - the U.S. Attorney -- must approve each request, and certain requests must be elevated further - to the Deputy Attorney General. Yet, proving how deep the sentiment runs, many are still unhappy with the latest DOJ policy. In fact, the revised policy did not deter the reintroduction of a bill in the Senate from the 109th Congress that would prohibit DOJ and the SEC from even asking for a waiver.
I have no reason to believe that there are systemic abuses of respondents' due process rights by our excellent Staff. Nonetheless, I believe it is important for the Commission periodically to take a hard look at the policies and procedures that govern the Staff's daily activities. We need to be checking constantly to ensure that all of our practices are consistent with our own high standards.
Indeed, this week the President of the American Bar Association (ABA) sent a letter urging us to reconsider our policies and procedures regarding waiver.1 Specifically, the ABA has proposed revisions to our so-called "Seaboard" report, which most of you probably know is a Commission statement of the factors we will consider when determining whether to afford cooperation credit.2 The Seaboard report was a ground-breaking effort by former Chairman Harvey Pitt to clarify standards and to provide transparency. The Seaboard report was careful to not include waiver of privilege or work product protection as a factor to be considered when evaluating cooperation. However, waiver creeps in through a footnote tied to factor 11, which deals with the production of internal investigation materials to the Staff. The relevant part of the footnote reads as follows:
[T]he Commission does not view a company's waiver of a privilege as an end in itself, but only as a means (where necessary) to provide relevant and sometimes critical information to the Commission staff.
In the six years since Seaboard was issued, this footnote has become the backdoor through which credit has been afforded for waiver. I strongly believe that the Commission should not view a company's waiver of privilege as a factor that will afford cooperation credit, and I personally refuse to consider for "credit" purposes whether a respondent has waived when I decide how to vote on a recommendation. The ABA shares this view and in its letter suggests, among other things, that we delete the offending footnote. We will carefully consider this suggestion and others that we may receive.
In the same vein, it is time for the Commission to review our internal policies and procedures governing Staff requests - whether enforcement or examination - for protected information. We need to consider whether we ought to follow the latest example set by the Department of Justice. Such formal requests are rarely made, but when they are, shouldn't we ensure that they have been vetted at the highest levels? And, we need to ensure that all waiver requests - however subtle - are subject to these policies and procedures.
Ultimately, everything that the Commission accomplishes turns on the quality of its Staff. Before I close, I would like to recognize the contributions of one specific Staffer. I am sad to report that Joe Cella, Chief of the Office of Market Surveillance, has recently decided to retire after 30 outstanding years of service. I mentioned Joe last year for receiving an FBI commendation for his efforts in fighting micro-cap fraud. He, of course, was also the nerve center in the Commission's efforts to detect insider trading, and he spearheaded our efforts in the wake of September 11 to look for possible trading in airline securities by terrorists.
Press releases announcing the types of cases that Joe worked so hard on cannot highlight stunning disgorgement or penalty figures the way that press releases for some of our other cases do, and so these cases do not always get the public attention that they deserve. I am sure that our micro-cap fraud program and trading surveillance unit will continue in their excellence after Joe leaves, but he will be sorely missed. Joe, congratulations on a successful tenure at the Commission, and I wish you all the best in your future endeavors. Just, please, do not turn to the dark side and open a boiler room -- I am sure you know all the tricks now and we'd have a heck of a time tracking you down!
As for the rest of you, thank you for attention to these and other matters affecting the SEC. I wish you Godspeed until this time next year.
Endnotes
http://www.sec.gov/news/speech/2007/spch020907psa.htm
