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U.S. Securities and Exchange Commission

Statement by SEC Chairman:
"Message from the Chairman" in SECís 2008 Performance and Accountability Report


Chairman Christopher Cox

U.S. Securities and Exchange Commission

November 14, 2008

Dear Investor,

The mortgage meltdown and ensuing global credit crisis during the past year have confronted our markets with unprecedented challenges. The government´s response to the financial turmoil has been equally unprecedented: the Federal Reserve and the Department of the Treasury have together committed over one trillion dollars in taxpayer funds to support insurance companies, banks, thrifts, investment banks, and mortgage giants Fannie Mae and Freddie Mac.

The Emergency Economic Stabilization Act (EESA), signed into law in October 2008, gives the Chairman of the SEC a formal oversight role with respect to the Troubled Asset Relief Plan administered by the Department of the Treasury. In addition, the Housing and Economic Recovery Act of 2008 gives the SEC Chairman similar oversight and advisory responsibilities with respect to the conservatorship of Fannie Mae and Freddie Mac supervised by the Federal Housing Finance Agency. These duties come in addition to the new responsibilities the SEC is already discharging as the statutory regulator of credit rating agencies, and the mandate that the EESA has given the agency to report by January 1, 2009, on the results of a congressionally-mandated study of fair value accounting.

Response to the Credit Crisis

The agency has taken a number of other actions in recent months to address significant issues that have arisen in the credit crisis. When the auction rate securities market froze early in 2008, the Enforcement Division immediately commenced investigations of potential securities law violations by the largest sellers of these instruments. Preliminary settlements were reached in principle with six of the largest firms, which would return more than $50 billion to injured investors and make these settlements, when concluded, by far the largest in the agency´s history. (While settlements in principle were reached during FY 2008, the amounts were not included in the enforcement statistics for this report because they were not finalized by the close of the fiscal year on September 30.)

As of the close of FY 2008, the Commission had over 50 pending subprime-related investigations involving lenders, investment banks, credit rating agencies, insurers, and broker-dealers. During the past year the SEC charged the managers of two Bear Stearns hedge funds in connection with last year´s collapse of those funds. The Commission returned $356 million to investors harmed when Fannie Mae issued false and misleading financial statements. And the Division of Enforcement is currently in the midst of a nationwide investigation of potential fraud and manipulation of securities in some of the nation´s largest financial institutions through abusive short selling and the intentional spreading of false information.

As part of this aggressive law enforcement investigation into potential manipulation during the subprime crisis, the Commission approved orders requiring hedge funds, broker-dealers and institutional investors to file statements under oath regarding trading and market activity in the securities of financial firms. The orders cover not only equities but also credit default swaps. To assist in analyzing this information, the SEC´s Office of Information Technology is working with the Enforcement Division to create a common database of trading information, audit trail data, and credit default swaps clearing data. Our Office of Economic Analysis is also supporting this effort by helping to analyze the data across markets for possible manipulative patterns in both equity securities and derivatives.

During FY 2008, the Enforcement Division also brought the highest number of insider trading cases in the agency´s history. In addition, the SEC brought a record-high number of enforcement actions against market manipulation in 2008, including a precedent-setting case against a Wall Street short seller for spreading false rumors. Overall for the fiscal year just ended, the SEC completed the highest number of enforcement investigations in any year to date, by far. We also initiated the second-highest number of enforcement actions in agency history.

Not just in 2008, but in each of the last two years, the Commission set the record for the highest number of corporate penalty cases in the agency´s history. And for the second year in a row, the SEC returned more than $1 billion to harmed investors using our Fair Funds authority under the Sarbanes-Oxley Act. To support this record level of law enforcement, the SEC now devotes more than one-third of the entire agency staff to our enforcement program. That is a higher percentage of the SEC´s total staff than at any time in the past 20 years. The SEC´s internal allocation of funds for enforcement in FY 2008 was the highest in the agency´s history. In this past year, we also increased the number of enforcement personnel by 4 percent.

Other significant actions in connection with the credit crisis included proposed rulemakings using our new authority under the Credit Rating Agency Reform Act to address weaknesses and conflicts of interest in the ratings process and to develop strong additional new requirements for credit rating agencies. In July, we released the findings from extensive examinations of the three largest credit rating agencies: Moody´s, Standard & Poor´s, and Fitch. Our examinations included hundreds of thousands of pages of the rating agencies´ internal records and emails relating to their ratings of subprime residential mortgage-backed securities and collateralized debt obligations. SEC staff also analyzed the ratings history of thousands of structured finance products.

The examinations uncovered serious shortcomings at these firms, including a lack of adequate disclosure to investors and the public, a lack of policies and procedures to manage the rating process, and insufficient attention to conflicts of interest. In response to the findings, the Commission proposed sweeping new rules to regulate the internal policies and business practices of credit rating agencies. The reforms addressed conflicts of interest and required new disclosures designed to increase the transparency, accountability, and competition in the credit rating industry.

In the last year, the Office of Compliance Inspections and Examination also conducted examinations of the effectiveness of broker-dealers´ and investment advisers´ controls on preventing the spread of false information—a particularly salient concern in the midst of the ongoing market turmoil.

The Office of the Chief Accountant and the Division of Corporation Finance acted on multiple occasions during FY 2008 to address questions regarding disclosure of fair value measurements of hard-to-value assets in inactive markets, consolidation of off-balance sheet entities, and the accounting treatment of bank support for money market funds. Staff from the SEC and the Financial Accounting Standards Board also worked together to assist preparers and auditors by providing clarifications of existing fair value measurement guidance in the current environment.

When money market funds faced serious pressure in the latter part of FY 2008, the Division of Investment Management worked closely with investors, fund managements, and independent directors of money market funds to ensure the protection of shareholders, including in particular investors in the Reserve Primary Fund, which suspended redemptions in late FY 2008. The division also worked closely with the Department of the Treasury in support of its Temporary Guarantee Program for Money Market Funds.

The Division of Trading and Markets worked to protect customers of Lehman Brothers´ broker-dealer, investment advisory, and investment management subsidiaries following the firm´s bankruptcy during the last month of the fiscal year. The division also coordinated numerous market regulation issues including the imposition of new restrictions and penalties for naked short selling. The division prepared recommendations during the height of the market turmoil in the final quarter of FY 2008, when the Commission used its emergency authority to temporarily restrict short selling. These temporary actions were taken in close consultation with other regulators around the world. The Commission also required disclosures to the SEC of significant short positions.

In coordination with the CFTC and the Federal Reserve, the SEC in FY 2008 worked with the financial services industry to develop one or more central counterparties, clearance and settlement systems, and trading platforms for credit default swaps, as an operational step toward bringing additional transparency to this $55 trillion unregulated market. We also entered into separate Memoranda of Understanding with the Federal Reserve and with the Commodity Futures Trading Commission to make sure that key federal financial regulators share information more efficiently and coordinate regulatory activities in important areas of common interest.

Future Regulatory Reform

On several occasions during FY 2008, I reported to the Congress on serious shortcomings in the regulatory structure that were exposed by the collapse of the mortgage market and the ensuing credit crisis. These include the fact that there was no statutory regulator for investment bank holding companies. The holding company in the case of Lehman Brothers, for example, consisted of more than 200 significant subsidiaries—including OTC derivatives businesses, trust companies, mortgage companies, offshore banks, and reinsurance companies. The SEC was not the statutory regulator for 193 of them.

I told the Congress that when SEC regulation is backed up with statutory authority, it is strong and successful—and that voluntary regulation of businesses the SEC does not regulate by statute does not work. For this reason, reforms are needed to address other regulatory gaps as well. There is no public disclosure nor any legal requirement for the $55 trillion market in credit default swaps to report to the SEC or any other agency. Congress needs to pass legislation that would not only make credit default swaps more transparent but also give regulators the power to rein in fraudulent or manipulative trading practices and help everyone better assess the risks involved.

Also in need of additional transparency are troubled Fannie Mae and Freddie Mac, both of which are now under government control. Although recent legislation required Fannie and Freddie to comply with some of the SEC´s rules, it did not subject them to the full disclosure requirements that other public companies must follow. As Congress determines how Fannie and Freddie will emerge from government control, this is an omission that lawmakers must correct.

Still other regulatory gaps persist, including a statutory divide between the supervision of broker-dealers under the Securities Exchange Act of 1934 and that of investment advisers under the Investment Advisers Act of 1940. One of the agency´s significant efforts to reconcile the supervision of these overlapping financial services was struck down by the courts last year. Congress has an important opportunity to modernize the more than half-century old legislation in this area in any comprehensive overhaul of the regulatory system, and the SEC stands ready to provide its expertise.

The multi-trillion dollar municipal securities market falls in yet another regulatory black hole. It entails many of the same risks, and is subject to the same abuses, as other parts of the capital markets. As the economic slowdown makes it increasingly difficult for many states and localities to meet their obligations, and as many municipalities continue to use interest rate swaps in ways that expose them to risk that the financial institution on the other side of the contract may fail, investors need to know more about what they own. In FY 2008, investors were facing what would have been the largest municipal bankruptcy in American history in Jefferson County, Alabama, while the multi-billion dollar fraud in the City of San Diego, in which the SEC charged five former city employees this past year, injured both investors and taxpayers alike.

Over the last two years, I have repeatedly asked Congress to give the SEC the authority to bring municipal finance disclosure at least up to par with corporate disclosure by repealing the Tower Amendment. Using the Commission´s existing authorities, in FY 2008 the Commission proposed improving municipal disclosure by requiring that secondary market disclosure information be provided, in an electronic format, to a single repository. In addition, the Commission is considering rule changes by the Municipal Securities Rulemaking Board to expand its Electronic Municipal Market Access system, or EMMA, to accommodate secondary market disclosure information. Beyond the significant issues raised by the ongoing market turmoil, and the several actions the SEC took during the past year to address them, the Commission made several important decisions in areas of ongoing interest to investors during FY 2008.

Improved Disclosure

During the past year, the SEC unveiled the successor to the agency´s 1980s-era EDGAR database. The new system, called IDEA (Interactive Data Electronic Applications), will give investors faster and easier access to key financial information about public companies and mutual funds. IDEA will at first supplement and then eventually replace the EDGAR system, which will become an archive of SEC filings made prior to the new era of financial reporting in interactive data format. Companies and mutual funds could begin providing financial information using interactive data as early as next year.

The decision to replace EDGAR marks the SEC´s transition from collecting government-prescribed forms and documents to making the information itself freely available to investors in a user-friendly format they can readily use. Instead of sifting through one form at a time in EDGAR and then re-keying the information to analyze it, investors will be able to utilize interactive data to instantly search and collate information to generate reports and analysis from thousands of companies and forms through IDEA.

During FY 2008 the SEC also launched the 21st Century Disclosure Initiative, a wide-ranging internal effort to fundamentally rethink public company disclosure. The Initiative is examining the basic purposes of disclosure from the perspectives of investors and markets, with a view to creating a comprehensive high-level plan for overhauling the current forms-based disclosure system. The Initiative is focused on using new technology to gather information from registrants in new ways that can generate more dynamic, accessible, and easier to use disclosure for investors. These same improvements would provide the Commission with tools to better analyze risk, be more productive with existing human resources, and better fulfill its mission of protecting investors, maintaining orderly markets, and facilitating the formation of capital.

This past fiscal year also saw final Commission action removing impediments for investors and companies to set up electronic shareholder forums, in which an unprecedented level of shareholder involvement and interaction might take place in the future. The Commission also gave investors access to searchable proxy statements on the Internet and required the electronic filing of Form D as well as electronic filing of applications under the Investment Company Act, and of other regulatory information.

After overseeing vast improvements to the audit standard for internal control over financial reporting, the Commission scheduled the final phase-in for smaller public companies to comply with the audit requirements of the Sarbanes-Oxley Act for fiscal years ending after December 15, 2009.

International Coordination

The Commission´s international work was more significant in FY 2008 than ever before. Over the last year, the SEC made 556 requests of foreign regulators for assistance with SEC investigations—more than one a day on average, and far higher than any previous year. Many of these investigations are linked to possible wrongdoing in the subprime area. At the same time, the SEC cooperated with 454 requests from foreign regulators for enforcement assistance. These international enforcement collaborations were made possible in substantial part by several bilateral and multilateral arrangements that the SEC has entered into in recent years, including agreements I executed with the College of Euronext Regulators; the German Federal Financial Supervisory Authority; the United Kingdom´s Financial Services Authority; the UK Financial Reporting Council; and securities regulators in the European Union, India, Japan, China, Korea, the United Kingdom, France, Austria, Canada, Australia, Portugal, the Netherlands, and Israel.

Our international relationships were especially important this past year as the SEC worked closely with our counterparts overseas to deal with the fallout from the subprime crisis. As Chairman of the Technical Committee of the International Organization of Securities Commissions, and Co-Chair of its Subprime Task Force and of its Credit Rating Agency Task Force, I coordinated the SEC´s regulatory responses with regulators from every major world market. This work provided essential analysis of how the domestic securitization of U.S. mortgages, and the rules governing U.S.-based rating agencies such as Moody´s, Standard & Poor´s, and Fitch, affected risk management by banks and institutional investors half a world away.

During FY 2008 the Commission also voted unanimously to propose a Roadmap that could lead to the mandatory use of International Financial Reporting Standards (IFRS) by U.S. issuers beginning in 2014 if the Commission believes it to be in the public interest and consistent with the protection of investors.

The United States´ participation in the development of global accounting standards goes back many years. In 2002, Section 108(d) of the Sarbanes-Oxley Act of 2002 required the SEC to conduct a study and report to Congress on the adoption of a principles-based accounting system. The report noted, among many findings, that global accounting standardization would produce a myriad of benefits, including greater comparability for investors across firms and industries globally; more efficient allocation of scarce capital among investment alternatives; and lower costs of capital, since global accounting standards would eliminate the duplicative cost of preparing two sets of financial statements, and make it easier for companies to access capital in more markets.

Since that report was completed in 2003, over 100 countries, including all of Europe, have elected to require or permit IFRS reporting. Approximately 85 countries require IFRS reporting for all domestic, listed companies. The market capitalization of exchanges within those 85 countries requiring IFRS represented approximately 35 percent of global market capitalization in FY 2008, as compared to 28 percent for U.S. exchanges. The share of global market capitalization represented by IFRS markets is expected to grow still larger with the inclusion of the additional countries that have decided to adopt IFRS by 2011. Given that today two-thirds of U.S. investors own securities of foreign companies, the SEC has an abiding interest in determining what role IFRS should play in U.S. capital markets.


This annual report, in addition to describing the SEC´s many accomplishments and performance results, also presents the Commission´s financial picture for 2008, beginning on page 57. Our auditors, the U.S. Government Accountability Office, affirm that the SEC´s financial statements are presented fairly in all material respects in conformity with U.S. generally accepted accounting principles (GAAP), and that the SEC had effective internal control over financial reporting and compliance with certain laws and regulations. Furthermore, we are pleased to confirm that the financial and performance data we present in this report are fundamentally complete, reliable, and conform to Office of Management and Budget guidance.

Throughout the 75-year history of the SEC, its core objectives have remained steady. Today our mission—to protect investors, maintain fair and orderly markets, and facilitate capital formation—is more important than ever before. As described in this annual report, the thousands of dedicated professionals at the SEC continue to work tirelessly towards these ends in behalf of the American people. Attracting and retaining the top-flight professionals that make the SEC what it is remains a top priority—which is why we are so proud that our agency has been rated in the top three best places to work in the federal government, our highest ranking ever. The men and women of the SEC are committed to doing everything they can, every day, to protect your investment in America´s future.

Christopher Cox



Modified: 10/21/2008