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U.S. Securities and Exchange Commission

Speech by SEC Commissioner:
"Increasing Accountability and Transparency to Investors"


Commissioner Luis A. Aguilar

U.S. Securities and Exchange Commission

Remarks at "The SEC Speaks in 2009"
Washington, D.C.
February 6, 2009

Good afternoon everyone. Thank you for the warm reception and thank you Buddy Donohue for the kind introduction.

At a time when discussions in the boardroom and at the kitchen table are dominated by conversations questioning the strength of the American financial system and its regulatory structure, there is no question that the financial services industry is in crisis. This crisis requires that the leaders of industry and government quickly identify challenges, articulate an action plan, and implement the response. I believe that the driving principle for any regulatory reform is to re-establish accountability and transparency to investors.

It is my privilege to speak to you today to offer my thoughts on our way forward. It is true that the words I am about to speak are my own, and do not necessarily reflect the views of the Commission or my fellow Commissioners or the Commission staff.

Before I discuss the way forward, I will begin with a few words about who I am. My experiences are different from my fellow Commissioners and help to shape my perspectives and approaches.


As Buddy mentioned, my professional career consists of work in the securities industry from many vantage points. My approach to issues is shaped by the fact that I have worked in government, in private practice, and in corporate America. My roles, over the last 30 years, have included the following:

  • SEC staff attorney;
  • Outside corporate and securities counsel;
  • General counsel of a global investment manager;
  • President of a broker-dealer; and
  • International business executive

Personal History

The skills and knowledge gained during my professional career also rest on a foundation of values that began to develop in my childhood. These values are hard work, integrity, and self-reliance. I was born in Cuba and first came to the United States as a refugee when I was six years old. I was re-united with my parents when I was 10 years old.

Between my public school education and the ability to pay my way through school by taking on jobs ranging from being a "stock boy" in a yarn store to loading baggage and cargo into airplanes at the Miami airport, this country gave me the chance to become the person standing before you today.

I am humbled to now have the opportunity to give back by serving as a SEC Commissioner. My years as a practitioner in the securities industry have allowed me to see the practical effect of regulation and regulatory reform. This knowledge is informed by my background which has given me a profound respect for how hard people work for their money, and the need to be vigilant in protecting their investments and retirement assets.

Reinvigorating the Financial Regulatory Structure to Increase Transparency and Public Accountability to the Investor

There is no debate. Our financial system is in a crisis and investors are feeling the pain. However, this crisis presents a tremendous opportunity, or a mandate, for us to better the system. We must remember why the capital markets exist, which is to allow all Americans to participate in the ownership of our economy, and to provide efficient capital to anyone with a good idea and an entrepreneurial spirit, so they have a chance to make that idea a reality.

We must act now to re-establish transparency and accountability to investors by looking to Congress and the SEC for immediate action. First, I will quickly highlight the Congressional action required to close regulatory loopholes and adequately fund the SEC. Second, I will discuss internal shifts in policy and practice the SEC should undertake in order to:

  • Empower Enforcement and Examination staff; and

  • Implement proposals to enhance the voice of investors in shaping future policies.

Third, I will discuss what the SEC can do to enhance investors' ability to demand transparency and accountability.

I. Congressional Action

A. Congressional action is required to close regulatory loopholes

First, Congress needs to reconnect the Commission's powers to its mission to protect investors, provide for efficient markets, and facilitate capital formation. There are enormous areas of the securities markets that lack appropriate regulation, including over-the-counter derivatives, hedge funds, and municipal securities.

In a recent speech, I outlined specific steps Congress should take in each of these areas, and I will not repeat those proposals today. I just urge Congress to act promptly.

B. Congressional Action Required to Adequately Fund the SEC

Second, I recently also proposed that Congress take action to ensure that the SEC is independently funded and, thus, adequately resourced to advance its mission going forward.

Budget Allocation

To underscore that proposal, I think it is important for everyone to fully appreciate the dramatic programmatic consequences resulting from the SEC's budget having been held to flat or declining dollars for the past four years. This has had the untoward effect of limiting the ability to hire and retain adequate staff, limiting technological development, and limiting the ability to initiate new programs and investigations.

The SEC's entire budget allocation is a disproportionately small amount in comparison to the agency's mission.

With often less than $900 million in hand and approximately 3,500 staff, the SEC is tasked with regulating tens of thousands of entities including public companies, investment advisers, broker-dealers, transfer agents, exchanges, credit rating agencies, and several SROs.

By contrast, it has been reported that the FDIC has a staff of 5,000 to oversee 8,300 FDIC insured banks with a budget in the range from $1.2 to $2.2 billion dollars. Moreover, the FDIC is independently funded and thus, has control over its own budget and long term projects.

To ensure that the SEC is able to advance its mission, it is imperative that the SEC have a dedicated stream of funding that is adequate to meet the challenges faced by our capital markets today and the guaranteed funding to be able to anticipate the challenges of the future.

C. Congress Should Refrain from Diminishing Current Investor Protections

Beyond funding matters, as we enter a period of increased momentum for legislative action, one area to watch closely is the regulation of broker-dealers who provide investment advisory services. I would not want to diminish any current investor protections, particularly in this time of crisis. It is a fundamental and longstanding principle recognized by Congress, the Supreme Court, the Commission, and the industry, that an investment adviser is a fiduciary and as such must avoid conflicts of interests with clients and as a fiduciary is prohibited from overreaching or taking unfair advantage of a client's trust. For those of us who have spent time in the investment adviser industry, we view the fiduciary relationship as the foundation of the adviser/client relationship.

Recently, there has been a great deal of discourse about "harmonizing" the regulations of broker-dealer versus investment advisers. I think the better way to frame the issue is to ask "how should broker-dealers who provide investment advice be regulated." Historically, broker-dealers that simply effected transactions as directed by their clients did not provide investment advice and would not have been considered investment advisers. Today, as broker-dealers increasingly provide advice to their clients, we should consider whether the higher standards and fiduciary duties of advisers should also be applied to these broker-dealers.

II. SEC Shifts in Policy and Practice

In addition to Congressional action to strengthen the SEC, the SEC must take its own actions to ensure greater transparency and accountability to investors. In a recent speech to the North American Securities Administrators Association, I made several suggestions for immediate actions including eliminating the Commission's penalty pilot program and I applaud Chairman Shapiro for taking this step. Given my time constraints, I am just going to highlight a few recommendations today to:

  • Empower Exam and Enforcement staff; and

  • Implement proposals to enhance the voice of investors in shaping future Commission policies.

A. Empower Exam and Enforcement Staff

One immediate need is to build our exam and enforcement staffs back to full capacity. We will also need to be prepared for our future needs. Once Congress acts in the areas of over-the-counter derivatives and hedge fund advisers, it will be necessary to expand our exam staff by adding individuals with specialized expertise so that the Commission can quickly deploy staff to work in these areas to quickly collect information, identify issues, and assess risks.

We also need to better empower our staff. I commend Chairman Shapiro for her focus on expediting the formal order process. One proposal to empower our staff that I would like to highlight is my recommendation for the Commission to delegate the power to issue an order of private investigation to the Enforcement Division Director and Heads of the Regional Offices in circumstances that do not present extraordinary issues. This would streamline the process and I have asked Chairman Schapiro to consider such an action.

B. Retail investor participation in Commission business

Before I turn to what we can do to increase investor power to demand transparency and accountability, I have two final recommendations to make regarding what the SEC can do to enhance public accountability.

First, as we seek to improve our regulatory process and adopt better rules, I think it is important to provide retail investors with an active voice in our policymaking. In a recent speech to members of the Investment Company Institute, I called for the establishment of an advisory committee consisting primarily of retail investors to provide advice and guidance to the SEC. I strongly believe direct retail investor input would be helpful toward restoring the confidence of retail investors in the SEC. It'll send a powerful message to investors that the SEC is their advocate.

Second, I recently called for an SEC staff study of the consequences on regulation and the capital markets of the relative decrease in direct investor ownership of securities, and relative increase in direct institutional ownership. Put another way, investors increasingly own operating companies, the engines of our economy, only indirectly through institutions, and I think we should look carefully at what this means. These trends in ownership and market participation raise very important questions for financial regulation, including how these trends affect shareholder voting, and capital raising techniques.

III. Enhancing investors' ability to demand transparency and accountability

What I have just discussed are a number of steps that the SEC and Congress can take to restore accountability to the capital markets and financial services. But the government cannot, and should not, do this alone. The private sector has a vital role.

When it comes to the private sector, the Commission often is focused primarily on disclosure requirements. That approach is incomplete. Even if quality information is available to investors, it often is difficult to digest and, even if the information is digested, investors don't always have a lot of meaningful options to act on the information, other than selling their shares.

Selling shares is often not optimum or desirable and I believe that the Commission should facilitate "corporate governance improvements" so that investors can have a greater say in the way their companies are run.

A. Improved corporate governance through shareholder proxy access

There are a few things that the Commission can do to improve corporate governance, but my top recommendation is swift and bold action to give shareholders access to their company's proxy statement. The legal and practical reasons for doing so are overwhelmingly compelling.

As a legal matter, shareholders have the right to appoint the directors, and have the right to nominate directors and make proposals in shareholder meetings. These rights should not be frustrated by the Commission's proxy rules.

Practically speaking, shareholders can do a lot to align company management's incentives with the public interest. We just have to give them the tools. As former Commissioner Harvey Goldschmid rightly noted, "Shareholders, under our free-market system, not only supply capital, but have the right economic instincts. If they understand the system, they want corporate efficiency, honesty, productivity, and profitability. In a macro sense, these shareholder interests are consistent with the nation's economic needs."

Proxy access has been an issue before the Commission at various times since the 1940s. In just the past few years, the Commission has proposed three rules, and held four roundtables related to the proxy process and proxy access. We have collected a great body of valuable information about the topic and can act quickly. Now is the time, with an energized new chairman and a spirit throughout the country for renewed accountability, to finally take seriously the modern realities of proxy voting, and give meaning to the fundamental shareholder right to appoint directors.

In turning our focus to proxy access, all past proposals should be carefully scrutinized to make sure they do not frustrate effective shareholder access to improve corporate governance. For example, as to the 5% ownership condition in the Commission's 2007 proposed rule, I find compelling the objections that claim this threshold is too high to permit effective exercise of shareholder power, especially as to large cap companies.

I think there is evidence that there are serious problems with the corporate governance in this country. The incredible growth in relative CEO pay in modern times strikes me as a bright red flag. The ability of management to extract excessive compensation to the detriment of shareholders seems to be a clear result of weak corporate governance.

We cannot afford not to take advantage of the prior work of the Commission on the subject of proxy access. Weak corporate governance extracts a toll on our markets in terms of efficiency and integrity, and can be self-reinforcing. Giving shareholders a more effective voice is a strong tool for improving corporate governance.

B. Improve shareholder participation under e-Proxy

A second way the SEC should act to enhance accountability to investors is addressing the empirical problems in the implementation of e-proxy. As many of you are aware, the number of shareholders who voted through companies using the notice and access model dropped dramatically. Retail investor voting, in particular, plummeted. Some reports indicated less than 5 percent of individual investors voted at meetings held by companies that used e-proxy in late 2007 and early 2008. Other statistics compared the level of participation by the same investors before and after the notice and access model was put in place, and found decreases of over 30% for large investors, and over 60% for smaller investors. For these investors, access clearly didn't equal delivery.

I recognize that there are significant cost savings to issuers who use e-proxy, but we should make sure that cost savings come without compromising effectiveness and adversely impacting an investor's exercise of their rights. That seems to have happened here, and we need to fix e-Proxy or scrap it.

I know that the Division of Corporation Finance is aware of this situation. I strongly suggest we move quickly to reconsider e-Proxy, improving it if possible, repealing it if necessary, but with the goal of restoring investor participation.

In closing, I would like to again express my thanks to all of you. The proposals I have outlined today, and in my prior public statements, are all aimed at enhancing transparency and accountability to investors, and are important reforms. But it is the individuals such as yourselves who will be the key to any success we achieve in implementation.

I also want to acknowledge my colleagues at the SEC. As you know, this year the SEC celebrates its 75th Anniversary. I believe deeply that the historical independence and strength of the SEC has been an important factor in the growth of our capital markets and confidence of investors. In this time of market turmoil, the SEC has a more critical role to play than ever before. The several thousand men and women who devote themselves to the protection of investors, markets, and capital formation are among this nation's finest. I am proud to work at their side and will work tirelessly to make sure they have the tools to do their jobs.

President Obama, in his inaugural address, highlighted the difficult times ahead to rebuild our country, and noted that [QUOTE] "our economy is badly weakened, a consequence of greed and irresponsibility on the part of some." [CLOSE QUOTE] No one thinks that seeking private gain at the expense of others will magically end. However, by empowering the SEC and empowering investors to create more transparency and greater accountability, we can once again bring market reality closer to the ideals we all hold.

Thank you.


Modified: 02/06/2009