Speech by SEC Commissioner:
Remarks at "The SEC Speaks in 2010"
Commissioner Elisse B. Walter
U.S. Securities and Exchange Commission
February 5, 2010
Thank you very much, Buddy, for that kind introduction. It is a great honor to serve as an SEC Commissioner and a great pleasure to appear before you again this year. I will try to be brief, as I know that I am all that stands between you and your much needed lunch break. Of course, before I begin, I must remind you that my remarks today represent my own views, and not necessarily those of the Commission, my fellow Commissioners, or members of the staff.1
When I returned to the Commission in the summer of 2008, we were in the midst of a severe financial crisis, and the after-effects of that crisis are still reverberating today. Less than a year after my arrival, Mary Schapiro came on board as our new chairman. Chairman Schapiro recently celebrated the first anniversary of her second tour of duty at the Commission. Under her leadership, the SEC has worked vigorously to implement important new reforms, enhance its operations and procedures, and update its rules, policies, and practices in a wide range of areas. From taking immediate action to assure that the agency is more nimble in its enforcement efforts to proposing and adopting rules that respond to the needs of investors and the marketplace and fill regulatory gaps identified by the events of the recent past, our Chairman has served us extraordinarily well.
Over the course of this conference, you should expect to hear details from the staff about some of these exciting new initiatives. Therefore, rather than summarize them for you, I would instead like to speak today about a more general topic, but one that is nonetheless extremely important to the Commission's ongoing efforts to reach optimal answers to the difficult questions before it and to reform the way it does business. I am speaking about Commission process. By "process," I mean the Commission's rulemaking activities and other internal practices by which the Commission carries out its mission to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation.
I. The Commission Rulemaking Process
Now, let me start with our rulemaking — a rulemaking process that I believe makes for better, more robust rules. I focus on the process because there are many who would like us — as a Commission — to just snap our fingers and adopt a series of rules to address every regulatory problem that has come to light during the financial crisis. However, it doesn't work that way. And, there are others who wrongly believe that, when we improve upon a rule after it's been proposed, it must be due to some pressure — pressure from Congress, or industry, or significant investor groups, or whoever fits this critique at the moment.
Although I have lived and worked inside the Beltway for sufficiently long that I should not be surprised, my first reaction to all of this is simply disbelief — because I have seen firsthand how tirelessly, diligently, and effectively the staff has been working to appropriately address the problems brought to light by the financial crisis. My next reaction is that perhaps there is a misperception or misunderstanding regarding how the Commission operates, and that it might be beneficial to spend a little time speaking about the Commission's rulemaking process. So here I am today.
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In our rulemaking process, the Commission is legally obligated, under the Administrative Procedures Act (or "APA"), to be transparent. The primary purposes of the APA are clear:
To require agencies to keep the public informed of their organization, procedures, and rules;
To provide for public participation in the rulemaking process;
To establish uniform standards for the conduct of formal rulemaking and adjudication; and
To define the scope of judicial review.
In reality, the rulemaking process in a larger sense — including all the informal and formal steps through which the Commission ultimately arrives at a final decision — actually begins before a rule is proposed and ends long after it is adopted; in fact, one could say that it never ends. It is a process that at times seems cumbersome, but I believe in it strongly because it works.
The ongoing dialogue of the Commission and its staff with the public, and also those persons and entities that we regulate, is invaluable to the Commission in reaching an informed decision. Prior to proposing a new rule or regulation, Commission staff typically meets with representatives from industry and the public to discuss possible approaches and receive constructive feedback. As a former staff member myself, I cannot tell you how many times outside parties pointed out something significant about a particular topic, from their vantage points as investors or securities markets professionals, that we had not had the opportunity to observe firsthand. At times, the Commission issues a concept release — as it did recently with respect to equity markets structure — to seek written comments from a broad range of persons, even prior to issuing a rule proposal.
Once the Commission proposes a rule, it then formally seeks public comment. Indeed, the Commission nearly always asks for comments not only on the specific rule it has chosen to propose, but also on a wide range of potential changes it might make. This enables the Commission to obtain effective feedback from all interested parties. All comments received are recorded and displayed on the SEC's website, which provides a record of each rule from proposal to adoption, including meetings with commenters on the proposed rule. This transparency is significant because it enables commenters to react to, and counter or expand upon, the views submitted by others. Many take advantage of these opportunities.
Sometimes the Commission will extend or reopen a comment period in order to solicit additional advice and guidance on a more tailored approach or simply to give interested parties more time to comment, which can be particularly important when the rulemaking is complex. For example, we reopened the comment period for the proposal to implement price test restrictions on short sales to seek specific additional feedback regarding an alternative price test and to ensure that the public had a full opportunity to comment given the wide range of opinions on this issue. In response to the proposing and reopening releases, the Commission received over 4,300 unique comment letters. We also recently reopened the comment period for proxy access to allow interested persons to comment on additional data and related analyses that were included in the public comment file. For this particular proposal, we received letters from 535 commenters during the first comment period, and 46 commenters during the second comment period. Each and every comment letter we receive is read and reviewed, often multiple times and by many SEC personnel.
Like other agencies, the Commission often makes changes to the proposed rule when it reaches the adoption stage in response to the comments received. This is not because the Commission caves into anyone's demands. Instead, it is because the rulemaking process works. In fact, for every comment suggesting one approach, there are many others suggesting another. We solicit input, and we receive it. We make changes when we are convinced by the factual record and sound legal and policy arguments that have been advanced that the proposed rule needs to be modified. The release accompanying the adopted rule discusses the comments and explains why changes were made. And the Commission's decision to adopt a rule is reviewable in a U.S. Court of Appeals.
Of course, the Commission does not agree with all comments when it adopts a final rule. Nor will it do what is "right" in everyone's judgment. Reasonable minds differ on what is the "right" result. To quote former Commissioner Jack Whitney II, speaking in 1964:
The Commission is a human institution, and therefore its batting average is going to be less than perfect. It is not possible to expect that its conclusions will satisfy all of the people — industry, Congress, public investors, the press, or indeed, each member of the Commission itself.2
Rather, the Commission must assess and weigh the conflicting arguments and opinions urged upon it and arrive at its own decision. But since we have sought and received the conscientious and informative comment and advice of many people through our informal and formal processes, "the Commission [will not]," as Commissioner Whitney went on to say, "be deceived or misled and does understand, as much as possible, the consequences of its decisions and the facts on which they rest."3 Even if the Commission and commenters have differing opinions on the final result, using a transparent, deliberative, and thoughtful process that actively involves the public and informs policy making, in the end, promotes credibility and investor confidence in our rules.
I also agree with Commissioner Whitney that the need for this kind of assistance from the public is not going to diminish, and, in fact, will be critical — especially in this new year as the Commission engages in numerous regulatory actions involving a whole host of complex, difficult, and controversial topics.
So, having walked you through Rulemaking 101 when you've already aced that course, I encourage all of you to speak up about the pressing issues you are presently facing and to provide the Commission with constructive feedback on our initiatives. And I'd really appreciate it if you would go beyond simply submitting a letter that says "bad idea," or even "good idea." We are not taking a poll. We would really like to understand your reasoning, obtain the data or other empirical evidence underlying your view, and hear what you think would be a good idea, or at least a better idea than the one we have formulated. We welcome your ideas, your concerns, and your guidance. Our initiatives and projects will not be as well executed without your active participation.
I would just add one other observation about the current pace of the Commission's major rulemakings as compared to previous years. Over the last five years, the agency's time from proposal to adoption of a rule was on average about 10 ½ months. Today, we are operating at a much faster pace than that for every rule (both the ones we have already adopted and the ones that are yet to be adopted). Specifically, under Chairman Schapiro's tenure, it is presently taking the agency on average approximately six months to move from rule proposal to adoption. This reflects the Commission's renewed energy and its commitment to take aggressive and timely action that will restore investor trust and confidence, not only in the securities markets, but also in the agency. We understand the need to act quickly in response to the financial crisis, but getting it right is even more critical. In my view, we are doing both.
II. Streamlining the Enforcement Process
Turning to the Enforcement process about which you've just heard a lot, I believe strongly that this is an area where the Schapiro Commission has demonstrated its ability to move swiftly when necessary and appropriate — such as where we act to halt ongoing fraud or preserve the assets of wrongdoers.
The current financial crisis has reminded all of us that vigorous enforcement of existing laws and regulations is not only vital to the fair and proper functioning of financial markets, but also necessary for investor confidence. At last year's conference, Chairman Schapiro drew applause when she announced the end of the Commission's two-year "penalty pilot" experiment, which had required the Enforcement staff to obtain a special set of approvals from the Commission in cases involving civil monetary penalties for public companies, and changed the approval process for formal orders of investigation so that they were issued more quickly through the approval of a single Commissioner. Since that time, there have been further internal improvements to reinvigorate the SEC's enforcement program.
Significantly, as you are aware, and as others have explained in more detail during the previous panel, the Commission has recently implemented changes aimed at enhancing the strength and speed of enforcement. As our Enforcement Division Director, Robert Khuzami, recently noted, these changes constitute the Division's biggest reorganization in at least three decades. I agree with Rob that they will make the agency more knowledgeable, better coordinated, and more efficient in addressing the causes of the financial crisis.
These initiatives include the creation of five new national investigative groups that will be dedicated to high-priority areas of enforcement: Asset Management, Market Abuse, Structured and New Products, Foreign Corrupt Practices Act, and Municipal Securities. Through each of these units, the staff will dedicate resources and expertise to these highly specialized and complex areas to quickly combat fraud and other misconduct. I think that Rob has chosen these areas well. And, as some of you know, I have a special interest in and concerns about the municipal securities markets, and I am particularly pleased that one unit has that focus. That market is enormous and operates with increasing participation by retail investors; yet, there has been relatively little public attention given to it in recent days.
The Enforcement staff has also redeployed some of its most talented staff from management to conducting complex investigations. This will increase the resources dedicated to our investigative work and decrease time to complete investigations.
Further, the Division's processes have been streamlined so that it can quickly take action, when appropriate. These changes include delegating to senior officers of the Division the power to issue formal orders of investigation and to approve routine case decisions, and condensing the length (but not the substance) of internal memoranda recommending actions that require Commission approval, so that they are more focused and easier to review.
Finally, as part of its overall effort to revise the way the SEC handles the large volume of complaints and tips it receives, the Division created a new Office of Market Intelligence, which will collect, analyze, refer, and monitor tips and complaints to identify wrongdoing using internally developed risk criteria and the expertise of other Divisions and the specialized units.
All of the initiatives to streamline Enforcement's processes and procedures will result in cases being acted upon more quickly and provide Enforcement staff with a greater capacity to focus on developing and urgent cases.
III. Streamlining the SRO Rule Filing Process
The last example of process I would like to mention is the important recent initiative to streamline the SRO rule filing process.
Self-regulation, subject to Commission oversight, is a basic premise of the Securities Exchange Act of 1934 ("Exchange Act"). When Congress amended the Exchange Act in 1975 to provide the SEC with comprehensive oversight authority over all SRO rules, the Senate Committee on Banking, Housing and Urban Affairs put it well when it stated that:
[S]elf-regulation would be continued [under this amendment], but the SEC would expect to play a much larger role than it has in the past to ensure that there is no gap between self-regulatory performance and regulatory need and, when appropriate, to provide leadership for the development of a more coherent and rational regulatory structure to correspond to and to police effectively the new national market system
[This Act] is designed to accomplish this, not only by clarifying regulatory responsibility at all levels but also by assuring that the self-regulatory organizations follow effective and fair procedures, that their activities are not anticompetitive, and that the Commission's oversight powers are ample and its responsibility to correct self-regulatory lapses is unmistakable. The intent of the bill is not to diminish the role of self-regulation but to strengthen the total regulatory fabric.4
In other words, it is not only important to let SROs carry out their regulatory duties, but also vital for the Commission to thoroughly oversee them.
The SROs are subject to a range of requirements under the Exchange Act, including the requirement in Section 19(b) and Rule 19b-4 to file their proposed rule changes with the Commission. Commission review and the public comment process are intended, among other things, to help ensure that SROs carry out the purposes of the Exchange Act.
In July 2008, the Commission amended its internal rules of procedure to streamline the rule change process for SROs under Section 19(b). In addition to shortening the time after filing in which the Commission has to publish notice of a proposed SRO rule change, the Commission also issued new interpretive guidance indicating that a broader range of proposed rule changes may properly be filed for immediate effectiveness. Today, over two-thirds of SRO rule filings are immediately effective upon filing and do not require Commission approval.
In general, I think these measures have improved the Commission's performance. Since the recent streamlining initiative became effective, on average, the numbers show that the Division of Trading and Markets has published rule filings for notice and comment within 5 ½ business days from the date of filing; that the Division has approved filings within 35 calendar days; and that less than two percent of the filings have been held beyond 15 business days for additional review. Also, legislation recently passed in the House, as part of the financial reform bill, would streamline the SRO rule-filing process even more.
All the talk of streamlining, however, must not obscure the important relationship between the Commission and the SROs, which has become even more critical when you consider that within the last ten years, stock exchanges have gone from not-for-profit, member-owned entities to demutualized for-profit public companies. This has increased the need for these SROs to compete, both domestically and internationally. While this makes it even more important for the SRO rulemaking process to be as expeditious as possible, it also makes government oversight even more crucial than before because it opens the possibility for self-regulatory powers to be used for anti-competitive purposes. For example, when a market participant believes rulemaking unfairly denies it access to the use of an SRO, it can appeal such denial to the Commission. Such action has been important, in the past, to rectify anti-competitive actions by SROs.
This delicate balance between the need for speedy SRO rule filings and Commission oversight is particularly apparent in the review of new products. Some SROs have a commercial incentive to introduce new products as quickly as possible. At the same time, the Commission has an obligation to consider the protection of investors when it approves a rule filing. We should not forget that complex structured products and financial derivatives, whose risks even sophisticated investors sometimes had trouble understanding, contributed in no small way to the financial crisis. I believe that, while acting expeditiously, it is critical for the Commission to thoughtfully consider the interests of the investors it serves before it permits new derivative products to be traded on an exchange and offered freely to retail investors.
Finally, I want to close by speaking for a moment about the SEC staff. The past couple of years have been difficult, but a time for renewed commitment at the agency. Despite the headlines and the criticisms and all the internal changes, the staff has diligently served the investing public and remained steadfast to our mission. They have worked extremely hard to implement unprecedented, comprehensive reform, and I remain humbled and honored to be standing among the staff once again. Thank you for everything you do for this agency. And thank all of you for being here today.