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U.S. Securities and Exchange Commission

Speech by SEC Chairman:
"Looking Ahead and Moving Forward"


Chairman Mary L. Schapiro

U.S. Securities and Exchange Commission

SEC Speaks
Washington, D.C.
February 5, 2010

Thank you for that kind introduction. I would like to ask all of the current SEC staff in the audience to stand so we can recognize your service and thank you for your extraordinary contributions over the past year.

Last February, when I appeared at SEC Speaks, I had been Chairman for a full 10 days. I could barely find the Office of the Chief Accountant. And, I wasn't even sure which door would get me in our closed Commission hearing room.

So, needless to say, I wasn't in much of a position to comment credibly and specifically about where the agency had been, even if I knew where we should be headed. But it was clear to me, that things had certainly changed since I had served as a Commissioner in the late 80s and early 90s — most particularly, the landscape around us.

One year ago, we were just emerging from an economic crisis that threatened our financial system. The markets were still trying to gain a firm footing. Bernard Madoff was fast becoming a household name. Confidence in the institutions of government generally and the SEC specifically, by all accounts, was badly shaken. The spotlight was squarely upon us. And, Americans weren't sure the SEC was up to the job.

Yet, having served as Commissioner 20 years earlier, I knew what the agency was capable of.

I knew the caliber of the professionals in our ranks. And, I knew that we could absolutely adapt to the changing environment, reform our ways and restore investor confidence in the process.

And, I knew that a vigilant, intelligent, responsive SEC, squarely focused on its mission, was essential to our economy's success.

So we got to work.

We brought in new leaders across the agency. We streamlined our procedures. We sought to reform the ways we operate. We began to revamp our systems. We set out to create more effective regulation. We fully engaged in the debate on regulatory reform. And, we initiated one of the most significant investor-focused rulemaking agendas in decades.

And through this process, I witnessed firsthand the dedication and expertise that I had long believed embodied this agency.

Over the year, I saw the agency not only undergo some very significant change, but willingly embrace that change. It wasn't easy, but the times we faced were difficult and the actions we took were needed.

That said — we're not done by any stretch of the imagination. We may have turned a corner, but there's still quite a long distance to go. So, in the year to come, we will continue to move forward with both internal reforms and rules that will better protect investors and strengthen our markets and the Commission itself.

But, to appreciate what we have yet to do, it is important to understand what we already have begun.



Let me start with the significant internal reforms.

In the past year, as you know, we restructured the Enforcement Division and streamlined its procedures. No longer do attorneys need to get full Commission approval to initiate an investigation or enter into settlement talks with corporate defendants.

These were important measures, not just for the administrative hurdles they removed, but for the sense of confidence that they instilled in our team.

Additionally, we removed a layer of middle management and redeployed dozens of superbly qualified attorneys back to the front lines. We created specialized units to concentrate expertise and better connect the dots. And, more recently we added a host of measures to encourage corporate insiders to come forward with evidence of wrongdoing.

While statistics are not the best way to measure success, the numbers are nonetheless telling. In our first 12 months, compared to the previous year, our output increased significantly. In that time:

  • We sought more than twice as many temporary restraining orders and asset freezes (restraining orders: 79 compared to 36 — a 119 percent increase) (asset freezes: 89 compared to 42 — a 112 percent increase).

  • We issued well over two times as many formal orders of investigation (558 compared to 245 — a 128 percent increase).

  • We obtained about $540 million more in disgorgement orders and more than twice as much in penalty orders (disgorgement orders: about $1.73 billion compared to about $1.19 billion — a 45 percent increase) (penalty orders: about $410 million compared to about $193 million — a 112 percent increase).

  • And, we filed nearly 10 percent more actions overall, including nearly twice as many involving Ponzi-like schemes. (Overall actions: 725 compared to 665 — a 9 percent increase) (Ponzi-specific: about 60 compared to about 35 — a 71 percent increase).

But what these numbers don't show is the complexity and range of the actions we've brought — actions that reflect our desire to bring even the difficult cases — mortgage-related cases like American Home, Countrywide and New Century, to name a few.

And, it includes pay-to-play cases, accounting fraud, and one of the largest insider trading cases we've ever seen. And just yesterday, we brought a case against State Street Bank for misleading investors about subprime mortgage investments.

Yet this only scratches the surface. The pipeline is full and more cases will be coming — including more actions growing out of the financial crisis.

I expect that the reforms we have undertaken will bear fruit in the year to come.


As with the Enforcement Division, the past year saw reform within the inspections and examinations office in response to ever-changing Wall Street and the Madoff fraud.

There, we began to improve our inspections program and place greater reliance on risk assessment. For instance, we began requiring examiners to routinely verify the existence of client assets. And, we started to more rigorously review firms before sending our examiners in. This way we could use our limited resources wisely and target those firms with the greatest risks.

Looking ahead, we plan to move forward with more reforms under the leadership of our new OCIE director, Carlo DiFlorio. Carlo arrived just this past month, and already he is undertaking a top-to-bottom assessment, engaging in a serious dialogue with the staff, and identifying ways to improve our program even further.

Internal Systems

In the past year as well, we began revamping our technology and focusing on the way we handle the massive number of tips and complaints we receive.

It's a time consuming process but one that will pay dividends. In a matter of weeks, we will have fully centralized our system so that complaints we receive in Chicago are downloaded into the same database as complaints received in Miami.

And we will have a new set of guidelines and protocols that will govern how everyone should handle the tips they receive.

Looking ahead, we will work on further upgrading our technology so that the system we install will be able to not only store the complaint, but also analyze the complaints and connect the dots that might not be readily apparent.


Inside the SEC we have also been spending a great deal of time promoting a culture of collaboration — stressing the importance of sharing information and sharing ideas.

To that end, I established several cross-functional teams to focus on issues such as target date funds and developing a consolidated audit trail. And, we even have begun integrating our broker-dealer and investment adviser examinations.

As importantly, we have established a new Division, the first in 37 years. The Division of Risk, Strategy, and Financial Innovation is helping to bore through the silos that for too long have compartmentalized, and thereby limited the impact of our institutional expertise.

It offers a reservoir of talent from a wide range of disciplines that supports initiatives underway throughout the agency.

Already, as you may know, this Division has attracted renowned experts in the economic, legal, and public policy implications of the financial innovations being crafted on Wall Street.

But more important than helping us keep pace with Wall Street, this Division has been working behind the scenes when fresh, interdisciplinary insights are vital to good decision-making. It has parachuted into complex legislative matters demanding immediate specialized expertise.

It has worked with other Divisions and Offices on a wide variety of matters such as credit derivatives-based insider trading litigation, securitization, proxy access rule-making, and life settlements.

This new Division already is proving crucial to the mission of the agency, and will continue to do so.


Of course, the changes we have initiated have not just been internal. The past year has witnessed one of the most significant rule-making agendas in years — an agenda that shows we are willing to address challenging issues and make the tough choices.

The year ahead will be no different.


In the area of disclosure, we have focused on proxy enhancement where we took significant steps to improve the disclosures that shareholders receive from the companies they own. We adopted rules that would reveal more meaningful information about the leadership structure of boards, the qualifications of board nominees and the relationship between a company's overall compensation policies and risk.

We have also proposed rule amendments to improve the quality and timeliness of disclosure in municipal markets. Our rules currently prohibit a broker, dealer or municipal securities dealer from purchasing or selling municipal securities unless they reasonably believe that the issuer has agreed to make timely disclosure of certain financial information and material events.

Operating within the confines of our limited jurisdiction, we proposed new rules that would enhance the information available to municipal securities investors by providing for disclosure within 10 days, of such important information as preliminary, proposed and final determinations of taxability by the IRS, as well as tender offers, bankruptcies, receiverships and similar proceedings.

Another area we are focused on is target date funds. These are funds marketed in retirement plans that contain a "target" retirement date in their name. As the target date approaches, these funds are designed to become more conservatively invested.

However, not all target date funds are created the same, and some with very near-term target dates lost substantial amounts of investors' money in 2008.

In the year ahead, we are going to confront the issue of the potential for target date fund names to confuse investors, or lull them into a false sense of security. I have asked the staff to prepare a rule proposal to provide additional information to investors when a fund includes a date in its name.

In addition, I have asked the staff to prepare rule recommendations regarding the marketing of these funds. The fact is that some advertisements perpetuate a "set it and forget it" mentality — which is concerning. Given the growing prevalence of these funds as a retirement tools, this is an initiative that will have a real impact on everyday Americans.

Protecting Investors

In the past year as well, we took significant steps to protect investors who use the services of a financial professionals.

Custody Controls: For instance, we adopted a rule that will provide greater protections to investors who entrust their assets to investment advisers. Now, money managers who hold or control their clients' assets will be subject to a surprise inspection to verify assets — and custodians who are affiliated with an investment adviser will be subject to an annual custody controls review.

Both the surprise inspection and the custody controls review will be performed by an independent, third-party accountant. In addition, we will consider custody enhancements for broker-dealers in the coming year.

Point of Sale: Looking ahead, I believe we must continue to demand more from the financial professionals upon whom investors rely.

That is why I intend to focus on point of sale disclosure. Retail investors should be provided clear, simple, meaningful disclosure at the time they are making an investment decision — disclosure that includes comprehensible and comparable information about the securities products and services being offered — as well as the compensation and conflicts of the person making the recommendation.

So, in the coming year, we will be focused on how we can get helpful, relevant information to investors at a time when it is most meaningful — that is, when they are making an investment decision, at the point of sale — not after.

In the past, there has been significant industry resistance to this seemingly level-headed concept. I am hopeful, however, that a focus on the needs of retail investors will prevail.

12(b)-1 Fees: Directly related to the concept of point of sale, is the issue of 12b-1 fees. These are fees that are automatically deducted from mutual funds to compensate securities professionals for sales and services.

The problem is that investors may have no idea these fees are being deducted, what services they are paying for, or who they are ultimately compensating. That's why I believe we need to critically rethink how 12b-1 fees are used and whether they continue to be appropriate.

This is no small matter considering these fees amounted to more than $13 billion in 2008. Of course, in 1980 when these fees were first permitted, they may have made sense — but after 30 years of growth and change in the mutual fund market, it is past the time to reassess their need and their effectiveness.

So, I have asked the staff for a recommendation on 12b-1 fees for Commission consideration in 2010.


NRSROs: Also, in the year ahead, I hope we can adopt a strong set of rules that would create an even more robust regulatory framework for credit rating agencies — a framework that includes further measures designed to improve the quality of ratings by requiring greater disclosure, fostering competition, helping to address conflicts of interest, shedding light on rating shopping, and promoting accountability.

Proxy Access: And, I am hopeful that we will adopt rules to facilitate the effective exercise of the rights of shareholders to nominate directors to the Boards of the companies they own. This so-called proxy access rule is designed to increase shareholders' ability to hold boards accountable.

Money Market Funds: More recently, we adopted rules that will make money market funds more resilient by strengthening their credit quality, liquidity and maturity standards. Our rules also establish a new on-line disclosure regime for money market funds — including disclosure of a fund's "shadow" or mark-to-market NAV — and our rules take steps to limit the disruption caused by any fund "breaking the buck," or falling below the standard $1 net asset value.

Importantly, our money market fund reforms are not yet done. Looking ahead, we will be considering yet more measures to address money market fund risk, especially the risk of a run on money market funds.

In particular, I have directed our staff to examine the merits of a floating, mark-to-market NAV for money market funds, rather than the stable $1 price.

Other ideas under consideration include mandatory redemptions-in-kind for large redemptions (such as by institutional investors); "real time" disclosure of "shadow" NAV; a private liquidity facility to provide liquidity to money market funds in times of stress; and a possible "two-tiered" system of money market funds, with a stable NAV only for money market funds subject to greater risk-limiting conditions and possible liquidity facility requirements


Finally, in the past year, we launched a robust and vigorous review of market structure and began seeking public comment on a wide range of issues to help facilitate the Commission's review. Considering the extent of change in the equity market, it is necessary for us to determine how those changes are affecting investors.

That's why, under the leadership of our new Trading and Markets Director, Robert Cook, we'll be focusing on such issues as high frequency trading, co-locating trading terminals, and markets that do not publicly display price quotations.

But, we are not going to wait to map out the entire landscape before weeding out some inequities that are apparent in the market. So, looking ahead:

  • We will be voting on proposed rules concerning flash orders.

  • We will be voting on proposed rules that would generally require an investors' interest in a stock be made publicly available, instead of just to a select group operating with a dark pool.

  • We will be voting on proposed rules that would effectively prohibit broker-dealers from providing their customers with unfiltered access to exchanges or alternative trading systems — and that would assure broker-dealers implement appropriate risk controls.

Audit Trail: But, again we're not stopping there. Very shortly after I arrived last year, staff sent me a very thoughtful proposed concept and powerful argument for, a consolidated audit trail to facilitate the work of investigators. So, early last summer, I set up a task force to further develop proposals for an inter-market audit trail to improve market surveillance.

Currently, the self regulatory organizations have their own separate audit trail systems to track information relating to orders in their respective markets. But, it is difficult to connect the dots and ferret out wrongdoing as trading activity frequently occurs across various markets — and each market is only able to readily see trading activity conducted in their own market.

It is like trying to put together a jigsaw puzzle, but only being able to see a small part of the final picture. To see the complete picture, with today's fast, electronic and interconnected markets, there is a heightened need for regulators to have access to a robust and effective consolidated order and transaction tracking system.

Looking ahead, I anticipate this spring that the Commission will consider staff recommendations to have the SROs develop and implement a consolidated audit trail that captures customer and order event information across markets.

Short Sales: Finally, in the past year, we adopted rules that seek to reduce the potential for abusive "naked" short selling in the securities market. These rules have significantly reduced the number of times short sellers failed to deliver securities. Looking ahead, in the coming weeks, we will consider proposals to restrict the practice of short selling.


As you can tell, over the past year, we haven't sat idly by. We haven't had that luxury. To help restore confidence we needed to act, and so we have.

And, if the last year is any indication, we will be equally busy in the months to come because there is much that remains to be done.

We are a relatively small agency, but we are charged with protecting millions of investors every day. The scope of our responsibility is broad and we all feel the great weight of that responsibility every single day.

I am fortunate to work beside four Commissioners who appreciate the significance of that responsibility. I am grateful for the leadership throughout the agency who embrace that mission. And, I am amazed by the expertise of the staff and their determination to get the job done.

We have achieved quite a great deal in the past year. And, I don't see us letting up anytime soon.

Thank you.


Modified: 02/05/2010