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U.S. Securities and Exchange Commission

Speech by SEC Commissioner:
Remarks at 42nd Annual Rocky Mountain Securities Conference


Commissioner Elisse B. Walter

U.S. Securities and Exchange Commission

Marriott City Center
Denver, Colorado
May 7, 2010


Thank you very much, Don, for that wonderful introduction. I very much appreciate the invitation and your efforts, and those of George Curtis and others, to make this conference timely and valuable. I know that to George it must feel good-mile high, even-to be back home in Denver after spending so much time inside the Beltway in Washington. He may not miss us, but I must say that we certainly miss him and his astute counsel. Also, it is great to see Jay [Brown] again, and I look forward to the discussion today that he will moderate.

From a look at the conference agenda, the planning committee has done a great job in organizing a forum to discuss the important issues in the securities universe, and I was pleased to receive the invitation to speak about the Commission and the future of the markets and investor protection.

The timing of this conference is quite fortuitous. Although it's hard for me to believe, in just a few weeks I will be halfway through my tenure as an SEC Commissioner. For that reason, I have been reflecting even more than usual on the historic events that have occurred during my relatively short time back at the SEC and our collective response to them, as well as the other actions that we have taken. Of course, this has also led me to reflect upon where we are today, and upon the direction in which I would like us to go in the future.

Before I get too far along though, please let me remind you that I speak only for myself today and not my colleagues at the Commission.1

Where We Have Been

It should not surprise you when I say that late 2008, and a lot of 2009 for that matter, was a roller coaster ride for the Commission and the financial services industry overall-in fact, for the global economy. Some of you know that the ride for me personally actually started a bit earlier. Soon after I was sworn in as a Commissioner in July 2008, I learned that I would need to fight a personal battle with cancer. With all of this happening at once, I couldn't help but wonder whether Abraham Lincoln was right when he said "The best thing about the future is that it comes only one day at a time." In fact, to me, each and every day seemed to be filled with more than a lifetime of experiences and challenges. Yet, I was absolutely determined to carry on with the important professional tasks entrusted to us at the Commission-to protect our nation's investors and ensure the integrity of the markets.

To some extent I have found the challenges we have faced at the Commission recently to be at least as much about dealing with the ghosts of the past as about laying the groundwork for the future. When I returned to the Commission, our reputation had been suffering, and morale was low. To my surprise, I also found that the culture had changed-to be much less of an environment where staff at all levels felt free to share and debate ideas.

We have made significant strides in the right direction since that time, however. Chairman Schapiro has done so much to bring needed change and restore the agency's name, and I feel proud to have been a part of that. Some of the changes have related to procedure, systems, and personnel. We have enhanced the collaborative spirit among our staff and sought to break down the silos dividing them. A good example of this is our new Division of Risk, Strategy, and Financial Innovation, which looks across jurisdictional lines to focus on new products, trading practices, and risks.

In Risk Fin, as well as throughout the Commission, we are recruiting people with the right talents and experience to help us with industry developments. This is quite important. People with industry experience bring us important insights and can add real value to the regulatory dialogue. I believe that having a good cycle of the right people moving from the private sector to government, and vice-versa, enhances our ability to regulate intelligently and is quite healthy both for our staff and for the entities we regulate. We are also improving the education and training of our staff generally to keep abreast of the rapid and innovative developments in the financial services sector.

We have sought to reinvigorate our staff in other ways, perhaps most comprehensively in the Division of Enforcement. This started with the hire of Rob Khuzami, a former federal prosecutor who also spent time in the industry and has been instrumental in bringing change to the Commission. Rob brought in Lorin Reisner, another former prosecutor, who we are privileged to have with us at this conference.

The Enforcement Division, like all others, listens and does its best to implement the wishes of its client, the Commission. The composition and outlook of the client, however, changes over time. The current Commission has sent the Division a clear message that we want tough prosecution-and we want it yesterday. Rob and Lorin are moving forward with that mandate.

We've emphasized the message by removing strictures on the Enforcement staff, such as the requirement that they come to us each and every time they want authority to issue subpoenas in an investigation, and another that they work within the artificial confines of the, thankfully now-defunct, penalties pilot program.

And, there are other ways in which enforcement at the SEC is becoming more vigorous. Under Rob's leadership, the Division is undergoing a significant structural reform that will maximize our resources and enable Division staff to act more swiftly and decisively when securities law violations occur.

Although it has been said, and I agree, that there are "lies, damn lies, and statistics," our numbers do indicate that these efforts are bearing fruit. In Chairman Schapiro's first year in office, compared to the previous year, we sought nearly twice the number of emergency actions to halt ongoing frauds, issued more than twice the number of formal orders, and obtained nearly twice the number of penalty orders and millions more in disgorgement. We have brought more cases-including cases addressing subprime mortgage and other areas implicated by the financial crisis.

These changes should make clear to all listening-and those who thought they didn't have to listen and we would just go away-that the Enforcement Division has sharpened its teeth and will use them. As you would no doubt agree, however, it is much better to stop a fraud from happening in the first place than to address it through an Enforcement action.

In that vein, we have sought to strengthen our examination program in a variety of ways. Our new OCIE director, Carlo di Florio, is currently undertaking a comprehensive assessment of his program, with task forces focused on strategy, structure, people, process, and technology. He is also committed to recruiting industry specialists with new skill sets in trading, products, and risk management, among other disciplines. Finally, Carlo is focusing on making the exam program more risk-based through effective surveillance, technology, and data strategies to better identify exam targets and areas of focus.

To maximize our effectiveness as a regulator, we have to improve our use of technology, both in OCIE and throughout the agency. This is an area on which I focused when I returned to the Commission, and I cannot say often enough that technology is critical. We have been criticized for being behind the curve in our use of technology, and I certainly understand that. But, it is important to realize that our allocated budget in this area over time has been eclipsed by expenditures in the private sector. This is one of the many reasons why Congress needs to permit the Commission to self fund-but more about that a bit later.

Despite our budgetary constraints in this area, Chairman Schapiro has been successful in obtaining resources to undertake certain new IT initiatives and projects. Among the most prominent and timely is the overhaul of our tips, complaints, and referrals system.

In addition to the procedural, system, and personnel-related changes that we have made during Chairman Schapiro's tenure, the Commission has had an aggressive rulemaking agenda focused on restoring investor confidence and enhancing the integrity of our markets. I recently compiled a list of all of the rules we have proposed and adopted during my time as a Commissioner, and even the length of that list, no less its substantive breadth and depth, was eye-opening. I'd like to share my thoughts on some of the actions that have been most important to me. One disclaimer, though: They are not in any particular order; I tried to rank them but abandoned that effort as futile.

First, I must mention our efforts to strengthen the relationship between shareholders and public companies through our rules and proposals that relate to corporate governance. We've taken a number of specific steps in this area, including our proxy access proposals, proxy solicitation and disclosure enhancements, and also approval of changes to NYSE Rule 452.

Last May, we proposed a comprehensive set of rule amendments to facilitate the rights of shareholders to nominate and elect directors on corporate boards. I continue to believe that our proposed dual-pronged approach, which would facilitate both direct access to the company's proxy and shareholder proposals, is a good way for us to unfetter a shareholder's nomination and voting rights in director elections. It would help ensure that shareholders have a real say in determining who will oversee management of the companies that they own.

I understand that there is a lot of speculation about what we will do with respect to proxy access, and some impatience as we get there. I won't comment extensively today on where we are in the process, but I will say that we are working diligently to grapple with the complex issues and thoughtful comments we received. It is critical that we take the time we need to produce the best final product. Excellence should triumph over speed.

A related area where we have already taken final action relates to proxy disclosure enhancements. Last December, we took action to provide critical upgrades to the information shareholders receive as part of the proxy voting process about directors and director nominees, board leadership, and compensation policies, among other things. I believe that our proxy disclosure enhancements go a long way towards helping shareholders get the information they need to make more informed voting decisions.

These enhancements should also be particularly helpful in light of the elimination of broker voting in uncontested director elections as a result of the amendments to NYSE Rule 452. These amendments are designed to ensure that the ballots cast by retail shareholders reflect their own decisions, not the decisions of their brokers. I remain concerned, however, that shareholders may not understand fully how important these changes in fact are, or how to exercise this significant right of franchise. We all need to make sure that they receive this education, and at the Commission we have made great strides in this regard.2

Also, to further our goal of improved corporate governance, our staff is taking an in-depth look into the proxy voting mechanics (such as over and empty voting) and shareholder communications issues (including the "NOBO/OBO" distinction), a project we refer to as "proxy plumbing." Just as it is in your homes, this "plumbing" is critical to the proper functioning of the proxy process, and I look forward to considering these issues further.

Another area near and dear to my heart where we have taken important steps is accounting. More specifically, we have made progress toward moving to one global set of accounting standards. We recently reaffirmed our commitment to move in that direction, and I think that this was the right thing to do. I have long been concerned that we might be heading towards a reporting system with dual GAAP for U.S. public companies; I am pleased that the staff work plan is not one geared towards "early adoption" for certain U.S. public companies. Even more important is that we move to one set of standards only if it is in the best interests of investors. Critical milestones must be achieved before we move forward, including successful completion of the FASB-IASB convergence project and assuring that standard setting will be independent.3

A third topic of great importance to me is the oversight of credit rating agencies. When the independence and integrity of these types of gatekeepers are compromised, market confidence suffers. We certainly saw this during the recent financial crisis. Commission rulemaking has been designed to improve disclosure about credit ratings history, highlight rating shopping, and address conflicts of interest that arise in this business. Importantly, we also opened the door for what I sincerely hope is a meaningful and constructive dialogue on rating agency liability and accountability.4

We are taking action to improve our access to information that we need to monitor the markets effectively and detect and investigate illegal activity in a timely fashion. Specifically, we recently proposed rules that would provide us with more information about large traders and their trading activities. Another initiative holding tremendous potential that I hope moves forward expeditiously is a consolidated audit trail, which would capture customer and order event information across markets. I believe that a large trader reporting system, along with a consolidated audit trail, would critically enhance our ability to surveil the marketplace and I look forward to public input.

A couple of other initiatives deserve discussion; given the shortness of time, however, I am forced to simply mention them. First, I believe that our recent amendments to the money market fund regulatory system were quite important. Second, late last month we proposed rules that would enhance investor protection in the context of asset-backed securities, adressing an important transparency problem exposed by the recent financial crisis.

Overall, I believe that the Commission has taken a number of actions that are critically important, both to address the financial crisis and to otherwise carry out its important mandate. Arguably more interesting to you, however, is where I think the Commission should go in the future. As Charles F. Kettering, an American inventor and co-founder of the Memorial Sloan-Kettering Cancer Center, once said, "My interest is in the future because I am going to spend the rest of my life there."

Looking Ahead

In wading through the fallout from the financial crisis and undertaking regulatory reform, we all spend a considerable amount of time thinking about the things we don't want to happen again. To take a slightly different approach, there are at least a couple of particular things that I hope come out of the crisis.

The first applies on a macro level to each of us, but especially to those in the financial services industry. The basic message is that no matter who you are, or what role you may play in the financial services world, you must think of yourself as a steward. We at the Commission certainly need to do this-it is our mandate to be the investor's advocate-and we are constantly assessing, adjusting, and augmenting our efforts to do so.

This must be a broader effort, however-much broader. To me, a clear lesson emerging from the financial crisis, and probably from every financial crisis at least in modern history, is that over-emphazing short-term financial gain at the expense of prudent long-term decisions, legal and ethical standards, and just plain common sense, is bad business. Sooner or later-it will catch up with you. Although we probably have always known this, the industry collectively seems to have a poor memory or has repeatedly pushed it to the side in the efforts to maximize short-term profits. We need to change that; I feel strongly that we can't just return to business as usual.

My second message is another plea: As we seek to make the regulatory system better, we should be very careful not to run roughshod over important values and approaches that have worked. The particular point I would like to make here is, although I certainly and strongly support efforts to address systemic risk, they should not override or displace the equally critical role that investor protection plays in policing our securities markets. These goals instead need to be pursued in tandem, enhancing each other.

Of course, in addition to systemic risk, there are other elements of the reform bills now pending before Congress that are important.5 I will not address them today, but I do want to reiterate the importance of self funding for the SEC. Put quite simply, I think Congress must allow this to happen. Unlike most other financial regulators, we remain without a stable funding stream because we depend on yearly appropriations from Congress. In contrast, the regulatory demands on the Commission have grown substantially, with the ratio of staff to the entities we oversee now standing at 1 to 10.

Self funding would allow us to protect the millions of investors more effectively, and would have other important advantages, including improving our ability to plan for and fund critical technology initiatives. It could also enable us to maintain appropriate staffing in light of any increased workload as a result of the new legislation. Thus, I fully support the statement made by Chairman Schapiro last month on the importance of self funding,6 and believe that self funding could have a significant impact on the Commission's effectiveness in the future. Although there is a self funding provision in the Dodd bill, no such provision exists in the House bill. I would very much like to see it be a part of what is ultimately passed by Congress and signed into law.

Overall, while the legislative process is uncertain, it is clear that any regulatory reform initiatives that become law would have a significant impact on the direction the Commission will take in the future. This includes some of the particular substantive areas I'd like to discuss now-areas where I hope we can do more work in the future.

But to start-a bit of personal trivia. As my husband could no doubt attest, in recent years, I've had trouble falling asleep at night. My mind instead tends to continue to grapple with the complex issues of the day. As you might imagine-although it has long been my dream to be a Commissioner, and I'm very glad I am-arriving at the Commission at the time of financial crisis hasn't helped my sleeping habits. For example, one area that often keeps me up at night is the municipal securities market.

With the focus in regulatory reform on the gaps and weaknesses in our existing regulatory framework, I've frankly had a hard time understanding the relative lack of attention paid to this area. The market for municipal securities is enormous and operates with increasing participation by retail investors. Also, as former Chairman Arthur Levitt put it last year, "[t]he opacity of this market is unrivaled and thus presents a significant threat to our economy."

I spoke in depth on this topic last year,7 but I want to reiterate my strongly-held view that this is an area where we need to act. Despite its obvious size and importance, the municipal securities market lacks many of the protections customary in many other sectors of the U.S. capital markets. Investors in municipal securities are, in certain respects, afforded only "second-class treatment" under current law, and that needs to change.

Our principal goal should be to improve the quality and timeliness of information available to those who buy the municipal securities that are critical to state and local funding initiatives. Among other things, while our options seem to be limited absent legislation, we should further leverage our current antifraud authority to improve the quality and timeliness of disclosures. The Commission staff is actively at work on that. I would also like to see us continue our close work with the MSRB to enhance the usefulness of the EMMA system with respect to electronic collection and availability of information in the secondary market. Regulators and the industry also need to work together to provide critically needed pre-trade transparency in this market.

As important as these steps might be, to reform regulation of the municipal securities market fully, I believe that Congressional action is necessary in a number of areas. For example, I believe that changes need to be made to the MSRB, ensuring that it has a majority independent board and reconsidering the current separation of the regulatory and enforcement functions. Congress should also permit us to apply the same registration and disclosure standards to non-governmental conduit borrowers that would apply if they issued their securities directly without using municipal issuers as conduits. Also, the Commission needs regulatory authority over all financial intermediaries involved in the municipal securities market. I will not repeat my prior provocative comments about the Tower Amendment, because so much of what we need to do can be done without changing that aspect of the law.

Moving from the municipal securities markets to the equity markets, rapid advances in technology and a surge in electronic trading have contributed to a transformation of the U.S. equity market structure. We are in the midst of a comprehensive review of this area. Some specific proposals are already outstanding, we are receiving comment letters on a concept release, and we will be holding a roundtable in the near future. And, of course, we are reviewing yesterday's unusual trading activity and working with exchanges to protect investors.

As I mentioned earlier, another area where we have taken recent action to restore investor confidence relates to money market funds. Mom-and-pop investors, like my (fictional) Aunt Millie, and small businesses use these vehicles to invest excess cash temporarily; they often need the money invested in these funds to meet short-term financial obligations, such as purchasing homes, paying for health care, making college tuition payments, and funding payrolls. Investors currently have about $3 trillion invested in money market funds-more than the gross domestic product of France. And for more than three decades, our laws governing money market funds have provided a regulatory foundation-a strong one in my view, which has helped make these funds a popular investment vehicle.

The market turmoil that began in 2008, however, has shown us areas where we can improve. Thus, earlier this year, we adopted amendments to the money market fund regulatory regime to enhance protections to fund investors by making the funds more resilient to certain short-term market risks and giving them new tools to manage the adverse consequences of such turmoil.8

We may need to take additional steps in this important area. When we proposed money market fund amendments last year, we requested comment on additional, more fundamental changes, some of which could transform the business and regulatory model on which these funds have operated for many years. These changes included whether money market funds should move to a "floating net asset value" used by other open-end investment companies, and whether to require that funds satisfy redemption requests in excess of a certain size through in-kind redemptions.

We have received a number of comment letters on these issues, and we continue to examine carefully further changes in this area, working with the President's Working Group. It is my hope that any action taken here builds on the successful regulatory model while incorporating the lessons of time.

The next important area is one where a lot of thinking has been done, but unfortunately not much action has been taken. I refer to the regulatory inconsistency that exists for financial professionals providing virtually identical services to retail investors. The Commission has been looking carefully at this area to determine what changes in the regulation of broker-dealers and investment advisers would most appropriately address investor confusion and ensure the full protection of the securities laws, both within its current authority, which has certain limits, and with legislative change.

As you may know, this is an area of great importance to me, and I have spoken in favor of harmonizing the regulatory regimes for investment advisers and broker.9 When Aunt Millie walks into the local financial professional to ask for advice, she has no idea-nor should she-which set of laws governs the conduct of the person on the other side of the table. For this reason, I believe that every financial intermediary that offers a comparable product or service should be regulated in a substantially similar way. Moreover, I support a fiduciary duty for all financials.

The Obama Administration and the Congress have touched upon this issue in the context of regulatory reform, although to differing extents. I recently spoke on the implications for this area under the bills pending in Congress,10 and won't go into the details again today. I would like to emphasize, however, that, as they now stand, the bills fall short of proposing a necessary and comprehensive solution that would harmonize the regimes by taking into account the strengths and weaknesses of both.

Although legislative action appears necessary to full harmonization, we could make some progress in this area under our current rulemaking authority. For example, the Commission could take a look at the registration process, disclosure obligations, supervisory responsibilities, and recordkeeping requirements of broker-dealers and investment advisers. Although such rulemaking may not be the complete solution to the problem, it would be a good start. Right now, I am focused on seeing what comes out of Congress. And, I am very interested to see that the issue of how financial professionals treat their institutional clients is also getting more attention.

I also believe that we should redouble our efforts to ensure that investors receive the information they need to make investment decisions when they need it, which is at or before the point of sale. Our recent efforts regarding mutual fund summary prospectuses provide a good illustration. The idea there is to permit mutual funds to deliver a new streamlined summary prospectus containing key information in a standardized format, while providing more detailed information in a readily accessible format on the Internet-or, at an investor's election, in paper. This is a good step forward; I support it, because it improves fund disclosure overall. As this and other information is most beneficial to investors at the point of sale, however, I would really like to see the Commission take additional action. The legislative bills before Congress contemplate this to some extent, with both bills clarifying the Commission's authority to designate the information retail investors should receive before making a purchase, and the House bill also requiring a study examining related issues.

A final point-I also have a great interest in seeing that regulators and investors get the information they need, regardless of how jurisdictional lines have been or will eventually be drawn. A couple of examples come to mind. First, with respect to investors, we have been working with the Department of Labor to consider ways to enhance the information provided to 401(k) participants and other investors in target date retirement funds. Second, the jurisdictional and other complexities contemplated in the bills on OTC derivatives before Congress will present some very real challenges. We need a rational and reasonable approach in this area, not one that makes the system even more complicated and fragmented. Although I certainly have my views on how the lines should be drawn,11 looking beyond this issue, each regulator must have full access to information across the OTC markets, even if it has only partial jurisdiction.

The Commission also needs to continue its efforts to make changes internally. We need to do an even better job calling on cross-agency expertise and internally collaborating on projects. And, our culture needs to continue to evolve. I hope that, as the oldest Commissioner, I'm not just clinging to my past, but I would again like to see the environment that prevailed in my "glory days," where the sound of ideas being shared and debated was almost deafening.


After that embarrassing show of sentimentality, I will close by again thanking you for inviting me to speak before you today to offer my thoughts about where we have been and what's ahead. These are critical matters to our nation's investors, and I have tried to highlight some that are most important to me. I also hope that by my speaking out about my personal challenges, I have been able to help at least one of you who has been touched by similar issues. I believe that continuing the critical work of the Commission during this time not only was the right thing to do for investors, but also facilitated my recovery.

Please feel free to contact me if you have any thoughts on these and other issues. My door is open to you, and I am always interested in your perspectives, thoughts, and ideas. Thank you.



Modified: 05/19/2010