Statement by SEC Chairman:
Remarks at the Commission Open Meeting
Chairman Harvey L. Pitt
U.S. Securities and Exchange Commission
January 8, 2003
Good morning. This is an open meeting of the U.S. Securities and Exchange Commission on January 8, 2003, our first of the New Year.
It begins a month in which Congress directed the Commission to complete what I believe is the most extensive rulemaking agenda in the shortest period of time in the agency's history. When we finally turn the page on the calendar at the end of this month, we will have considered nine final rules and produced four major studies related to the Sarbanes-Oxley Act. To put that in perspective, the Commission adopted a total of 23 final rules in all twelve months of 2000.
Considering the obligations we have under the Sarbanes-Oxley Act, the Commission's chief focus on the rulemaking front of late necessarily has been implementing the Act. This does not mean, however, that we can or will let other important efforts fall by the wayside.
Investment Company Transactions with Portfolio and Subadviser Affiliates
The first item on the calendar is a fine example of the regular work of the Commission continuing apace during these extraordinary times. The Division of Investment Management recommends that we adopt rule amendments to permit investment companies to engage in transactions with affiliated subadvisers and portfolio companies without first obtaining an exemptive order from the Commission.
In the past decade we have seen a number of changes in the way that funds operate. Fund investment advisers, who once managed a small number of funds, today may manage a dozen or more funds, and these investment advisers often rely on subadvisers to manage the funds' investment portfolios.
These changes in business practice, coupled with the affiliated transaction prohibitions of the Investment Company Act, have produced unnecessary consequences. Funds are constrained from buying or selling shares of a company in which another fund in the same complex owns a significant stake, and subadvisers to one fund cannot do business with any other funds in the same complex, even funds that they do not manage. Even though the risk of harm to funds and their investors is, at most, theoretical, the affiliated transaction provisions of the statue prohibit these transactions.
The amendments we are considering today would help restore balance to our regulation of affiliated transactions. They would allow funds and advisers to engage in transactions with these remote affiliates without having to obtain individual exemptive orders from the Commission, which Congress authorized us to permit in appropriate circumstances.
These amendments should reduce costs for funds and the millions of investors who own fund shares, without sacrificing one iota of investor protection. The amendments would also permit the Commission and its staff to shift precious resources away from routine exemptive applications that do not raise investor protection concerns and toward novel and/or complicated applications, allowing more timely resolution for funds and their investors.
Standards Relating to Listed Company Audit Committees
The second item on today's calendar is a recommendation from the Division of Corporation Finance that the Commission propose new Exchange Act Rule 10A-3, pursuant to Section 301 of the Sarbanes-Oxley Act. Section 301 of the Act requires the Commission to direct national securities exchanges and national securities associations to adopt certain listing requirements related to the independence and functioning of their listed companies' audit committees, including
- that they be responsible for the appointment, compensation, and oversight of any registered public accounting firm employed to perform audit services;
- all members be independent of the issuer; and
- they have complaint procedures, the authority to engage advisers, and the ability to determine appropriate funding for the audit.
Once implemented by the self-regulatory organizations, the Section 301 listing standards will be an important complement to other SRO listing standards related to corporate governance, both existing and planned.