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U.S. Securities and Exchange Commission

Speech by SEC Commissioner:
Remarks at the Practising Law Institute — SEC Speaks


Commissioner Cynthia A. Glassman

U.S. Securities and Exchange Commission

Washington, D.C.
February 28, 2003

Good morning. I am pleased to participate in what I know will be an interesting and informative program.

When I spoke to this gathering last year, I had just been appointed to the Commission, and had been on the job for about four weeks. Now I return as the longest-serving member of the Commission. However, I can no longer claim to be the only "non-lawyer," a title I wore proudly, but I do remain the only economist — also a badge of honor.

Since I was asked to limit my remarks this morning to about 10 minutes, it is a good thing that it was a relatively quiet year. All kidding aside, "quiet" certainly is not a word that comes to mind when thinking about what was one of the busiest years in the Commission's history. Sarbanes-Oxley created a very ambitious regulatory agenda with unusually tight deadlines. The people who are participating in this program, and the terrific staff throughout the Commission, worked tirelessly to respond in a thoughtful and creative way. I do not think it is an overstatement to say that you will not find a more dedicated group of professionals anywhere in government, and I am proud to work with them.

Today, I will touch on Gramm-Leach-Bliley, Sarbanes-Oxley and investor education, but as background, I would like to share my approach to regulation in these and other important areas. In assessing the many rules we have proposed and adopted, my approach has been to ask the following questions:

  • What are the objectives of the rule?
  • Will the rule meet our objectives?
  • Does it go far enough — or does it go too far?
  • Does it meet the spirit as well as the letter of the law?
  • Does it make sense? Are there likely to be unintended consequences? Are the benefits commensurate with the costs?
  • Does it create unrealistic expectations?

The answers help me make my decisions regarding whether the proposed rule will be appropriate, effective and efficient.

Turning to Gramm-Leach-Bliley, I spoke last year about my desire to work closely with our sister regulators in the banking industry to implement the provisions of that legislation. During the past year, we made significant progress in improving the process for coordinated regulation, and earlier this month we adopted final rules for bank dealers, exempting them from certain restrictions they would otherwise face under the securities laws. We will continue to work together toward implementing the more difficult exemptions for bank brokers, with the ultimate focus of our efforts continuing to be the protection of investors with a minimum of regulatory and practical burdens.

With respect to Sarbanes-Oxley, I will discuss what I view as the themes that have emerged in the Commission's rulemaking during the past year, and that are likely to inform our future rulemaking in the area of corporate governance.

The overriding problem addressed by our Sarbanes-Oxley rulemaking has been what I refer to as the "agency" problem — that is, how best to ensure an agent's fidelity to the principal. As I noted last year, I believe that incentives work, and we have looked for ways to provide the right incentives — both the carrot and the stick — to encourage agents to act faithfully.

In the corporate setting, this approach involves striking the right balance between management and shareholders, and positioning the board of directors to be an effective referee. In implementing Sarbanes-Oxley, corporate governance reforms have become the primary tool the Commission has used to adjust the balance among management, shareholders and the board. It is fair to say that Sarbanes-Oxley represents a significant shift in the federal-state balance regarding corporate governance regulation, and that there is now a significant overlay of federal rules to supplement state corporate and agency laws. We are going to continue to wrestle with finding the correct balance in our rules.

In solving the principal-agent problem in our rulemaking under Sarbanes-Oxley, the Commission focused on two primary areas — enhancing disclosure and altering incentives to change behavior.

With respect to disclosure, there were a number of specific areas where information provided to the marketplace was opaque or misleading — sometimes intentionally so — and we have tried to increase transparency in those areas. For example, we adopted new disclosure requirements for off-balance sheet arrangements and non-GAAP financial information. In both areas, we recognize that the arrangements or information can have a legitimate purpose. However, the additional disclosures we required recognize that they can also be misused, and have the potential to mislead investors about a company's true financial condition.

In addition to requiring more disclosure, I think there will be a continuing push to increase the utility of information by requiring more timely disclosure. Along these lines, we adopted rules accelerating the deadlines for periodic reporting and disclosure of insider transactions. While at some point there is a tradeoff between "faster" and "better" disclosure, significant delays in reporting important information can disadvantage investors. We have more work to do in this area; accordingly, I expect that the Commission will continue to examine whether there is additional information that companies should report on a current basis on Form 8-K.

The second area — relating to incentives and behavior — arises out of the fact that, as I previously mentioned, many of the problems we have seen in the recent past can be explained (at least in part) by agents having the wrong incentives. We have been trying to correct that by adopting significant new regulations governing the conduct and qualifications of officers, directors, attorneys, auditors and analysts. When it comes to these "gatekeepers" of public trust, my impression is that the Commission has been — and will continue to be — more willing to hold both firms and individuals accountable in enforcement proceedings when they breach that trust.

Finally, I renew the pledge I made last year to continue to focus on investor education. The requirement of basic investing knowledge is critical in today's world, and it is likely to become even more important in the future. With more than 80 million Americans having some part of their savings in the stock market, educated investing is a basic living skill. A baseline awareness of investing fundamentals such as the benefits of diversification — and of the basic scams that are out there — could help prevent a significant portion of investor losses. It also would make the fraudsters' work more difficult.

Ignoring the education needs of the expanding investor class would be shortsighted. Given the important role education can have in restoring faith in the markets, I am pleased to have played a part in making sure investor education funds were part of the joint SEC-SRO-State proposed analyst settlement. While many of the details are still to be worked out, the settlement hopefully will provide significantly more funds for education than we have ever had in the past. I plan to continue to play a role in ensuring that this opportunity is not squandered, and that the funds are put to good use.

* * *

In sum, we have passed a lot of new rules, but it is important to remember that we cannot legislate ethics, and that mere technical compliance with the rules we have passed will not be sufficient to restore investor confidence. Corporate officers and directors, and other gatekeepers, must commit to meeting not just the letter, but also the spirit of these new rules. Investor confidence is the ultimate barometer of corporate responsibility, and that confidence will be restored only when companies prove worthy of the trust that has been placed in them.

Looking ahead to next year, we have more challenges. We have a number of issues to address regarding the structure of the securities markets. Our new budget will allow major new hiring and technology investments, and we will need to integrate these new resources and, under Chairman Donaldson's leadership, examine the way we do business. And we still have some remaining Sarbanes-Oxley issues to address, not the least of which are the PCAOB Chairman, and consideration of the lawyer noisy withdrawal proposals. But I hope the year to come will be less controversial, and that next year I can truly say that it has been a quiet year. That fact that I saw no articles about the SEC in my newspapers last Sunday is certainly a good beginning.

Thank you.



Modified: 03/18/2003