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Speech by SEC Commissioner:
Remarks at "The SEC Speaks in 2003"


Paul S. Atkins

U.S. Securities and Exchange Commission

Washington, DC
February 28, 2003

Thank you, Paul, for your introduction. You and Annette have done a fine job as co-chairs of this year's "SEC Speaks." It is a pleasure to have this opportunity to speak to all of you today.

Before I begin, I must note — as you've no doubt heard countless times today — that the views I express here today are my own and do not necessarily reflect those of the SEC as an institution or of the other Commissioners.

As this is my first "SEC Speaks" since rejoining the SEC as a Commissioner, I'd like to use this time as an opportunity to re-introduce myself to everyone.

I must confess, in some ways it seems as if I've been back here for an eternity with the flurry of activity that the SEC has conducted over the last six months; yet it has only been seven months since I was sworn in as a Commissioner.

As Paul said in his introduction, this is my second tour at the SEC. I previously served between 1990-1994 on the staff of former Chairmen Richard Breeden and Arthur Levitt.

I think one reason I feel as if I've been back longer than seven months is that once I returned, it seemed in so many ways — such as seeing old friends and familiar faces — as if I'd never left.

In fact, on my first day back at the SEC, a long-time staffer stopped me in the hallway and, noting that my face was somehow familiar, asked me for directions to the SEC's Office of the Secretary.

When I remarked that it was my first day, she then did a double-take and said, "Don't I know you from somewhere?"

Another reason that my time away seems so short is that the major issues and topics of discussion when I was here before — such as improving corporate governance and strengthening management accountability — are still headline news and just as relevant and important today as they were 12 years ago.

Indeed, in these areas, the SEC over the last few months has acted upon an unprecedented number of rules. And what I most want to discuss today is our approach to addressing these rules and other regulatory matters.

My overriding philosophy is based on a belief in our free market system. Government is not, and should never be, a merit regulator, a price setter, or a judge as between competitors. History shows that government — when it tries to substitute its judgment for the market's — can cause more harm than good.

I believe that the SEC is here to help the market work better and more efficiently because the market speaks volumes about what investors want and need.

With respect to regulation, my first inclination is to encourage reasonable self-regulation, rather than government-imposed mandates. Yet, I recognize that self-regulation alone may not always be sufficient.

For example, during the auditor independence rulemaking process, I noted that the rules we adopted are essentially professional ethical obligations that should have and could have been adopted by the accounting profession.

Consistent with my market-oriented philosophy, my preference would have been for the profession to regulate and police itself.

Yet because the professionals fell down on the job — after they had ample warning from regulators and the marketplace — Congress called upon us to act.

I believe that the final rules that we adopted serve the Congressional mandate for us to take the appropriate steps to lay the groundwork for a restoring of investor confidence in public accountants.

Still, while I acknowledge that regulatory action may be necessary when other measures are insufficient, it is imperative that the SEC recognize that — in the interest of serving investors — regulatory burdens often harm investors.

In certain cases, costs may be imposed upon industry, which are in turn passed on to shareholders, without a commensurate benefit flowing back to those investors. I believe it is important to compare expected costs to anticipated benefits any time we propose and implement regulations, not only for those rule proposals mandated by Sarbanes-Oxley, but for all of the SEC's regulatory actions.

One recent proposal where I did not believe it had been shown that the benefits to shareholders outweighed the costs that would be passed on to them was the series of rule amendments requiring mutual funds to disclose their proxy voting policies and procedures and their actual proxy votes cast.

I am concerned that our rulemaking appears to impose significant costs when the marketplace is already responding to the goals of the rulemaking and that there is a danger of unintended consequences — particularly to the movement for confidential voting.

I felt that this issue could be better addressed by allowing the market to work. In any event, I believe that the Commission's ultra-fast-track adoption undermined the staff's ability to gather and evaluate information before concluding that the benefits outweighed the costs.

I am not citing the proxy voting rule amendments in order to re-argue my objections. I am offering it as a good example of how I approach the regulatory process and how I will continue to analyze proposed rules and amendments.

Let me turn now to enforcement. I believe the SEC should be proud of its accomplishments over the past few years — bringing a record number of ever-more complex cases, and bringing those cases faster than they have in the past. Former Chairman Pitt and the staff deserve great credit for this exceptional record.

As a commissioner, I recognize the need to rely upon the enforcement staff since I cannot be there to investigate facts or to make credibility determinations of witnesses. However, I am concerned that enforcement actions not serve as an alternative means of rulemaking. I intend to assess enforcement actions to ensure that the alleged illegal conduct does clearly violate the law and to verify that the action is not an inappropriate extension of the law.

A second, closely related concern involves inconsistency in the imposition of penalties in settled actions. There probably can never be hard-and-fast rules regarding sanctions. Nonetheless, inconsistent settlements for largely consistent actions create confusion and uncertainty and might hinder settlements in future cases.

As an example, the recent batch of four Regulation FD cases resulted in a vast difference in penalties amongst settled actions.

I have been told by a number of people that the varying penalties in these initial Regulation FD cases sent mixed and confusing messages to the business and legal communities. As a result, market participants and the bar were left to try to puzzle out our intent, rather like interpreting tea leaves or, like the Romans, reading the entrails of sacrificed animals for guidance.

When I see the commentary generated by these cases, I fear that we are providing inconsistent guidance on what constitutes violative conduct and what constitutes an appropriate penalty for such conduct.

I hope to work with the staff and my fellow commissioners to try to respond to this criticism and to prevent similar concerns going forward.
Now that the bulk of the Sarbanes-Oxley rulemaking initiatives are behind us, I look forward to working with Chairman Donaldson and my other colleagues on the many issues facing us in our role of the investors' advocate, including —

  • the accounting oversight board,
  • the seemingly intractable market structure issues, problems which I fear are partly of our own making,
  • the convergence of global accounting principles,
  • the need to forge a new era of co-ordination with our fellow federal and state regulators, and
  • a long-neglected need to bring our basic rules regarding disclosure and investor interests from a 1930s-based mentality into the 21st century.

In that vein, it may be a good time to re-examine the role of shareholders in corporate matters and the rules governing their communications.

Again, I have to note here that, in light of my earlier experiences at the SEC a dozen years ago, the more things change, the more they stay the same.

Chairman Donaldson hits the nail on the head when he cites the state of investor confidence and improved corporate governance as major goals to be addressed. We need to shore up the role of independent directors as the cornerstone of our corporate governance system.

We must also address the growing unease in the boardroom over the crush of new paperwork, fears of increased personal liability, and the increasingly limited availability of director's liability insurance. Directors serve in a vital, part-time job on which much depends. We cannot afford to have these people wonder if their service is worth it.

So, that is my teaser for the events to come, without any Madison Avenue pizzazz. I assure you that there is no shortage of excitement to come. Please keep your cards and letters coming — we depend on your input and feedback to do our job effectively.

You, as aficionados (I won't say groupies) of the SEC, have a special role in helping to oversee us and hold us accountable. You can see our warts, and our successes, better than most other people. I look forward to working with you to get it right.

Thank you for your time.



Modified: 03/26/2003