Speech by SEC Commissioner:
Remarks of Commissioner Paul S. Atkins Before the SEC Speaks Conference
Commissioner Paul S. Atkins
U.S. Securities and Exchange Commission
March 3, 2006
It is an honor to be here with you again at SEC Speaks. Since I am the only thing standing between you and lunch after a busy morning, I shall try to be quick. Warning: My father always used to say that if someone says that if he will be quick, watch your wallet and settle in for a long speech. To start, since it is part of this conference's ground rules anyway, I'll dispense with our standard disclaimer about not speaking for the SEC, although I should note that the disclaimer itself might seem rather incongruous to a non-SEC first-timer at a conference bearing this particular name.
As I was preparing for this conference, I realized what a difference a year makes! Brian Cartwright replaced Giovanni Prezioso; John White replaced Alan Beller; Linda Thomsen replaced Steve Cutler; Nancy Morris replaced Jack Katz; Annette Nazareth replaced Harvey Goldschmid; and Chris Cox replaced Bill Donaldson. In all, more than 350 people have left the SEC and 230 have joined us in this past year. Together, that represents a great loss of talent and institutional knowledge, while at the same time a great gain of eager new talent with different knowledge and professional experiences to inform their decision making. I expect that we will shortly have other announcements of new members at senior and other positions. That diversity and change is a valuable aspect of our agency, as those of you who have served here know well. This is all part of a natural renewal process – each of us contributes to the overall organization, but none of us is irreplaceable. As they say, the sands of time fill in our tracks after we leave. That is not a bad thing – it is a sign of a vital, healthy institution that has good bones, a strong culture, and a solid mission.
Now, sorry to disappoint some of you and I don't want to needlessly worry others, but these thoughts are not a prelude to my own swan song as a commissioner! I note them because I think that we are at a particularly exciting time for the Commission – a time of change, renewal, promise of the future. Everywhere we turn, we have a host of interesting issues ahead of us, with a newly reconstituted team to address them. Some of these issues, which you all are discussing today and tomorrow, are:
- Disclosure reform in general, and XBRL in particular, which will tremendously benefit investors (especially mutual fund investors) by bringing the 21st century into our still largely paper-based 1940s approach;
- SRO governance, in the context of the rapidly evolving landscape in our securities marketplace;
- Market micro-structure, in light of the problematic rules that we adopted last year and the troubled implementation of them so far;
- Implementation of Sarbanes-Oxley 404, to remain true to congressional intent and protection of investors while not killing the proverbial golden goose along with it;
- Oversight of the PCAOB and the FASB, particularly through an open, transparent, logical budget process; and
- Our own internal procedures, including how best to ensure the full and effective integration of our examiners – our eyes and ears – into our policy-setting and regulatory framework.
This is just a small sample of the challenges and issues that we face. That we should all look forward to future progress with optimism and confidence is in no small measure due to the leadership of our new Chairman, Chris Cox. Chairman Cox has brought enthusiasm and an obvious drive to continue in the fine traditions of this agency toward meaningful progress in our regulatory mission. Indeed, his arrival comes at exactly the right time for both us and the American economy. He understands that with great power comes great responsibility.
Because the Commission is making progress on a number of fronts, today we have the luxury of applying our efforts toward strategic thinking that will help us improve the way we do business for decades to come. For example, fifteen years ago when I was a staff member in the Chairman's office, we could only dream of the positive working relationship that we now enjoy with the Department of Justice, simply because they often had different priorities than ours. This ability to work co-operatively means that it now is more likely that criminal violations of the securities laws will land perpetrators in jail. That is the best deterrent of all to intolerable conduct. In addition, compliance awareness among corporate officers in general is better than it has ever been, board members are more engaged than ever, and some observers have said that corporate accounting standards have never been better.
And what is the state of our economy five years after Enron and four after WorldCom, two apparent exemplars of our economy that were shown to be laden with fraud? The overwhelming evidence shows that our economy today is very strong.
The Dow Jones Industrials is now above 11,000 (at least still as of a few minutes ago, but I don't want to jinx it!), nearing the all-time peak it reached on January 14, 2000. The GDP expanded at a solid 3.5 percent pace last year. More than 4.6 million new jobs have been created since May of 2003, two million of them in just the past year. Unemployment has fallen to 4.7 percent, lower than it has been in three decades, and household wealth is at an all-time high. More Americans than ever own their own homes. In a vote of confidence for our financial markets, fully half of all U.S. households and one in three individuals own equities.1
There remain, however, areas where we at the Commission have an opportunity to improve our own processes. Particularly after the past few days, the public at large has seen how we, in exercising our enforcement power, have enormous leverage in our dealings with private parties. Although much of the coverage has reflected more of an exercise in hyperbole than sober analysis, it does provide a good opportunity to survey how we implement our authority.
Attention to the basic functioning of our enforcement processes is not new. Thirty-four years ago, SEC Chairman William Casey asked John Wells to form a committee to address complaints regarding the fairness, promptness and efficiency of SEC enforcement actions. Recommendations issued by the Wells Committee included that enforcement actions not be brought against companies making good faith compliance efforts, that an audit mechanism be employed to ensure uniformity of enforcement outcomes and, most famously, that the subjects of enforcement investigations have the opportunity to formally respond before an action is filed.
Our enforcement power is much greater than it was in 1972. Then, the SEC chiefly could only bring injunctive actions and initiate administrative proceedings against regulated entities. During the intervening quarter century, laws such as the Securities Enforcement Remedies and Penny Stock Reform Act of 1990, the Insider Trading Sanctions Act of 1984, the Insider Trading and Securities Fraud Enforcement Act of 1988, and Sarbanes-Oxley gave us valuable, formidable tools that we have used to mainly good effect. Officer and director bars, temporary restraining orders, civil penalties, cease and desist orders are just some of those additional measures that we now have.
As we have obtained more experience exercising these relatively new powers, we need to listen to commentary and suggestions as to improvement in our enforcement procedures. Should we create a new advisory committee? While I am a long-standing fan of the use of advisory committees as a tool for effective outreach and listening, that is not our only means of moving forward.
It is worth noting that articulating the Commission's approach to corporate penalties is one area where, thanks to Chairman Cox, we have made significant progress. Our January principles turn primarily on the existence or absence of a direct benefit to the corporation resulting from the violation and the degree to which the penalty will compensate or further harm shareholders. But, despite this guidance, do not think that large corporate penalties are a thing of the past. As I have said for quite a while, corporate penalties are appropriate in many circumstances, particularly where the company and its shareholders have broken the law and accrued a benefit from it. Consider, for example, the $700 million in disgorgement and penalty of $100 million that AIG agreed last month to pay.
What has been the result of this relatively new penalty authority on our enforcement program? An old adage of Total Quality Management and Six Sigma is that you ultimately get what you measure. Is there a propensity for our enforcement attorneys to use the amount of penalties as a yardstick of their own performance? What else should a junior staff member conclude when our own official SEC press releases announcing senior staff departures include lists of the significant penalties obtained during their tenure? The newspapers dutifully pick this information up. It even carries on after our employees leave the Commission – I understand that it is not at all uncommon for biographies of former staff members to list these penalty awards. Are penalties – for their own sake – a proxy to show how effective we are in doing our job? What effect has that on the rest of our program, and on cases that are important but lack zeroes?
But, what other measure can replace a dollar figure in determining staff performance? The very useful internal study that Harvey Pitt distributed to us commissioners four years ago before he left raised the issue of the equally troubling – and often derided – "stats (for "statistics) system, which fails to recognize staff members who promote the division's goals by conducting well-run investigations that ultimately do not uncover violations. The investigations, for example, can build valuable experience and knowledge about an industry or market practice that is ultimately useful in other situations.
Beliefs about what cases are career enhancing seem to affect our ability to bring certain cases. Fraud in non-NASDAQ OTC stocks, what most of us think about as the micro-cap market, is by all accounts on the rise. The micro-cap market itself is huge -- the enforcement staff estimates that $57 billion in micro-cap shares trade hands each year. Fraud in this market manifests itself through old-fashioned boiler-rooms with hard-sell cold-calling; new tactics such as cyber-smear or the infamous voicemail that was supposedly incorrectly left on machines giving a bogus stock "tip; and bear raids composed of an unholy alliance of abusive short sellers, stock promoters, class-action lawyers, and others.
We have plenty of power and authority to take more of these cases on (with or without the controversial hedge fund registration rule that dissipates our scarce examination resources and does not add to our enforcement authority). We in fact have succeeded in bringing these cases over the years – some brought with the Justice Department and the FBI, where we have caught organized crime elements. How many of you have gotten a fax promoting a stock that is "just about to take off or an e-mail inbox full of touting spam? How many cold calls touting outrageous claims have you gotten? I have received these calls – once a dozen years ago when I was sitting at my desk at the SEC (now that's brazen, stupid or both!) – you should have heard the reaction on the other end of the line when the caller found out whom he had called. The guys are too crafty, though, to leave any traceable address or telephone number, try as I will to get one.
These sorts of calls – or faxes or e-mails or voicemails – will not likely ensnare any of you in this room. But, many, many good, honest people do get duped. These are instances of clear bad guys and obvious victims who have been robbed of their money, their dreams, and their futures. There is often little grey area to argue about the fine points of securities law or accounting treatment. Beating micro-cap fraudsters is a fight that we can and must win. So why have we not been able to put more micro-cap promoters out of business? I believe one reason is that junior staff members think that spending time pursuing pump-and-dump promoters is a poor career investment. If the junior staff believe that only big dollar penalties against corporations will bring a promotion, and managers believe that only these cases will distinguish them from their peers, then is it a surprise that individual staff members avoid spending time pursuing pump-and-dumps?
One way to solve the dilemma may be to reward directly staff members who show a willingness to pursue micro-cap cases. This happened just the other day with John Polise and Joe Cella, who were commended by the FBI for their assistance. Another way might be to improve the efficiency with which we can address repeat pattern cases like micro-cap manipulation. In fact, I should note that one of my own counsel, Kimble Cannon, prepared a report with suggestions for improvements in our approach to micro-cap fraud. We should be looking for ways to improve our internal processes with the goals of eliminating redundancies, increasing the information sharing among the staff, and creating standardized plans of attack so that we can successfully prosecute the enormous volume of micro-cap fraud cases using our existing resources.
I understand that our enforcement division under an initiative spearheaded by Walter Ricciardi is actively working to apply to the whole division the case tracking platform that our Boston office adopted a couple of years ago. I strongly commend this effort, which is long overdue and will bring us tools similar to those that most large law firms and corporate legal offices use. However, it seems to me that tracking cases is only the first step towards effectively employing institutional knowledge. We also need to focus on the follow-through steps, such as considering whether to develop specialized teams and conduct a review of the enforcement structure to determine whether it best meets our current requirements.
Eliminating internal barriers to efficiency must be a priority. We need to avoid the silo effect, wherein lack of communication and a failure to recognize common goals results in teams working in isolation, focusing only on their own tasks without regard to the overall needs of the organization. We need to move away from the long-standing, ingrained, un-coordinated, "eat-what-you-kill management style, which underutilizes our resources in the name of morale building. I am happy to say that the current leadership of the Enforcement Division is looking at ways to change this.
We should also consider more flexibility in personnel assignment, which will improve morale and provide better training. For example, we should make it easier for junior staff to move between branches, and we should employ a more rational approach in assigning staff. We also might want to rethink the role of the regional offices, and the manner in which resources and investigations in the regions are coordinated. Our time is too valuable and resources too scarce for petty jealousies over staffing or case load as between branches, assistant directors, or regional offices.
The senior staff should not be shy about proposing broad fixes if that is what is required. I know that the staff shares my interest in seeking ways to more efficiently employ our limited resources, and I look forward to working with them.
It has been a pleasure speaking with you today. You have been a patient and indulgent audience. Please keep in mind that my door is always open to comments and recommendations.
|1 || Equity Ownership In America, 2005, a survey by the Investment Company Institute (ICI) and the Securities Industry Association (SIA), available at http://www.ici.org/pdf/rpt_05_equity_owners.pdf (see, also, Half of American Households Own Equities; Equity Ownership Increased Through Bull and Bear Markets, Growth Stimulated by Retirement Plans, November 10, 2005, at http://www.ici.org/statements/nr/05_news_equity_rpt.html.