Speech by SEC Commissioner:
Remarks Before the SEC Speaks Conference
Commissioner Roel C. Campos
U.S. Securities and Exchange Commission
March 3, 2006
Good Afternoon. I'd like to welcome you all to SEC Speaks. As we're getting into the afternoon I know that many of you likely are struggling to make it to the next caffeine break. If you give me your attention for the next 10 minutes or so, I promise you caffeine is right around the corner.
With the start of 2006, the Commission is pleased to have completed its move bringing everyone in DC back together in one building. While our OCIE, IM and other staffs might have felt like they were out of sight and therefore out of mind, they were never far from our thoughts. In fact, at times, I think they may have relished the privacy! I know they had to enjoy the restaurant selection at 901 E which is much broader than our current selection. But, you can't beat the convenience of the Metro and walking into the office having avoided nature's cold, wind, snow and rain.
Because we have only a few minutes, I would like to give you a glimpse at five of the issues on the top of my burner right now. There are more like 20+ pressing issues but I can see that caffeine hunger in your eyes.
First, I'd like to mention:
Subpoenas on Journalists
There has been much in the news lately about the subject of the SEC serving subpoenas on journalist, including subpoenas to two Dow Jones and TheStreet.com columnists in connection with a market manipulation investigation. While I will not comment directly on any on-going investigation, I feel it appropriate to make a few comments about our Agency's procedures in this area. Earlier this week, our Chairman issued a statement in which he pointed out that he and Commissioners were not informed of the subpoenas issued by the SEC's San Francisco's office in this case. Yesterday, Thursday, the Agency also announced that it will develop clear guidelines regarding the issuance of subpoenas to journalists during fraud investigations. In my view these statements have been incorrectly interpreted in the media and in the public to indicate that our Enforcement Staff did something wrong. In other words, our Staff, in my opinion, seems to have gotten "a bum rap."
First, in case anyone here didn't already know this, I offer that the SEC's Enforcement Staff is by far one of the most professional, competent, and reasonable in the world. I have been associated or worked with many and I feel I have a sound perspective to say that.
Like the rest of our Agency, the mission of our Enforcement Division is straight forward: to protect American investors from fraud by enforcing federal securities laws. The Division has long established, carefully developed practices for conducting civil discovery. For example, counsel for individuals or entities as a practice are notified well in advance, before any request or subpoena is issued. In many cases, discovery is worked out on a voluntary basis with private counsel. In some cases, because of organizational needs to record the request, subpoenas or formal discovery requests are actually requested by the party. Our Enforcement staff as a matter of professional policy and cultural DNA seeks to conduct its investigations and discovery in a manner respectful of all subjects and third parties, not just journalists. As a matter of course, in seeking discovery, our staff makes all efforts to exhaust all sources of information before resorting to formal process or subpoenas. The Agency has a long history of very cooperative and respectful dealings with the press in matters involving discovery and subpoenas. Any disputes regarding privileges, as a matter of course, are sought to be resolved informally and, ultimately, through the courts if agreements cannot be worked out through counsel.
From my perspective, the announcement yesterday that new guidelines will be worked out with the staff and the Commission as to the issuance of subpoenas to journalists should not be interpreted to mean that no guidelines were in place or that our staff committed any errors. As our Chairman has also clearly stated, this effort does not signal in any way any retreat from aggressive enforcement of securities laws in this particular case or any case. Our Agency, of course, prides itself in constantly seeking to do better in accomplishing its mission.
Finally, it goes without saying, no one is above the law. If in any matter it is important for the integrity of the investigation to enforce a subpoena, it will be done through appropriate legal process of the federal court system, without hesitation. Of course any privilege or constitutional rights will be taken into account as a matter of due process.
I will now move on to items two and three: Shareholder Access and Electronic Proxies.
Although this issue may not be the first to appear on the radar screens of most people, I'm still supportive of the proposals that we introduced in late 2003 which would have, under certain and limited circumstances, required companies to include in their proxy materials shareholder nominees for election as director. In my opinion, nothing has changed in the last two-and-a-half years to resolve the issue.
Unless a shareholder mounts a full-blown proxy fight which is very expensive and time consuming shareholders do not have a real option of voting for a director other than those supported by management. Further, as you know, the plurality voting system means that those directors receiving the most votes are elected to the board, even if a director fails to receive a majority of the votes cast. Thus, as a result of the barriers to placing non-management candidates for director on the proxy, coupled with plurality voting, it is very, very difficult to remove or replace any of the directors appearing on management's slate.
I believe our 2003 proposals represented a middle-of-the-road approach to giving shareholders access to the ballot, and I hope the Commission finds an opportunity to revisit this issue.
One proposal that is, however, on the radar screen of most is our recent proposal regarding internet availability of proxies. Obviously, this proposal also concerns shareholder access, although perhaps not quite so directly as our 2003 proposals. I think the primary motivation behind the internet proxy release was to take advantage of technology to reduce the cost of the proxy process. Indeed, because the proposals also would apply to solicitations other than issuers, they might have the effect of reducing the costs of proxy contest, making it easier for shareholders to place their director nominees on the ballot. I think these are laudable goals. However, I remain concerned about the possible unintended consequences of the proposal. I don't really have time to go into details, but I'll be paying particular attention to the following issues:
First, whether allowing companies to separate the proxy card from the rest of the proxy materials might encourage shareholders to vote their proxies without reading the information in the proxy materials. If this occurs, we run the risk of undermining the spirit of the proxy rules. I think there are some possible solutions to this including the possibility of permitting or requiring electronic voting but there may be some technological difficulties to overcome.
Another area of concern that I have about our internet proxy proposal is that changing the "default" rule to one of "notice and access", as opposed to paper delivery, may disproportionably impact certain groups of investors, such as seniors. This is something that I think should be addressed. Perhaps a middle-of-the-road option would be to permit the "opt out" of Internet delivery to stay in effect until the shareholder changes its mind, rather than automatically defaulting back to Internet delivery each year.
Item number four is:
Retirement and Defined Contribution Plans
We have witnessed over the last 25 years a definitive shift from company guaranteed pension plans towards investor-oriented 401(k), 403(b), 457 and other defined contribution retirement plans. Americans today invest $3.2 trillion through these retirement plans, with nearly $1.6 trillion of that amount being invested in mutual funds. Assets held in these retirement plans often represent the "single largest financial asset" of many working Americans today, and, as major investors in our capital markets, the Commission must focus its attention on making sure that retirement investors receive the investor protections necessary for them to successfully manage and prepare for their golden years.
With the number of elderly Americans expected to grow 80% within the next 25 years, this work has already begun. I have been very supportive of the diligent work of our staff in this area, including the staff's recent examination of pension consultant relationships and the many enforcement cases that we have brought in response to the discovery of mutual fund market timing in 401(k) plans just to name a few. I further encourage the staff to move quickly and broadly in examining the investor protection and transparency needs of investors in the retirement space, and I am very much looking forward to your recommendations in this particular area.
The final item on my list for today is:
Another topic that has been of utmost concern to me is duplicative regulation and the need to streamline the regulatory process. Specifically, I am speaking to the issue of self-regulation at our nation's registered exchanges, or SROs.
A year ago, the Commission issued a concept release concerning self-regulation in recognition of developments in the marketplace and the changes in ownership structures of SROs. The Commission sought comment on the role and operation of SROs in today's markets and also proposed a number of alternative regulatory and legislative approaches that could be considered by the Commission to address concerns with the current SRO model. At the same time, the Commission issued a proposal regarding governance and transparency issues surrounding SROs, again responding to the changing marketplace and the rise of for-profit exchanges.
Instead of becoming passé over the past year, the issues surrounding self-regulation have become even more important with the mergers of the NYSE with ARCA and Nasdaq with Instinet. Moreover, the self-regulatory dilemma is not limited to the US. Worldwide, the majority of equity stock exchanges have demutualized and regulatory authorities are facing the same questions regarding the appropriate regulatory framework concerning both the regulatory role of exchanges and the regulation of exchanges. The trend extends to derivative exchanges worldwide too.
While I am enthusiastically exploring all of the issues tied to self-regulation, and believe that the Agency has to move quickly to address these issues in their entirety, I believe we must start by speeding up our short-term solutions. Those measures include the improvement of coordination in examinations between and by regulators and the elimination of duplicative and inconsistent regulation of broker-dealer members by the exchanges.
Our Office of Compliance Inspections and Examinations conducts examinations to detect violations of the securities laws. On the front-lines, they play a key role in our efforts to protect investors. And, they've been working hard to ensure that examinations operate efficiently and effectively. For example, they have been working with the NYSE, the NASD, various state regulators and the industry to coordinate examinations in order to ensure that regulatory and compliance resources are expended efficiently and firms are not subject to duplicative and overly burdensome examinations. For example, based on information from the NASD and NYSE for the 4th quarter of 2005, 111 firms that are dual members of NASD and NYSE were examined by both the NASD and NYSE during 2005. Of these, 60 firms requested coordination and 59 firms received coordination (98.3%). Fifty-one firms preferred no coordination and this request was honored.
This is not to say that a large firm will not be exposed to multiple examinations at the same time. For example, the NYSE might be reviewing net capital compliance, and the NASD might be looking at the firm's sales of variable annuities, and the SEC may explore the firm's anti-money laundering compliance. It is worth noting that in determining which issues to review, the regulators are communicating, coordinating and combining their analysis to determine where risks lay and thus which areas merit review in a particular year. This coordinated approach should produce a pool of topics that, divided among the regulators, should make oversight more efficient and effective.
And, coordination can help reduce duplicative document gathering and production required of a firm. If the scope of documents requested in the course of examinations by two regulatory authorities overlaps, even if the subject matter of the examination does not, our goal is to share the produced documents between the regulators. The firm should not be required to expend the resources to gather and produce the same materials twice.
I commend the OCIE staff and other regulators for their efforts in providing effective oversight of the industry for the protection of investors. I encourage them to continue to think about ways to improve efficiency and reduce unnecessary burdens on regulated firms while remaining consistent with our mandate to protect investors.
The second short-term solution involves the elimination of duplication and inconsistent regulation of broker-dealers by the exchanges. The NYSE and the NASD have been in discussions over the past few months regarding the harmonization of their broker-dealer rules. In the recent Commission approval order of the NYSE/ARCA merger, the NYSE undertook to work with the NASD and securities firm representatives to achieve that goal. In addition, the NYSE represented that it would use its best efforts, in cooperation with the NASD, to submit to the Commission within one year proposed rule changes reconciling inconsistent rules and a report setting forth those rules that have not been reconciled. Clearly, this commitment is headed in the right direction.
With the recent creation of NYSE Regulation as a subsidiary of the NYSE Group, separate from the NYSE market subsidiary, the regulatory landscape at the NYSE is similar to the original NASD model of separating the regulation and the market within a holding company structure. This model does reduce some of the concerns expressed by broker-dealers about being regulated by their competitors. Add to this the commitment to harmonize rules among regulatory entities, and progress is imminent.
The question is whether it goes far enough. The NASD, the SIA and the BMA all have argued that harmonization fails to resolve the conflicts of interest that arise when an SRO operates a for profit exchange. Instead, these commenters put forward two solutions that generally argue for the same conclusion. The first solution is an entirely independent SRO, arguably free from conflicts, such as the NASD will be once its separation with Nasdaq Market is final. The second is to combine the multiple SRO broker-dealer regulatory programs into one centrally managed entity. In other words, the SROs should merge their regulatory functions through joint ownership to produce and I quote from the recent remarks of SIA President Mark Lacritz "one rule book, one set of procedures, one set of examinations."
While I am in agreement with their concerns and even, perhaps, with some of their solutions, I believe that the questions these commenters present go to the larger issue of modernizing the model of self-regulation to recognize the realities of the current marketplace. The idea of a merger of the regulatory functions has appeal both for controlling conflicts of interest and minimizing duplicative regulation the two primary concerns addressed in the solutions proffered by the NASD, SIA and BMA, among others. But many questions remain regarding a single, broker-dealer regulatory entity. If one supports a merger of the broker-dealer regulatory functions, is it enough to allow joint ownership or is complete market independence necessary? Which functions are member regulation and which are market regulation? How would the single SRO be funded? How would communication and coordination be carried out between the single SRO and the exchanges? I hope we can answer these questions soon.
Right now, however, the NYSE and NASD can be working to quickly eliminate duplicative rules and synchronize other rules to increase efficiencies and minimize burdens and costs. Accordingly, in the short term I would urge the NASD to make a similar commitment to work with the NYSE to harmonize their rules while the Commission and the industry move forward on the larger issue of the appropriate model for self-regulation in today's marketplace.
As I mentioned before, there are at least 15 more items that I would consider pressing concerns, but time does not allow me to discuss them. So, as promised, it is time for a break. I hope you enjoy the rest of the conference and I urge you to contact my office and my colleagues when issues arise. We are always interested in what you have to say.