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U.S. Securities and Exchange Commission

Speech by SEC Commissioner:
Remarks at the Government Affairs Conference


Commissioner Cynthia A. Glassman

U.S. Securities and Exchange Commission

America's Community Bankers
Washington, D.C.
March 12, 2003

Thank you, and good morning. Before I go any further, I should make the standard disclaimer: The views I express here today are my own and not those of the Securities and Exchange Commission or its staff.

It's a pleasure to be here this morning. Given my years working on bank and thrift issues and your keen interest in what we are doing in those areas, I thought I would begin with those issues. I will start with an update on the Commission's progress on implementing the Graham-Leach-Bliley Act, and then give you a status report on where we are regarding a thrift exemption from the Investment Advisers Act. I will conclude my remarks by discussing the Commission's rules passed pursuant to Sarbanes-Oxley, and the ethics of corporate governance in the current climate. I will leave some time for questions.

First, turning to Gramm-Leach-Bliley, it is important to recognize that there are key distinctions between the main goal of bank and thrift regulation - which is safety and soundness - and the Commission's mission - which is investor protection. Congress' goal in enacting Gramm-Leach-Bliley was to ensure that U.S. investors receive the protections of the securities laws - whether they purchase securities from a bank, thrift or a broker-dealer - and the law made the Commission responsible for adopting rules that will achieve the goal of functional regulation.

When I began to work with the staff on Gramm-Leach-Bliley, the first thing I wanted to do was to improve the process. The Commission's interim final rules were not well received - an understatement, I know - and we wanted to get back on a more positive, interactive track with the banks and the banking regulators. We decided to tackle the bank dealer rules first. We reached out to the banks and held numerous meetings not just with lawyers, but with the banks' operational personnel to understand the practical business problems banks would face in complying with the new definition of "dealer" under Gramm-Leach-Bliley. It took us time to figure out what different banks do, assess their transactions under the statutory framework, and develop proposals that would accommodate bank securities transactions.

After drafting rule proposals, the staff met with bank industry groups and bank regulatory agencies to describe the new proposals and gauge the extent to which they met the needs of the banking industry. This process permitted us to make adjustments to accommodate industry concerns before presenting them to the Commission to be published for comment. On the whole, the bank representatives gave us very positive feedback. Feedback from the bank regulators was slightly less positive, but I think that everyone was pleased with our more transparent and interactive process. The Commission adopted the bank dealer rules on February 6, 2003, and set a compliance date of September 30, 2003, and we will also be extending the deadline for compliance with the broker provisions well past the May 12th deadline.

We will now turn to the much more difficult task of defining terms under the "broker" exemptions. We have no illusions about the difficulty of the task ahead. There is more bank activity on the broker side than the dealer side and there are more exemptions to consider. We have had very little consensus in the past on the controversial exemptions for trust and fiduciary activities and for custody and safekeeping. But I want to assure you that we have an open mind. I do not know where we will come out in the end. But we will continue to work with the industry to develop workable solutions. We have already begun meeting with the banks to understand their business and the problems they face. Once we complete our process, we will discuss our new proposed rules with industry groups and bank regulators before we formally propose them for comment.

I cannot promise that we will have consensus on each and every point. But we are committed to a constructive and transparent process and to reducing regulatory burdens wherever possible, consistent with the protection of investors and the statutory amendments made under the law.

Next, I would like to talk about another area in which I know you are interested: A thrift exemption from the Investment Advisers Act. As you know, Gramm-Leach-Bliley provided thrifts with an exemption from the Investment Company Act for their common and collective trust funds. However, thrifts remain subject to the Investment Advisers Act when they provide investment advisory services for these same assets. In general, thrifts that engage in investment advisory business - which may range from traditional trust services to management agency accounts - must register with the Commission under the Investment Advisers Act. I appreciate the concern of thrifts that banks are generally exempt from the Investment Advisers Act while thrifts are not.

Thrifts want to achieve clarity in this area and rightly so - the issue has been around for 20 years. While Congress has considered the issue on several occasions, it has not acted on it. I want you to know that the Commission is well aware of the concerns of thrifts. The staff has brought this issue to the attention of the new Chairman, and I have also flagged this issue for the Chairman so that we may work towards coming to an equitable solution for thrifts while meeting our mission of investor protection. Again, I cannot promise to have consensus on every point. But as with our GLBA process, we are committed to a transparent and interactive process with the industry and OTS.

And, finally, we arrive at the main topic of my talk here today: Corporate governance. Corporate governance issues now occupy the thoughts of everyone from the directors of large corporations to mom-and-pop individual investors. Through the Sarbanes-Oxley Act of 2002, Congress has taken significant steps to address the spectacular corporate governance failures that we all have heard so much about. Clearly many of the companies and the gatekeepers responsible for preventing fraud had fallen down on the job. Recognizing that dramatic steps were needed to right the system and restore investor confidence, Congress directed the Commission to adopt rules to increase the accountability of CEOs and CFOs, improve the quality of financial reporting, and raise professional, legal and ethical standards for the gatekeepers of our financial system - analysts, auditors, audit committees, boards and attorneys.

The Commission and its staff have worked hard to meet the deadlines for passing rules to implement Sarbanes-Oxley. By the end of the first 90-day deadline, we adopted rules accelerating the filing of quarterly and annual reports for certain issuers, requiring CEOs to certify quarterly and annual reports, and speeding up the disclosure of personal securities trading by corporate insiders.

In January, the Commission adopted 11 new rules, 9 of which were required by Sarbanes-Oxley. We adopted rules requiring heightened standards of auditor independence, disclosure of off-balance sheet arrangements, and the inclusion of a reconciliation to GAAP for earnings releases and other financial information prepared on a pro forma basis. The new rules also required companies to disclose whether they have codes of ethics for executive offers and whether they have designated an "audit committee financial expert" on their audit committees. In addition, the Commission published for comment a rule requiring non-listed companies to comply with the audit committee independence standards of the New York or American Stock Exchanges or NASDAQ, and we approved rule changes by the New York Stock Exchange and the NASD dealing with research analyst conflicts. Finally, we adopted rules requiring securities lawyers to report evidence of fraudulent conduct "up the ladder" to the chief legal or executive officer of the corporation, or, if necessary, the board of directors.

Sarbanes-Oxley and the Commission's rules tackle many issues critical to corporate governance. Regulation can only go so far, however. Corporate governance is just a means to an end - and that end is good corporate behavior. I believe first and foremost that good ethics is a critical underpinning of good corporate behavior. To paraphrase Pericles, "We do not say that a man who takes no interest in ethics minds his own business; we say that he has no business here at all."

In my view, there are three components of getting to good corporate behavior:

1)  a good corporate governance process
2)  punishment of bad behavior - by the company itself and by civil and criminal law enforcement, and by the market
3)  an ethical culture at the firm, that is valued by the market

At the SEC, we can implement rules to incent the good process, and we can enforce rules to disincent bad behavior, but we cannot legislate ethical behavior. Sarbanes-Oxley and the Commission's rules seek to incent good governance and to disincent unethical or irresponsible behavior at public companies and their gatekeepers in a number of ways. For example, Sarbanes-Oxley seeks to increase the awareness of CEOs and CFOs of their ethical and other responsibilities by having them certify company reports. CEOs and CFOs have always been liable for false and misleading statements. Certification is intended to focus their attention on the fact that they are accountable for the information disclosed - and that it had better be accurate.

The requirement that companies disclose whether they have a code of ethics for the chief executive and financial officers has reminded many officers and directors of their ethical and legal obligations, and given them renewed vigor to satisfy those obligations. But regulation can only do so much. An ethics code means little if the company's chief executive officer or its directors conduct themselves as if the ethic code's provisions do not apply to them.

In addition, Sarbanes-Oxley addresses the obligations of Directors to ethically represent the interests of the shareholders. The Board should act as a check on corporate managers, but to be a true check, it must act in the interests of the shareholders, and make sure that management interest is aligned with the shareholders. For example, to increase the independence of audit committee members, Sarbanes-Oxley addresses their qualifications to oversee auditing and the financial reporting process. But to be effective, audit committee members must exercise their intelligence, experience and understanding to ask the right questions of management and auditors, as well as demonstrate the forcefulness and tenacity to ask a direct question and insist on a straight answer.

Sarbanes-Oxley also required the Commission to set minimum professional standards for lawyers. While there are numerous state regulations regarding the professional responsibility of lawyers, Sarbanes-Oxley deals specifically with the conduct of lawyers representing issuers before the SEC. The Commission's new rule requires attorneys to report evidence of a material violation "up the ladder" within the corporation. The rule contemplates that lawyers will act ethically to address wrongdoing by reporting such wrongdoing to lawyers in high positions at the company - and nip fraud in the bud. Reporting up also relies on the ethics of the attorneys who receive the reports -those further up the ladder -to take action appropriate to address the wrongdoing and fulfill their professional obligations.

Sarbanes-Oxley dealt with other gatekeepers, including auditors and analysts. Auditors must be truly independent of the company, and our auditor independence rules reinforce that requirement. Our rules and those of the self-regulatory organizations (SROs) also address analyst conflicts. But rather than go into more detail on what else we have done, I want to turn now to what we cannot do. That is - we cannot impose ethics. Here, the market's perception of the value of good corporate governance and behavior is critical.

The good news in that regard is that recent research shows that ethical corporate governance benefits the bottom line. For example, a recent Harvard Business School study found that companies that care deeply about their customers, shareholders and employees - perhaps one way of quantifying ethics - increased revenues by an average 682%, compared with 166% for other companies.1 Doing a cost-benefit analysis of that kind of return suggests that it surely pays to be ethical!

A McKinsey study of institutional investors in 1999 found a similar value in good corporate governance. More than 80 percent of institutional investors surveyed said they would pay more for a well-governed company than for one that was poorly governed.2 In fact, these institutional investors said they would pay 18 percent more for a company with good governance. Again, that represents a hefty return on an investment in ethics!

One corporate actor we have not yet discussed is the shareholder: It is the shareholders to whom corporate managers owe a fiduciary duty, and shareholders have an important part to play in corporate governance. I have heard and read a lot lately about how shareholders are taking a more active role in corporate governance, during this, the first annual meeting season since Sarbanes-Oxley became law, and since investors have had a chance to react to the failures at Enron and other companies. Active and informed investors act as another check on corporate managers, and are also important to improving corporate governance.

The notion of the educated shareholder as a good corporate citizen dovetails with one of my top priorities - investor education. I appreciate that encouraging financial literacy is also one of your five policy goals. Therefore you might be interested to know that I have advocated that we allocate a significant part of the money to be paid as part of the proposed global settlement of research analyst conflicts of interest for that investor education. The money earmarked for investor education will be more than we have ever had for that purpose. Of course, the money must be used wisely. We have not yet worked out the details, but we expect to create a foundation with strict accountability standards that will fund proposals for investor education programs from both the public and private sectors.

By seeking to improve corporate governance, Sarbanes-Oxley and the Commission's rules aim to restore investor confidence. But we will not achieve the full potential of good corporate governance unless all corporate actors - management, boards, attorneys, auditors, analysts, and investors - take their responsibilities seriously and act accordingly.

Thank you. I am happy to take your questions.


1 James A. Mitchell, Ethics: Don't Leave Home Without Them, Corporate Board Member, January/February 2003, at 22 (citing John Kotter and James Heskett, Corporate Culture and Performance).
2 Gayle L. Mattson, The Effective Lead Director, The Corporate Board, July/August 2002, at 1.





Modified: 03/19/2003