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U.S. Securities and Exchange Commission

Speech by SEC Commissioner:
Remarks before the Redefining Investment Strategy Education ("RISE") Symposium Corporate Governance Panel


Cynthia A. Glassman

U.S. Securities and Exchange Commission

Dayton, OH
March 30, 2005

Thank you Bob. It is a pleasure to be here. As some of you may know, one issue that I feel truly passionate about is investor education -- we need to provide investors with the resources and education necessary in order for them to make sound investment decisions. As a result, I very much appreciate the opportunity to participate in this Symposium for student investors. I look forward to your many questions and our discussion. Before I go any further, however, I need to give our standard disclaimer, which is that the views I express here today are my own and do not necessarily represent the views of the Commission or its staff.

As a Commissioner of a regulatory agency whose mission is to protect investors and maintain the integrity of the financial markets, one of my roles is to vote on proposed regulations meant to help us carry out that mission. The Commission's implementation of the Sarbanes-Oxley Act of 2002, one of the most sweeping corporate governance reforms in history, provides a good example of this type of regulation. The corporate scandals that began to come to light in 2001 resulted in distrustful investors, doubting the honesty and integrity of public companies, the individuals who led them and the gatekeepers who advised and analyzed them. In adopting the reforms under Sarbanes-Oxley, or SOx as we call it, the Commission worked to restore investor trust shattered by the abuses of the past, and to incent and instill good behavior and practices at public companies and their gatekeepers for years to come.

There are five general themes or goals of SOx. I will briefly highlight each in turn. The first theme is restoring confidence in the accounting profession. SOx established the Public Company Accounting Oversight Board, an entity overseen by the Commission, and with which any auditor of a public company must be registered. Another reform included under this theme is the amendment of our rules to clarify additional relationships that impair the independence of outside auditors.

A second theme is improving the "tone at the top" of public companies. This category includes, among other reforms, our rules relating to the certification by CEOs and CFOs of the financial information included within their companies' periodic reports. I have heard repeatedly of the collective looks of disbelief that occurred when, during the Congressional investigation of Enron, Jeff Skilling stated that he was 'simply' the CEO and not responsible for Enron's financial statements. It was unfathomable to the legislators, as well as to the SEC and the markets at large, that CEOs and CFOs were not actually reading the very financial statements that they were signing. In my view, the certification requirement has certainly focused management's attention in this respect. I believe it is one of the more beneficial provisions of the Act. Another reform in this theme concerns our rules requiring disclosure of whether companies have adopted a code of ethics for CEOs, CFOs and other senior financial personnel, as well as when there are material changes to, or waivers from, the code.

A third theme focuses on reforms designed to improve disclosure and financial reporting. These reforms include our rules relating to the use of non-GAAP financial measures and material off-balance sheet transactions, the point of which is to prevent issuers from providing misleading information. Also included in this theme is the famous (or infamous) Section 404, the requirement that management annually assess and report on, and auditors annually attest to, the assessment of a company's internal controls over financial reporting.

The fourth theme under SOx is improving the performance of gatekeepers. Pursuant to this theme, we adopted rules governing standards of conduct for attorneys appearing and practicing before the Commission, including a requirement to report "up the ladder" evidence of material violations of the securities laws or breaches of fiduciary duties. In addition, we approved listing standards for audit committees, including requiring the audit committee to be directly responsible for appointing and overseeing the outside auditors, as well as requiring that it establish procedures to receive complaints regarding financial matters.

The fifth and final theme under SOx is enhancing the Commission's enforcement tools. SOx gave the Commission the ability to establish a "Fair Fund" in our enforcement actions so that civil penalties levied against wrongdoers can be returned to harmed investors, in addition to any disgorgement that is ordered. SOx also lowered the standard for imposing officer or director bars in fraud, manipulation or insider trading cases from that of "substantial unfitness" to simply "unfitness." The Commission has increasingly used these new tools -- since July 2002, we have authorized an aggregate of about $5 billion in disgorgement and penalties to be placed in Fair Funds for return to shareholders. In addition, during the period of 2002 through 2004, we sought a total of 457 officer and director bars, up from a total of 89 in 2000 and 2001.

As I mentioned, the SOx reforms provide a good example of adopting rules meant to incent good behavior. The Commission's enforcement actions provide a good example of providing a disincentive to engage in bad behavior. After all, our rules requiring good corporate governance and transparent disclosure are even more effective when they are meaningfully -- but reasonably -- enforced.

While the Commission does not have the power to bring criminal actions, we do bring civil actions for violations of the securities laws, and we have an arsenal of remedies we can use in charging violations. We can seek injunctions, cease and desist orders, accountings, disgorgement, civil penalties and, as I mentioned, officer and director bars. As a result of SOx, we can also require management to return bonuses or profits from stock sales received within 12 months of a restatement resulting from material non-compliance with financial reporting requirements, and we can temporarily freeze certain extraordinary payments made to securities law violators, such as severance and other similar payments. In recent years, as you may have noticed, we have ratcheted up our enforcement staff and enforcement actions.

While we can incent good behavior through the rules we adopt, and disincent bad behavior through our enforcement of those rules, one thing we cannot do, and no regulator can do, is instill integrity, honesty and ethics in a company's culture and the individuals who set that culture. I perceive that many companies realize good corporate governance -- not mere compliance with the rules, but also ensuring that the proper tone is set, and that good behaviors are encouraged, throughout the company -- is valued in the marketplace. And with that final thought, I look forward to hearing from my fellow panel members regarding how public companies have dealt with these issues, and how corporate governance is assessed from an investor perspective. Thank you.


Modified: 03/31/2005