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U.S. Securities and Exchange Commission

Speech by SEC Chairman:
Remarks Before the New York Financial Writers Association


Chairman William H. Donaldson

U.S. Securities and Exchange Commission

New York, New York
June 5, 2003

Thanks, Paul for your flattering introduction and thanks to the New York Financial Writers Association and Richard Papiernik, this year's President, for inviting me to speak here this evening. It's an honor to address such an esteemed group.

First, I'd like to congratulate the 2003 New York Financial Writers Association scholarship winners as well as Matthew Winkler, the 2003 recipient of the Elliot V. Bell Award.

As many of you know, I've been in and around the New York financial world for some time, and as I look around the room, I see many familiar faces and some old friends. When Mike Kandel originally asked me to speak this evening, shortly after President Bush announced my nomination, my memory took me back to a time when Mike was a struggling writer with a brand new financial publication called the Institutional Investor Magazine.

Mike's boss, Gil Kaplan, the founder of I.I., had just shown up on the doorstep of an equally fledgling new investment firm called Donaldson, Lufkin and Jenrette to convince us to take out a back cover ad at a price that surpassed the combination of all three of our salaries and was almost laughable given our nonexistent advertising budget. So here's to Mike tonight — a little grayer, a lot wiser and a veritable tycoon in the electronic media world. Time flies when you are having fun.

As I sat here listening to Paul's generous introduction, once again my mind wandered to my early days as a college journalist — helping to produce a daily newspaper — the oldest college daily, the Yale Daily News, where Paul Steiger also toiled as a writer and an editor — more than a few years after I did for sure. At the time I felt that I was destined for a career in journalism myself.

I mention this — reaching back to my far away, somewhat dubious journalistic credentials — to gain at least a measure of credibility when I say I appreciate the challenges and responsibilities of your profession, but more on that later.

Up front, let me pronounce the standard disclaimer that goes with my new role as Chairman of the SEC: the views I express tonight are my own and not necessarily those of the Commission or its staff.

The other day as I thought about what might be interesting to the New York financial writers and your guests, I was reminded that today marks, almost exactly the notorious first 100 days in office for me — a benchmark often used by journalists to assess progress. Given the enormity of the task I and my Commission colleagues face at this particular time in history — it seems that100 days is hardly enough time to get our sleeves rolled up. However, we have been hard at work.

Clearly, the heightened pursuit of justice on behalf of those who have been wronged, which was triggered initially by the revelations of fraud at Enron had already been underway when I arrived at the Commission. In the past three months though, the pace has accelerated, and we continue to move with determination to confront the depressing array of fraud and malfeasance in the corporate and financial community.

The most historic of these efforts was the completion of the Global Settlement. I'm sure that many of you followed the negotiations closely, and you are fully aware of the hard work and countless hours that it took to reach a settlement. But, just because the terms of the settlement have been accepted and now await approval by the court, does not mean that we have put the settlement behind us. We are now following up to ensure compliance, not only with the letter but also with the spirit of the agreement.

The Commission has selected Bill McDonough, a leader in every sense of the word, to be Chairman of the Public Company Accounting Oversight Board. The PCAOB has had a difficult birth, but under the able leadership of acting Chairman Charles Neimeier, the Board has met a daunting set of congressionally mandated deadlines. With the addition of Bill McDonough, I'm confident that the PCAOB will make its mark as a tough and effective regulator and reformer of the accounting industry.

Throughout my confirmation process, I heard from numerous sources that the morale of the agency was deeply affected by the escalating workload occasioned by the post-bubble investigations of fraud and malfeasance, the limited human resources and budget of the Commission and the political strains that had surfaced. The SEC has needed a new approach to management that recognizes and emphasizes each aspect of the important work being done by the agency.

Therefore, we have set in motion a new management structure operating out of the Office of the Chairman to work with the division heads to manage our vastly expanded agenda, vastly escalating resources and the need to restructure to achieve efficient and effective results and cooperation between separate divisions. By focusing not just on the developments of the day, but on a new approach to policy and planning that seeks to look around corners to what's ahead, I believe it might be possible to anticipate developing situations and prevent the agency from operating in a totally reactive mode.

And, the Commissioners and I have established an environment of mutual respect, open discussion and effective decision-making that we all agree must be the hallmark of any great organization.

Without a doubt, this has been a busy period. Since I took office, the Commission has held 34 meetings addressing a variety of enforcement and policy issues, many related to the continued implementation of the landmark Sarbanes-Oxley legislation.

We have adopted seven new sets of rules related to the legislation addressing such issues as the responsibility of management for establishing and maintaining internal controls for financial reporting, making financial reports more accessible to the public, preventing the improper influence of auditors, and calling on the national securities exchanges to prohibit any company from listing their securities that does not meet new standards of audit committee responsibility and independence.

We have requested public comment on New York Stock Exchange and NASD rules that will address and limit security analyst conflicts of interest and disclose any conflicts that may exist, as well as their rules regarding corporate governance requirements for any company that wishes to list on the exchanges. And, the Commission has approved New York Stock Exchange rules regarding the dissemination of liquidity quotes.

We have worked closely with our overseers in Congress on numerous issues including the agency's dramatically increased budget, analysis of the hedge fund industry and pending legislation that will assist our recruiting efforts by expediting the hiring of accountants, economists, and analysts in order to meet the new challenges ahead of us. I have testified before Senate and House Committees seven times since being nominated on these issues and the details of the global settlement. In addition, members of the Commission staff have testified on these and other issues such as the return of funds to defrauded investors, and the regulation of credit rating agencies.

Since I took office on February 18, the Commission has brought 176 enforcement actions and pursued innovative new enforcement strategies, demonstrated by the lawsuits brought against Merrill Lynch and four of its former senior executives for helping Enron commit securities fraud and the proposed record $500 million penalty in the WorldCom case. These matters demonstrate the Commission's commitment to hold accountable anyone who takes part or assists in committing fraud. Of course, the fight against corporate fraud requires resolve in the boardroom and at all levels of government. I'm concerned about companies that, under permissive state laws, indemnify their officers and directors against disgorgement and penalties ordered in law enforcement actions, including those brought by the Commission. In my mind, this just isn't good public policy. This is an area in which we may need to consider ways to bring about reform.

Along the way, I've tried to make use of the bully pulpit that comes with the Chairmanship to reassure and inform investors both large and small as well as our Congressional oversight committees, that we are on the beat and will not tolerate abhorrent behavior in either the financial or corporate world.

I've tried to raise the consciousness of corporate America, particularly those that govern — Boards and Directors and even the Self Regulatory Organizations themselves — of their responsibilities that go beyond mere adherence or conformity to new dictates and laws of Sarbanes-Oxley: responsibilities that rest at the very heart of their obligation to investors to create a corporate culture of transparency and accountability.

Now, I recognize that as journalists your job is not only to report what has taken place, but perhaps even more importantly, to gain insight into what lies ahead, I figure you are somewhat more interested in what I believe is in store in the next 100 days and beyond.

In the simplest terms, you should first expect to see a continuation of what we have started. Aggressive but fair enforcement, focus on strong management, discussion of the fundamental responsibilities of the American corporate and financial communities, developing fair and orderly markets, protecting investors, and nurturing a cooperative environment will always be critical components of my agenda as Chairman. Our achievements in the first 100 days are not singular accomplishments representing a box that has been checked, but they represent a road that we have embarked upon leading to new challenges.

New areas of emphasis such as our current examination and investigation of hedge funds are underway. Hedge funds currently are largely off the Commission's radar screen because they are not registered with us. Our contact with some of these vehicles is only after fraud is suspected in their operations. We need to know more about how these vehicles are managed and operated. The significant growth in this sector of the investment management industry justifies the Commission's consideration of investor protection issues raised by hedge funds.

We are also moving forward on a review of practices in the mutual fund industry, with emphasis on questions of disclosure, transparency of fees and expenses, and sales practices. The degree to which investors understand mutual fund fees and expenses is a significant source of concern to us. These costs should be readily understood by investors, and our disclosure regime must facilitate this understanding. Additionally, mutual fund investors must understand where the conflicts of interest are and the incentives that a broker has in offering a fund to an investor. We will endeavor to improve transparency of these issues for fund investors.

As you may recall, in early April, I and the other members of the Commission called upon the Corp Fin staff to conduct a review of the current proxy rules, particularly as they relate to the nomination and election of directors. In this review, the staff will consider an issue that continues to draw extremely strong reactions across the spectrum — the issue of whether investors should have more direct access to the federal proxy machinery for the purpose of electing directors.

The Commission has considered this exact question before — first in 1942 and as recently as 1992 — without providing such direct access. A number of recent developments — including a rise in shareholder activism, an increased focus on corporate governance and the potential for technology to ease some of the costs for companies and investors — raise the question of whether this issue is ripe to be addressed again. The staff will provide its report to the Commission in mid-July, and I expect that the role of nominating committees, shareholder communications and means of access to the process of the election of directors will all be touched on.

We need to take a more comprehensive look at market structure, and we are beginning this project without delay. We must consider a variety of different subjects, both regulatory and commercial. What is the proper regulatory role of markets? Of SROs? What are the best models of self-regulation, or is there a single best model? What are the best models to achieve the proper balance between competition and fragmentation? How do we address difficult regulatory and business questions regarding market data? And of course, making all of these issues more complex is the overlay of increasing globalization of markets and the need to consider every question in the context of global markets.

So you can see from this list that we do not lack for important things to do.

And now, at the risk of literally biting the hand that fed me this evening, and in the spirit of using the bully pulpit to encourage self-examination, accountability, and transparency, I would like to touch on the important role that you, the financial press, play and the responsibilities that come with it.

Institutionally, the role of the financial press is critical to the pursuit of accountability and high standards. You all are as much stewards of corporate governance as corporate officers and directors, legislators and regulators. Many times you are the first to identify trends. You often tell us when we have done too little or perhaps gone too far. You apply a healthy skepticism to your work, and question what would have otherwise been generally unchallenged.

In many ways, much of the Commission's pursuit of greater disclosure and transparency throughout the corporate and financial world might be rendered ineffective without your conveyance of information to individual investors through your reporting.

As the free press, performing as you do the essential role of unbiased reporting and critical professional examination — I ask that you reflect on the role you may have played in the bubble economy that came to such an abrupt halt.

During the boom of the nineties, even those with the highest of standards got carried away as the band played faster and faster. In the case of the media, the market boom coincided with an unprecedented growth and evolution of new media outlets and consumer dependence on the real-time reporting of the latest financial news. As the stock market became more easily accessible and many people who had never owned stock before began to dabble in the markets, the reporting of the financial press seemed to be the key to success — reporting the latest hot tips and buzz about future market movers, perhaps contributing to the false sense of confidence that plagued many new investors.

All of you, of course are employed for the most part by corporate organizations — organizations that must march to the beat of the economic dictates of commercial enterprise. Corporate entities that must produce a product, whether electronic or print, that satisfies the demands of particular market segments, as well as general mass audiences.

You experience — as we all do — tensions associated with delivering a quality product within the context of commercial demands.

But just as we have asked corporate America as a whole, particularly those who serve as the stewards of corporate governance, including the SRO's, to embark upon a thorough examination of their governance practices, Wall Street to examine its methods, and individual investors to think twice about their approach to investing and assessment of risk, as we move forward I would ask you all to turn the looking glass around and examine the way you do your own business and how you can learn from the lessons of the past.

I hope I will not be interpreted as attacking or preaching — but only asking for the same sort of self-examination of role in a commercial society as we move ahead to restore the faith in a large segment of the business and financial community and its leadership. I would ask no more or no less than I would ask of those who lead and govern the shareholder-owned enterprises of our society. These words come from someone who believes deeply in the freedom of the press, of the critical role you play in our society and the responsibilities that come with it.

With that I thank you again for the opportunity to be with you this evening, and I will be happy to take any questions you may have.



Modified: 06/09/2003