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U.S. Securities and Exchange Commission

Speech by SEC Staff:
Putting Investors First: Remarks before the ALI-ABA Course of Study SEC/NASD Compliance


Linda Chatman Thomsen

Director, Division of Enforcement
U.S. Securities and Exchange Commission

Washington, D.C.
June 17, 2005

The SEC, as a matter of policy, disclaims responsibility for any private publication or statement by any of its employees. The views expressed herein are those of the author and do not necessarily reflect the views of the Commission or the staff of the Commission.

Thank you for the opportunity to speak to you today.

No one here would dispute that, from a securities regulatory and law enforcement perspective, the last couple years have been among the most intense in the history of the securities industry. This has been a period in which we have seen significant cases involving some of the best known names in the industry, and remedies that are among the most significant in the Commission's history. I've heard the refrain from some corners of the industry that, "yes, we made some mistakes, but we've learned our lesson - we get it - you can leave us alone now." While I'm afraid I can't assure you that we'll leave the industry alone now, I want you to know that we do recognize that the industry has taken these events very seriously and has put a tremendous amount of resources, time, and effort into correcting problems and seeking to prevent similar problems from occurring in the future.

My message to you today is to keep it up - keep up your vigilance, avoid complacency, and remain steadfast in your efforts to maintain strong compliance programs, built on the foundation of a culture in which investor interests are placed first. Let your business and compliance decisions always be guided by that principle. As for us, we will also keep up our role in meeting the Commission's goals of protecting investors; maintaining fair, orderly, and efficient markets; and facilitating capital formation. It has been said that "[e]ternal vigilance is the price of liberty."1 And that is my theme for today: our need to remain vigilant. Of course, my views are my own and do not necessarily reflect the views of the Commission or any other member of the staff.

Sunscreen and floss

In light of the events of the past couple years, the clear challenge for the securities industry is to remain vigilant in seeking to prevent the next potential scandal - a daunting task, I realize. In my view, there are two primary keys to achieving this goal. The first is what I call sunscreen and floss - in order for it to make a difference, you have to wear sunscreen regularly, and floss daily. Doing these things once a year isn't going to do you much good. And this isn't just an issue of diligence or developing a routine. Applying the analogy to the compliance realm, it is making sure you create and foster within your firm a culture of compliance that encourages and supports prophylactic measures. This requires having, what my colleague Lori Richards has referred to as, a "living, breathing" compliance program - one that is active and constantly evolving in seeking to prevent, detect, and correct securities law violations.2 Your compliance program will not succeed if it is static, and fails to reflect changes in your business practices, your customers, the external environment, including legislative and regulatory changes, and other relevant factors. Furthermore, your compliance program must be executed in a creative manner that seeks to prevent and detect misconduct that may take new and different forms. This task requires constantly looking out for potential conflicts of interest and weak points in your policies and procedures, and exploring ways in which people might try to game the system, subverting the rules and standards to which they are subject. In other words, your program must be proactive, not just reactive.

The second key is to stay strongly focused, in the midst of keeping on top of all the minute details of maintaining a strong compliance program, on who, fundamentally, you are doing all this for, and why. And who is that? Is it the SEC? Is it to avoid an enforcement action? To satisfy the terms of the many new rules that have recently been adopted? Of course all of that is essential, but ultimately you are doing all of this for your customers, or, if you want to view it from the bottom line, the people who represent your most valuable business asset. Your efforts won't get you far in the end unless your guiding principle in making business and compliance decisions is what is in investors' best interests. While you can't anticipate every potential conflict of interest situation that may arise, if you apply this principle when making decisions, you are much more likely to come to the right answer - one that is consistent with the letter and spirit of the law. The success of this strategy, however, is dependent on whether your firm maintains a true culture of compliance, in which a belief that investor interests come first permeates all levels of the organization.

This is not an especially profound concept and yet it seems we need to relearn it. While it may be true that we learned everything we really need to know in kindergarten, it is also true that we need constant reeducation. I'm thinking about our recent settlement with two adviser subsidiaries of Citigroup, in which the advisers structured a transfer agency arrangement with a third party in a manner designed to maximize the profit potential of the arrangement to Citigroup, at the expense of the funds managed by these advisers.3 The advisers negotiated an arrangement in which a Citigroup affiliate would keep most of the profit formerly made by the funds' unaffiliated transfer agent, despite providing very limited services to the funds, and Citigroup affiliates would be guaranteed substantial investment banking and asset management business from the unaffiliated transfer agent. The advisers failed to disclose to the funds' boards the material terms of the arrangement, including the extensive benefits Citigroup would receive, and that the unaffiliated transfer agent had offered to continue performing all transfer agency services for the funds, as it had in the past, but at a $25 million annual fee discount. Our sanctions against the firm, which included $128 million in disgorgement and interest, an $80 million penalty and extensive remedial measures that require, among other things, an independent bidding process for fund transfer agency services when a Citigroup affiliate is bidding, reflect the egregious breach of fiduciary duty that occurred in this situation.

What is most striking to me about the Citigroup case is the great lengths Citigroup went to in analyzing the benefits that could be gained by renegotiating the funds' transfer agency agreement, while seemingly failing to recognize that it was the funds, not Citigroup, that were entitled to those benefits. The company retained a consulting firm to perform a comprehensive analysis of alternative transfer agency arrangements, and negotiated extensively with the funds' existing transfer agent to get the best deal possible. The problem was that the analysis and negotiations were focused on obtaining the most benefits and getting the best deal for Citigroup, not for the funds - a fundamental breach by the advisers of their fiduciary duty. I have to wonder whether the result would have been different if the advisers had taken a step back, while evaluating the potential benefits of a renegotiated arrangement, and asked a simple series of questions - whose money is this? Whose cost savings? Whose benefit? If they had done that, I believe the answer would have been equally simple -- the funds, not Citigroup. The opportunity for cost savings offered by the funds' transfer agent was an opportunity that belonged to the funds.

Your reaction to this case may be that this type of conduct is unusual, that the case is an outlier. I certainly hope that conduct like this is the exception, and not the rule, but I'm afraid we continue to see too many situations that seem to raise this same theme.

We also must put investors first

Will the Division of Enforcement "give the industry a break for a while?" I think this question, in part, reflects to some extent the misperception that this is an area in which we can declare victory and go home. But the issues of conflicts and money are chronic issues, vulnerabilities that will never completely go away and which must be managed. To answer the question more directly, we, like you, have to continue doing our job, which is to protect investors; maintain fair, orderly, and efficient markets; and facilitate capital formation. These three goals, which together form the Commission's mission statement, are clearly inter-related: by seeking to ensure the markets operate in a fair and efficient manner, we protect investors and create a market environment in which investors are not afraid to commit capital. While these goals are not necessarily the same as protecting the industry, I do believe they are consistent with the long-term best interests of the industry - if investors are getting hurt, the markets are not operated in a fair manner, and people are afraid to invest, your businesses don't stand much of a chance. So, to the extent we continue to uncover illegal conduct in the securities industry that harms investors, we won't give the perpetrators a break.

Rather than just telling you we are going to continue to do our job, I'd like to spend a few minutes telling you a little more about how we do our job. You often hear the phrase "tough but fair" and we've heard a lot lately about toughness. Today, I'd like to talk about fairness. It is at the core of what we do.

To be more specific, I thought it would be helpful to outline for you the process that our enforcement recommendations undergo before the Commission files a case. Before our recommendations even reach the Commission, they undergo a detailed review within the Division of Enforcement, including approval by senior management within the Division. Our enforcement recommendations are also reviewed by other divisions including, as appropriate, the Division of Investment Management, the Division of Market Regulation, and the Division of Corporation Finance, along with the Office of General Counsel. We provide an opportunity for potential respondents or defendants to answer our proposed charges through the Wells process and, when appropriate, revise our recommendation to reflect the input we have received. Finally, every single one of our recommendations must, in order to become a filed case, be approved by the Commission. It is a painstaking process, but one I believe ensures the fairness and appropriateness of the actions we bring. The purpose of having such a rigorous process is to make sure we get it right, a responsibility we take very seriously. In doing our job of enforcing the federal securities laws, I believe it is imperative that we be steadfast, but not stubborn; tough, but fair. Our rigorous internal process is designed to make sure we meet those standards.

The issue of fairness in law enforcement is not new; I think it has been around as long as government law enforcement has existed. In 1940, then United States Attorney General, soon to be United States Supreme Court Justice, Robert Jackson addressed an assemblage of United States Attorneys. There was a lot going on at the time, as his speech reflected, but he chose to spend most of his time on issues of fairness. At one point he said: "[y]our positions are of such independence and importance that while you are being diligent, strict, and vigorous in law enforcement you can also afford to be just."4 That sentiment is equally applicable to our work as enforcers of the federal securities laws.


To summarize, I think the securities industry and the SEC share a common focus in many respects, as much as our interests may appear, at times, to diverge. That common focus is the best interests of investors, and both you and we must continue to do our jobs in a manner that puts investors first. For you, I believe that means maintaining a strong, but flexible, compliance program - using your sunscreen and floss -- and looking to investor interests in making compliance and business decisions. For us, that means we will continue to bring actions when we uncover illegal conduct that has harmed investors, and will continue to follow our rigorous internal process of analysis and review, in order to ensure the fairness and appropriateness of the actions we bring.

Thank you.



Modified: 06/23/2005