Speech by SEC Commissioner:
Remarks before the SEC Open Meeting
Commissioner Paul S. Atkins
U.S. Securities and Exchange Commission
June 29, 2005
Thank you Mr. Chairman. Before I begin my remarks, I'd like to put into context what we are doing here today. I have prepared a timeline to walk you through the events of the past week.
On Tuesday at 10:00 am, the United States Court of Appeals for the District of Columbia released its opinion remanding this rule.
Less than 12 hours after the opinion's release, at 8:35 in the evening, the Chairman's chief of staff scheduled the issue for a vote on June 29, stating that the SEC staff has "concluded that the court's concerns can be addressed on the basis of the record already before the Commission".
The next day the SEC posted a Sunshine Act notice on its website announcing that this matter would be addressed at today's meeting.
- As Commissioner Glassman noted, Chairman Donaldson took an extraordinary step in issuing this notice, which I will address more fully later.
On Thursday, we received the first of numerous letters urging the SEC not to proceed in this way.
On Friday, we had an office move. All Commissioners and their personal staff had to be out of offices at the old headquarters building by 3:00 in the afternoon.
Later that day, only 80 hours after the Court's decision, at 6:15 in the evening, the SEC staff provided the Commissioners and their staff with a 27-page release that "fully addresses the issues remanded to the SEC" and recommends that no further information gathering is necessary.
- To place this timeframe in context, it is customary for the SEC staff to submit drafts of releases to be voted on at open meetings at least 14 days in advance, and, in most cases, 30 days in advance.
- Not a single member of the SEC staff contacted me or my staff to solicit my view or any input as to how the SEC should respond to the Court's decision.
Over the weekend, due to the office move, none of the Commissioners or their personal staff had any access to office space or computers.
Monday, June 27
On Monday morning, Commissioners and their personal staff moved into this new headquarters building.
Around noon, the SEC General Counsel stopped by my office for the first time to see if I had any questions about the recommendation.
At 4:00 pm, Commissioner Glassman asked Chairman Donaldson to remove the recommendation from the calendar and seek additional comment.
At 5:30 pm, I also asked Chairman Donaldson to remove the recommendation from calendar and seek additional public comment.
At 6:57 that evening, my staff received a copy of a significantly revised release.
At 10:00 am, the Commissioners' staffs met to discuss the release. It was clear that the recommendation was written in stone.
Noon yesterday was the Chairman's imposed deadline for receipt of dissenting statements. I was not able to comply as we had not yet received the final release.
Then, last night after 5:00 pm we received a final pre-meeting draft.
Finally, only 192 hours after the Court's decision, we are gathered for this meeting to re-approve the fund governance rule.
Of course, tomorrow is Chairman Donaldson's last day at the SEC
It's been a heck of a week!
As the timeline shows, the ink on the Court's opinion was not even dry when the die was cast for today's predetermined result. After protesting repeatedly over the past year and a half about our inability to conduct an analysis, the majority claims to have done just that in about a week.
This peculiar sequence of events is a very fitting capstone on this flawed rulemaking process in which the majority's self-described "logic and experience and anecdotal evidence"1 has counted more than anything else. When the majority adopted the rule, it described costs as minimal, explained that our staff had no "reliable basis" for estimating costs, and complained that doing so would be "difficult".2 After the rule's adoption, Congress asked the Commission to submit a report justifying the rule. The staff report, which the majority submitted to Congress in April over Commissioner Glassman's and my objections, continued to insist that costs were minimal, "speculative", and could not be estimated.3
I would have thought that the order of a unanimous court would have chastened the Commission, but the release only perpetuates the cavalier attitude with which we have approached our obligations in this rulemaking. While the DC Circuit, appreciating the difficulty of estimating costs in this area, did not demand perfection, it did direct us to do the best we can.4 I respectfully submit that our eight day reconsideration of the rule does not meet this standard.
The release purports to undertake a consideration of the deficiencies identified by the Court on the basis of information in the existing record and information that was publicly available at the time of adoption. This approach is problematic on several fronts. First, and most importantly, some funds have already begun to comply with the fund governance rules. Instead of relying on estimates, the Commission could easily conduct a survey asking questions about actual costs to comply with the rules. Why would we not seize on this fortuitous opportunity to utilize current, relevant data? In this regard, just two days ago, the ICI volunteered to assist the SEC with obtaining this information from its widespread and representative membership.5
Second, the release implicitly acknowledges that the rulemaking record contained critical gaps regarding costs. Recognizing this flaw, the majority haphazardly searches for additional information that happened to be publicly available at the time of the rule's adoption to attempt to justify its actions. The majority takes a sort of "judicial notice" of the newly-discovered information by treating it as irrefutable fact and uses it to ratify its prior decision. The majority's primary discovery was a two-page newsletter, which summarizes the results of a nonpublic survey about director compensation conducted by a private consulting firm. Incidentally, the SEC staff did not obtain a copy of the underlying non-public survey because doing so would contradict the majority's intention to rely only on the purportedly adequate public record. In any case, before relying so heavily on this summary, the majority should have included this summary in the comment file to alert the public of its intention to rely upon it. The public then could have reacted to it. The SEC economists should have evaluated the underlying data. The information presented in the summary may inform any decision that we make, but it should not do so in isolation. Others who are not consultants to independent directors, as the author of this summary is, might have supplemented or contradicted the data. Of course, this process could not possibly have occurred within the eight-day period the majority allowed itself. Does this respond to the Court's demand to do the "best we can"?
In addition to finding fault with the Commission's analysis of costs, the Court took issue with our consideration of alternatives. The Court directed the Commission to "bring its expertise and its best judgment to bear" to consider the disclosure alternative that Commissioner Glassman and I raised.6 The Commission's failure to do so violated the Administrative Procedure Act7 because, as the Court said, "the disclosure alternative was neither frivolous nor out of bounds."8 Oddly, neither the majority nor the staff solicited our views on the disclosure alternative before (or after) circulating a draft that concluded that the disclosure alternative was without merit. Thus, the majority's action today cannot be said to embody the expertise and best judgment of the Commission.
The release largely reiterates an argument, already dismissed by the Court as irrelevant,9 that the '40 Act always favors a prescriptive approach over a disclosure approach.10 As the court explained, "that the Congress required more than disclosure with respect to some matters governed by the ICA does not mean it deemed disclosure insufficient with respect to all such matters."11 The release ignores that we have found disclosure rather than prescriptive, one-size-fits-all solutions to be sufficient in a number of other contexts.
The majority claims that the proposing release elicited comment on the disclosure alternative. Although the proposing release did ask whether the Commission should consider any alternatives to the proposal, disclosure was not specifically mentioned. As the majority notes, a few commenters raised the possibility of allowing investors to choose among funds based on clear disclosure about the independence of their chairman.12 These comments were ignored and the staff's summary of comments did not discuss them. Commissioner Glassman's and my attempts to find a disclosure-based compromise were also ignored. In light of the refusal to consider the disclosure alternative prior to adoption, it is hard to understand how the rulemaking record can now form the basis for a full and fair discussion of this alternative.
Commissioner Glassman and I have both called for a more deliberate response to the Court. We could, for example, conduct a formal, unbiased survey, host a roundtable, or solicit additional public comment on the issues raised by the Court. Many others have made similar pleas. Because the failures identified by the Court relate to issues that were not fully aired during the notice-and-comment process, one logical approach would seem to be to do so now. As the Court explained, "uncertainty may limit what the Commission can do, but it does not excuse the Commission from its statutory obligation to do what it can to apprise itself - and hence the public and the Congress - of the economic consequences of a proposed regulation before it decides whether to adopt the measure."13
In the release, the majority boldly states that taking more than 8 days to reflect on this issue "risks significant harm to investors." The majority does not elaborate on how delaying action on the remand for the short time that it would take to do a thorough study would endanger investors. The urgency of forcing funds to change their governance structures seems to be more closely tied to the imminent departure of Chairman Donaldson and Commissioner Goldschmid than to legitimate concerns about the well-being of the shareholders in the many fund groups that do not have independent chairmen.
The release admits that the timing of this action is personnel-driven. It explains that the SEC needs to act expeditiously to marshal "the collective judgment and learning" of the five commissioners that originally considered the rule. It does not note the significant procedural and substantive objections that Commissioner Glassman and I raised before the rule was originally adopted. It does not note our futile pleas that the Commission obtain more empirical evidence. More importantly, though, if the Commission adopts a meritorious rule under lawful procedures, then the composition of the Commission that adopted it is irrelevant. The rule should be able to weather the inevitable personnel changes at the SEC and stand on its own without the support of the three commissioners that originally voted for it.
Finally, I must address the overall significance of these last eight days in the context of the Commission's 71-year history. The majority's action today demonstrates a profound disrespect for the rule of law. As the timeline shows, on June 21st of this year, just eight days ago, the DC Circuit took an extraordinary step. A unanimous court held that the SEC had failed in its obligations and violated the Administrative Procedure Act and the Investment Company Act.
This ruling was not a victory for the SEC. Considering the standard of review and the high degree of deference that courts grant to administrative agencies, a unanimous court holding that we have violated the law is nothing short of an absolute embarrassment. In fact, I can only think of three occasions in the SEC's entire history that the agency has been rebuked in a similar fashion.
I question the majority's conclusion that "[t]he Court did not vacate the rule amendments … and they remain in effect." The Court specifically identified two statutory violations in the process by which the majority adopted these rules. Until these statutory violations are remedied, the rule is not in effect, because the SEC has not satisfied the statutory predicate for legitimacy and enforceability of our rules. The only way for us to cure these fatal flaws is to comply with the Administrative Procedure Act and the Investment Company Act as the Court has directed us to do and which today's action does not do.
The Court gave the SEC a chance to redeem itself. It told us what we needed to do to fulfill our legal obligation. Unfortunately, three members of the SEC have decided to squander this opportunity.
Thus, I dissent. I plan to file a written dissent.
I have one question: Since this meeting was noticed, we have received numerous letters from commenters with a range of viewpoints. Will these letters be placed in the comment file?
Finally, I would like to make a few points of clarification. With respect to Mr. Prezioso's point on knowledge of an impending lawsuit justifying inclusion of the footnote regarding defense of future lawsuits, the Commission has faced impending suits before, including over Chairman Levitt's municipal bond pay-to-play rules.
Commissioner Glassman's point about duty officer action by the Chairman is that the process was rushed, not illegal. I served under two chairmen and remember only one instance in which the Chairman acted as duty officer - and that was because the acting duty officer was unavailable and the incident was a true emergency to catch a fraudster who had misappropriated millions of dollars.
As to the numerous points on substance that the staff and the Chairman have raised, I am on record in my dissent as to my view of this one-size-fits-all rule. The simple fact that some of the most egregious conduct in the recent scandals has happened at complexes with independent chairmen and 75 percent independent boards belies the effectiveness of this rule. But, today we are talking about a broken, flawed process and I believe that this is one of the saddest days in the Commission's 71-year history.