Speech by SEC Chairman:
Remarks Before the Securities Industry Association
Chairman Christopher Cox
U.S. Securities and Exchange Commission
Boca Raton, Florida
November 11, 2005
Good morning and thank you, Mark, for that generous introduction.
Having very recently addressed an SIA gathering in China, it's a pleasure to speak to you today in Boca Raton.
Some might find it ironic that this gathering of securities professionals is being held in a town whose name is a loose translation from the Spanish for "Pirates' Cove" or "Den of Thieves."
The name is a quaint reminder of the 18th century hijinks that used to take place in this part of the world. But it's also a fitting reminder that many of today's pirates sail the seas of high finance. And not only ordinary investors, but even seasoned professionals such as yourselves, need to watch your wallets.
Our capital markets depend on investors' confidence that they'll be protected from fraud and unfair dealing that their money will be safe from all but genuine market risks. For that reason, all of us here are comrades in our shared struggle against the financial outlaws of the 21st century.
The SIA itself is one of America's most distinguished veterans in this fight. And so, on Veterans Day, I salute you for your leadership.
This holiday may mark the eleventh hour of the eleventh day of the eleventh month, but none of you has waited until the eleventh hour to join the battle. For many years now, you've been in the trenches to protect our markets and investor confidence against the onslaught of corporate and accounting scandals.
As Malcolm Gladwell, who was with us earlier, has so brilliantly shown us, an accumulation of bad things can reach a tipping point. When enough investors lose confidence, there comes a point where they will flee the market in droves. At that point, it is America's economic security that is put at risk. That's how high the stakes were when scandals of the magnitude of Enron, WorldCom, and Global Crossing shook our markets to their foundations.
Today, it's clear that investors' confidence in our capital markets is back. Our nation's quick recovery from these egregious scandals is largely attributable to the persistent integrity of millions of truly honest and good American men and women who populate the world of finance. By continuing to do your jobs, and redoubling your hard work for your customers when the going got tough, you upheld our nation's reputation as the gold standard for investors.
World War I, whose armistice we commemorate today, was called the "war to end all wars." We all know it wasn't. We know, too, that as much as we would wish it, neither Enron, nor Parmalat, nor Refco will be the scandal that ends all scandals. Fraud and unfair dealing will always be with us, so long as there are large amounts of other peoples' money to tempt the unscrupulous.
But there is much that we can do, together, to arrest this threatening behavior before it does its worst damage. Our redoubled emphasis on sound corporate governance, solid controls, and transparent financial and business reporting is our best way to make sure that we don't face another shock of this magnitude in our capital markets.
That's why, when I took the helm of the SEC 100 days ago, I made enforcement our number one priority. Prior to my confirmation, some had wondered whether the SEC's direction would change in this regard. It will not. We are, first and foremost, the investor's advocate. And rigorous enforcement of the nation's securities laws is the essential tool in our arsenal.
Another thing that won't change under my chairmanship is the Commission's recent rulemakings. The confirmation of a new Chairman ought not to be a signal to re-open and contest every prior Commission enactment. That's why the Commission is continuing to defend in court its rules concerning mutual fund director independence. While I didn't participate in this rulemaking, which preceded my Chairmanship, I will always defend the agency's regulatory prerogatives so long as I am Chairman.
The same is true of the Commission's rule requiring the registration of hedge fund advisors. This rule, too, antedates my Chairmanship. It's scheduled to go into effect in February 2006 and it will. It is my conviction that consistency and clarity in rulemaking and enforcement are essential.
The SEC will strive for that going forward, as well. We will work to provide you and your customers all of the guidance you require, so that you can do your jobs the very best you know how.
Some of you have been telling us that the new disclosure requirements of Sarbanes-Oxley are too expensive, too burdensome, and even counterproductive. The Commission and its professional staff are listening. And we're working to fine tune this, and all of our rules, so that we get the maximum amount of investor protection at the lowest possible cost.
I want to reassure you: We at the SEC know that right now this is not true of all of our regulations, no matter how well intentioned. And we understand that regulation that's intended to improve the competitiveness of our markets can if we're not careful have the opposite effect. We know we've got to take care with the medicine we employ to cure the ills and maintain the health of the securities markets.
How many of you remember the BBC series 'I, Claudius' that ran for so long on Masterpiece Theater? If you remember the series, or your Roman history, you know that the way Claudius got medical treatment after his wife tried to poison him is a case study in unintended consequences. His wife tried to kill him by serving him poison mushrooms. He ate the mushrooms. But Claudius got his doctor to come before it was too late. The doctor used a feather to tickle Claudius' throat, to make him throw up. And lo and behold, it worked.
Thanks to that doctor, the emperor did throw up, and he wasn't poisoned. Instead, he choked to death on the feather.
As we work together to protect investors and stimulate capital formation, we've got to be sure we don't choke on our own medicine. That's why we're listening carefully to the Advisory Committee on Smaller Public Companies. We've already implemented the first of their recommendations.
There is, after all, a deeper purpose to the SEC's enforcement mission and a reason for our relentless focus on investor protection. Investor confidence is the bedrock foundation of healthy and competitive capital markets. It is the key to promoting capital formation. And so in enforcement and everything else we do, from rulemaking to no action letters, the SEC will constantly work to see to it that our regulation is a net contributor to American productivity, savings, and investment.
One of the most significant ways that the SEC can contribute to your productivity and our own is by encouraging the widespread use of interactive data. Before I get more deeply into what interactive data is, let me tell you what it will do.
It will make the disclosure mandated by the SEC vastly more useful to investors. It will make it more useful to you, to analysts in your firms, and to every market participant. With interactive data, the information in SEC reports could be made instantly searchable by anyone with an Internet hookup. Not just the disclosure documents, but the data within them will be searchable and retrievable. Interactive data will dramatically improve the usefulness of the entire disclosure exercise.
Right now, in countries around the world, companies, software designers, the accounting profession, and regulators are teaming up in an unprecedented global effort. In much the same way that Linux has developed an open source operating system for computers worldwide, a computer language for financial reporting called XBRL is being developed as a global open standard. It holds the potential to revolutionize financial reporting and corporate disclosure worldwide.
Very recently, the SEC has taken the lead in encouraging the adoption of XBRL to keep U.S. markets, exchanges, companies, and investors ahead of the curve. The interactive data that XBRL data tagging makes possible can help everyone in this room achieve many of your different goals: keeping investors informed; minimizing your costs and improving your productivity as analysts; and managing your own companies better with real time management control information. Interactive data can make the SEC a far more effective regulator, by helping us focus on preventing fraud, not just reacting to it.
Once data in SEC-mandated reports is made interactive, the numbers in financial reports will jump off the page. They'll not only be instantly searchable and retrievable, but you'll also be able to immediately download them into spreadsheets and an unlimited number of software applications.
Earlier this year, the SEC started down this road with a purely voluntary filing program. Issuers can now submit interactive documents in the XBRL computer language, which is an adaptation of XML. As many of you know at least the tech mavens among us XML is already in use throughout our economy. And the good news is, anything you can do in XML, you can do in XBRL.
Those RSS feeds you can now get on your desktop from almost every financial publication? No problem. Think SEC web feeds, direct to your desktop, with automatic robotic web searches all conducted in the background, in real time.
And why stop there? Your computer can use this real-time data to automatically assemble your favorite ratios and instantly pop them up on a toolbar.
And now, the even better part: what we can get rid of, if we move to interactive data.
Right now, thousands of people in financial firms across America are going through the time-consuming, laborious task of sifting through paper, text, and HTML reports. They're keyboarding data from static SEC reports into more useful formats, so they can actually use it. They need to do this if they want to compare companies and industries, and to fully understand an issuer's finances. Without that physical re-keying in of financial data, no analyst can begin to make sense of it.
We can completely eliminate this backbreaking, expensive, error-prone, natural-resource wasting task. It is so 20th century.
With interactive data, you can slice and dice the information like a chef at Benihana with a cube of Kobe beef. No more collating by the back-office staff. If you want to compare net income for 50 companies in one industry; or accounts receivable for 100 companies across three industries, or summon up financial ratios for all the companies on the S&P 500, you'll be able to do it instantly.
That's because each piece of information in an XBRL report is "tagged" with a computer label. That way, every entry in a balance sheet or income statement is easily identifiable. The taxonomies for these labels basically, the vocabulary for describing each entry in a financial report will tag every monetary value.
But the XBRL taxonomy is going further, to develop descriptions of non-quantitative info, such as footnotes. This means that someday, measurement of 404 compliance might be accomplished by examining the adequacy of data tags and the consistency of their use and application. A significant part of the 404 work could be automated.
Interactive data may even end up solving the seemingly intractable dilemma of different global accounting standards.
We all know that value judgments, perhaps irreconcilable ones, go into accounting standards. These decisions go to the heart of what's important to each culture. That's why I told the XBRL conference in Tokyo just this week that the quest for a global accounting Esperanto might never be achieved.
But then again, it might never be necessary because interactive data may make it possible for the users of financial information to customize the presentation of any set of reports as they see fit. The same set of data could be rendered according to U.S. GAAP, or International Financial Standards, or any system you choose. Instead of comparing apples to oranges, we may be able to compare Fuji apples to Granny Smiths.
The SEC's own mission will be furthered by using interactive data to review and analyze financial reports more efficiently. By applying more of our scarce resources to our main job of maintaining integrity in markets, we can better achieve the ultimate aim of all of our rules, enforcement, and regulatory guidance.
I truly believe that interactive data promises a reporting revolution, and the SEC intends to be at the forefront. That's why we instituted the XBRL Voluntary Filing Program. And it's why I'm here this morning, encouraging each of you, and your firms, to participate. The analysts among you may also want to discuss this project with the companies you follow.
It is in your interest, and your clients' America's investors because every one of them will be able to use this information, and draw these comparisons, in the same way, once this information goes on the Internet.
No, it isn't perfect yet and we all know that with technology, not everything goes off without a hitch the first time. That's as true with space flight as it is with financial reporting.
Who here doesn't remember or isn't old enough to remember the first manned American space flight? It was 1961, Freedom 7. It was just amazing. Every last detail planned for.
There was a major hitch in the launch procedure, and it caused a lengthy delay. Alan Shepard, in his remarkably cumbersome space suit, was forced to lie in that tiny capsule on his back, ready for launch, for hours on end. Finally, he contacted mission control:
"Houston, we have a problem."
For all the science, all the planning, it hadn't occurred to anyone to think about toilet facilities. It was, after all, scheduled to be a 15-minute flight. Alan Shepard was instructed to
go in his suit.
It's a humbling reminder to think ahead which is what we're trying to do at the SEC.
All the technology we're planning for can only help the investor if the data and analysis we collect is accurate to begin with. That's why one of the great attractions of XBRL tagging and interactive data is that the errors from today's manual data entry can be eliminated.
Back in 1961, those scientists at NASA were enthusiastic about all of the physiological data they'd collect from the sensors attached to Alan Shepard. They'd gain invaluable knowledge about how the human body reacts to space travel information vital to future missions. And so, with myriad wires and sensors connected to Shepard, NASA dutifully recorded the precise level of his heart rate, his blood pressure, and his breathing. And it was all useless.
The graphs and charts of Shepard's vital signs reflected the readings of sensors that had become urine-soaked.
That one oversight what to do about going to the bathroom seems an obvious point, now. But sometimes, when you fail to consult with the right people, you miss what's obvious to others. If only NASA had run the scenario by a group of kids beforehand, they would have known. I know because my brother in law, Mike Gernhardt, is an astronaut. He's been up in the shuttle four times, but as part of his earthly duties, he often speaks to students. And he says that, without fail, their most popular question is: "How do you go to the bathroom?"
A few years back, Mike gave my son Charles, who was 6 at the time, the thrill of a lifetime with a phone call from space. Rebecca and I had prepared Charles for this. We impressed upon him the importance of coming up with a really good question. So when his uncle Mike called, what was the very first thing he asked? Yep "How do you go to the bathroom?"
So that's why we're encouraging input from all of you. We need everyone the public, investors, business, computer experts, and financial professionals to participate. There might be something obvious to you that we have overlooked, something crucial to our mission. As Malcolm Gladwell reminded us, the little things can become big things.
But don't forget that Alan Shepard, and my brother in law Mike, both did travel in space. And interactive data, even though it is new technology and has risks, will someday soon take us to new heights. It will change our world. In that way, interactive data is just like the Internet itself, which has changed and democratized everything, and improved productivity in every industry.
It is difficult to believe that on the original Veterans Day, at the end of WW I, in the age of our grandparents, most Americans lived on farms and only a tiny fraction owned stocks. Even just a generation ago, during the Reagan Administration, only 19% of American households owned stocks. But the SIA's latest survey, released yesterday, shows that today more than 50% of American households own equities. What a sea change.
Today's information society is creating growth and opportunity unlike any the world has ever seen. And the same technology that is driving global economic growth is contributing great new weapons to our arsenal for protecting investors.
But even nine decades after the original Armistice Day, we can't yet declare armistice in the struggle against those who threaten our financial security. And while new technology will magnify the efforts of all of the professionals at the SEC, we will continue to rely on our fundamental enforcement tools. The guns of the SEC are not about to fall silent.
As we go forward, if we are going to accomplish our mission of protecting investors and growing our capital markets, the securities industry and the SEC must always fire in the same direction. I look forward to serving with this distinguished legion of veterans.
Thank you for what you do for America's investors, and America's economy. And happy Veterans Day.