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U.S. Securities and Exchange Commission

Speech by SEC Staff:
Remarks Before the Fall CLE Conference of the Section of Business Law of The American Bar Association


Giovanni P. Prezioso

General Counsel,
U.S. Securities and Exchange Commission

Washington, DC
November 18, 2005

The Securities and Exchange Commission, 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 those of the Commission, the Commissioners or of the author's colleagues on the staff of the Commission.

Good afternoon. Thank you for your kind introduction and for inviting me to speak today. Let me begin by saying, as always, the views that I express are my own and do not necessarily represent those of the Commission or my colleagues on the staff.

My topic today is technology - more specifically, the impact of technological change on securities regulation and the work of securities lawyers. Now don’t misunderstand, I’m not planning to talk about the way word processing, e-mail and the internet affect the daily business of securities lawyers - although they surely have revolutionized our professional lives. Not too many years ago, I was at a holiday party at my old law firm, where one of the retired partners was regaling the young associates with stories about the “good old days” when technology consisted of a typewriter and carbon paper.  One of the associates, slightly awestruck, said, “You mean you couldn’t re-write and revise and move paragraphs and make photocopies - how did you ever get your work done?” Without missing a beat, the partner replied, “We did it right the first time.”

What I would like to talk about, instead, is the important role that the securities bar can play in helping the Commission and market participants develop a legal and regulatory regime that takes full advantage of advances in communications and other technologies. Why address this topic? Three reasons: a concern, a hope, and an observation. First, my concern: that “technology” issues frequently are framed too narrowly, as nothing more than a set of highly technical regulatory questions posed by emerging technological tools. Second, my hope:  that the securities bar can use its unique position, as a group of professionals with a long-term perspective and knowledge of the securities laws and the markets, to look beyond this narrow view - and to help the Commission fully recognize the potential regulatory benefits of technological advances that, in many cases, can both reduce costs and better protect investors. Third, my observation:  that, while the Commission has already made significant revisions to its regulatory regime to reflect the pervasive technological progress of the past decade, the future holds the potential for many more regulatory changes that can assist investors and the markets in fully reaping the benefits of that progress. You all may have noted, moreover, our Chairman’s keen interest in how technology can be harnessed to protect investors and promote the efficiency of our capital markets.[1]

Let me step back and elaborate a bit on each of these points.

When we talk about “technology” issues, there is often a tendency to focus, as lawyers, on how very specific technological developments will be addressed under the securities laws. For example, does web posting constitute an adequate mechanism for furnishing information to investors? Are e-mails “correspondence” for regulatory purposes? Will storage of records in electronic form satisfy record retention rules? Resolution of these issues in a timely and sensible fashion is quite important to the effective operation of the securities laws and the financial markets. And similar technical issues will continue to arise as long as innovators devise new tools for disseminating information, from satellite radio to podcasting.

Over time, though, as we address these individual issues piecemeal within our existing regulatory framework, it is possible to lose sight of some of the larger possibilities that wholesale technological change can bring about. Occasionally, we may still find ourselves arguing about the length of buggy whips long after the horses have gone back to the barn and been replaced by automobiles.

In this regard, let me quote from Peter Drucker, whose remarkable career was commemorated in a Wall Street Journal article earlier this week:

Executives have become computer-literate. The younger ones, especially, know more about the way the computer works than they know about the mechanics of the automobile or the telephone. But not many executives are information-literate. They know how to get data. But most still have to learn how to use data. Few executives yet know how to ask: What information do I need to do my job? When do I need it? In what form?  And from whom should I be getting it? Fewer still ask: What new tasks can I tackle now that I get all these data? Which old tasks should I abandon?  Which tasks should I do differently? Practically no one asks:  What information do I owe? To whom? When? In what form?[2]

These comments about executives can be applied to lawyers and regulators as well. The more far-reaching challenges and opportunities arising out of technological progress often will involve wholesale changes in the economy and the markets - changes that enable a regulatory agency such as the SEC to revisit traditional policy dilemmas in a completely new light. In many instances, these changes may permit regulatory approaches that cut through a longstanding regulatory “Gordian Knot” - most notably, for SEC purposes, where they permit more effective dissemination of information at reduced costs.

The Commission’s recent Securities Act reforms provide a straightforward example of this phenomenon.[3] Under the pre-reform restrictions, a broker could explain something to an investor over the phone - a complicated tax provision regarding the securities, for example - but could not put that same information into an e-mail. If the broker needed to explain that information to more than one investor, he would need to call each investor, as opposed to sending all of them a simple e-mail, accomplishing the same task more quickly and efficiently and in a form an investor could study.[4] Over time, these recent reforms can be expected to change - and ideally to improve - the quantity and quality of information available to investors purchasing securities.

More broadly, technology can permit the Commission to tackle old policy dilemmas through new rules that previously would have been unrealistic, if not unthinkable. Regulation FD strikes me as a particularly good example of this point.[5] Few think of Regulation FD as a “technology” rule - and the vigorous policy debate surrounding its adoption did not focus principally on technology issues. Yet, in a very practical sense, Regulation FD is a product of changes in communications technology. The regulation simply could not have been implemented in a world without webcasts and universal access conference calls that allow management to discuss a company’s prospects in a forum broadly accessible to all investors.

Similarly, the Commission’s proposed “point-of-sale” disclosure rules not only would implement new technology, but would also enable investors, in some cases for the first time, to receive critical disclosure before making an investment decision.[6] As you well know, pre-trade communication of this information would be a genuinely dramatic step forward in disclosure to investors, one that the post office technology of the 1930s would not have permitted. Moreover, this development also is reflected in other recent initiatives, such as the Commission’s adoption earlier this year of the Securities Act reforms mentioned a moment ago.[7]

The potential for rethinking old problems based on new technologies was also brought home to me in another context while watching television with my children not too long ago. At the time, the Commission was deeply enmeshed in considering proposals to reform the shareholder proxy process, a sometimes contentious issue raising difficult policy questions about how to balance the interests of a public company, acting through its management, and individual shareholders, as represented principally through large institutions. As many of you know, the principal policy objective guiding the Commission’s proxy regulations has long been recreating, to the greatest extent feasible, the conditions of traditional shareholders’ meetings in which all those voting were in attendance[8] - quite a difficult task in the context of printed proxies disseminated to thousands of shareholders. As I sat through the umpteenth episode of “American Idol” with my children, it belatedly dawned on me that, while many legal and policy issues might stand in the way, modern technology has in fact made it possible to produce a replica of the old-fashioned shareholders’ meeting. If millions of pre-teenagers can vote for their favorite singers instantly, wouldn’t it be feasible for America’s biggest public companies to conduct real-time shareholder meetings, where electronic votes could be counted just as quickly as traditional paper ballots?

Notably, the state of Delaware amended its stockholder meeting statute a few years ago to permit the board of directors to determine that a shareholder meeting may be held “solely by means of remote communication.”[9] Other states are also thinking about how their laws governing shareholder meetings should reflect technological changes.[10]

Moreover, as Alan Beller will be discussing in some of his presentations this afternoon and tomorrow, the Commission’s Division of Corporation Finance is actively considering potential regulatory steps that could be taken to incorporate new technologies into the shareholder proxy process; steps that could significantly reframe the policy debate and perhaps resolve some of the stalemate on this issue that has arisen among various interest groups over the years.[11]

Of course, technological changes also may create new opportunities for abuse - and we need to adjust our thinking to encompass the potential breadth of those opportunities as well. Many of you are probably familiar with the Commission’s recent “vice-mail” enforcement actions.[12] These cases involve the use of mass-marketing techniques that permit voice-mail messages to be left on thousands of telephones. Unfortunately, as the Commission’s actions allege, one of the creative uses identified for this technology appears to be leaving “wrong number” messages that mention a “hot stock tip” as part of a pump-and-dump scheme.[13] At a more sophisticated level, complex derivatives driven by novel computer algorithms have created new techniques for “creative” manipulation of public company earnings and financial statements, manipulations that can sometimes take years to unravel.

Why am I talking to this group about the policy implications of technological change? In my view, the securities bar has a particularly important role as the Commission seeks new avenues through which it can benefit investors and markets based on new technologies. Why do I say that, especially given the stereotype of lawyers as, by-and-large, math-phobic technological illiterates?

Lawyers, because of their professional training, generally have a better understanding than market participants of the underlying policy objectives that drive the securities laws and the regulatory actions of the Commission. Lawyers in the private bar, moreover, because of their ongoing interaction with members of the business community, have a greater ability than Commission staff to see and understand the market impact of technological developments as they emerge on the horizon. Lawyers, because of the long-term nature of many of their projects and client relationships, also frequently have a greater ability to maintain the sustained interest that is needed to work through a complex rulemaking that may not bear immediate fruit in profits for particular business ventures.

At a concrete level, what are some specific examples of actions that the bar can take? First, given the Commission’s current focus on technology issues, lawyers in this group can step back and review the big picture - and seek to identify areas where longstanding regulations have become outmoded or where existing regulatory problems could be re-thought. I have already mentioned shareholder voting as a potential area that merits attention, but there are many others.

Perhaps most notably, the Chairman and the Commission have sought to identify ways in which interactive data initiatives - such as the introduction of XBRL - could enhance the disclosure regime for companies and investors.[14] These initiatives could enable the widespread use of significantly improved analytical tools that, over time, may prove just as significant as the introduction of EDGAR several decades ago. Moreover, decisions regarding taxonomies used in XBRL or other initiatives may, depending on how they are implemented, also come to supplant or modify the impact of the accounting principles set out in GAAP, a development with additional far-reaching implications that go beyond what I can cover today.

In addition, the Commission must begin the process of deciding what EDGAR itself will look like in the future. Many of the technologies embedded within the EDGAR system, and the structure of the system itself, were very forward-looking when selected. Today, however, new technologies present opportunities for substantially rethinking the system and its functionality. And now, as the Commission’s EDGAR contract is coming up for renewal and the Commission considers future plans for EDGAR,[15] is an ideal time for the bar to begin to develop input if it wishes to affect the shape of the system over time.

You can find other examples that reach across all of the Commission’s Divisions and Offices. In the area of mutual funds, you have already heard about interest in potentially far-reaching disclosure reforms that would build on new mechanisms for making information more rapidly available to investors.[16] In the area of market regulation, Regulation NMS includes protection for orders across the marketplace that previously could be afforded only to self-regulatory organizations participating in dedicated inter-market linkages.[17] In the areas of enforcement and compliance, the Commission is evaluating new reporting and measurement tools that will help identify high risk activities. Technological changes have also had a sometimes subtle impact on judicial decision-making as well. For example, defendants in cases alleging material omissions in disclosure documents increasingly seek to assert the defense that investors could have found the information in the public domain - typically through the use of electronic databases - a claim that would rarely have been made based merely on the availability of information in the Library of Congress.[18]

Let me close by coming back to my earlier observation that, in many respects, I believe the most significant regulatory benefits from the technological revolution of the last ten years are in the future, not the past. For a regulatory agency such as the SEC, focused on disclosure and transparency, the invention of the internet and associated technologies can fairly be compared, I think, to the invention of the airplane for an agency focused on transportation. The initial changes are significant, but the long-term implications likely will be even greater.

For the past few years, the Commission and the bar have devoted great energy and resources to dealing with the aftermath of scandals uncovered earlier in the decade. During this time, the Commission has not stopped its efforts to implement forward-looking changes that reflect the rapid evolution of the marketplace, as evidenced by Securities Act reform, Regulation NMS and mutual fund disclosure initiatives. At the same time, with the worst excesses of the boom market perhaps behind us, the Commission will be able to devote a greater portion of its energies to evaluate the securities regulatory regime in light of the great impact of technological changes on our markets, changes which have affected the way all issuers, intermediaries and investors behave.

In these endeavors, the securities bar can play a critical role. But it will require professional wisdom - about information and the way business works - not just technical expertise.  Over the course of the coming days at this conference, and over the coming months in their practices, I hope the lawyers here will have a chance to ask themselves some of the same questions that Peter Drucker identified for executives. What information do investors need? When do they need it? In what form? And from whom should they be getting it? I hope you will also have an opportunity to consider how those questions should be addressed by securities regulators and the others in the regulated community.

Many thanks for giving me so much of your time this afternoon.

[1] See, e.g., Chairman Christopher Cox, Remarks Before the Securities Industry Association, Boca Raton, FL, Nov. 11, 2005, and Remarks at the 12th XBRL International Conference, Tokyo, Japan, Nov. 7, 2005, available at http://sec.gov; see also Kevin Drawbaugh, SEC Eyes Boost in Shareholder Info via Internet, REUTERS, Nov. 9, 2005, available at http://reuters.com (last visited Nov. 22, 2005); Jonathan Peterson, SEC’s Chief Has a Thing for High Tech, Los Angeles Times, Nov. 7, 2005, available at http://latimes.com. (last visited Nov. 22, 2005)

[2] Peter F. Drucker, “Drucker on Management: Be Data-Literate – Know What to Know,” Dec. 3, 1992 (excerpt in the Wall St. Journal, Nov. 14, 2005 (at p. A22)).

[3] Securities Offering Reform, Rel. No. 33-8591 (Jul. 19, 2005), 70 FR 44722 (Aug. 3, 2005).

[4] See, e.g., Permissible Use of Free Writing Prospectuses, at section III.D.3.b. of the Commission’s Securities Offering Reform, supra note 3.

[5] Selective Disclosure and Insider Trading, Rel. No. 34-43154 (Aug. 15, 2000), 65 FR 51716 (Aug. 24, 2000).

[6] See Point of Sale Disclosure Requirements and Confirmation Requirements for Transactions in Mutual Funds, College Savings Plans, and Certain Other Securities, and Amendments to the Registration Form for Mutual Funds, Rel. No. 34-51274 (Feb. 28, 2005), 70 FR 10521 (Mar. 4, 2005); Confirmation Requirements and Point of Sale Disclosure Requirements for Transactions in Certain Mutual Funds and Other Securities, and Other Confirmation Requirement Amendments and Amendments to the Registration Form for Mutual Funds, Rel. No. 34-49148 (Jan. 29, 2004), 69 FR 6438 (Feb. 10, 2004).

[7] These reforms that, for example, allow far greater dissemination of information to investors early in the decision-making process, no longer requiring reliance on the delivery of written information in the mail, days after an investment decision has already been made. See supra note 4.

[8] See generally Loss and Seligman, Securities Regulation, 6-C-2(b) (3rd ed. 1990) (The Commission has “designed its rules to make the proxy device the closest practicable substitute for attendance at the meeting.”); Mortimer M. Caplin, Shareholder Nominations of Directors: A Program for Fair Corporate Suffrage, 39 Va. L. Rev. 141, 159 (1953) (“The aim of the SEC, under Section 14 of the Exchange Act, is to mold the proxy machinery as practically as possible into a replica of the old type of shareholders’ meeting…when a shareholder might appear in person and address his fellow shareholders.”).

[9] See 8 Del. Code Section 211 (Meetings of stockholders) (2005).

[10] See generally Elizabeth Boros, Virtual Shareholder Meetings, 2004 Duke L. & Tech. Rev. 0008; Daniel A. Birnhak, Online Shareholder Meetings: Corporate Law Anomalies or the Future of Governance?, 29 Rutgers Computer & Tech. L. J. 423 (2003).

[11] See generally Kevin Drawbaugh, SEC Eyes Boost in Shareholder Info via Internet, REUTERS, supra note 1. On December 8, 2005, the Commission proposed amendments to the proxy rules that would provide for use of the internet in the proxy process. The comment period ends Feb. 13, 2006. Internet Availability of Proxy Material, Rel. No. 34-52926, 70 FR 74598 (Dec. 15, 2005).

[12] See SEC v. O’Grady, et al., No. 05CV00868 (D.D.C. filed May 3, 2005) and U.S. v. O’Grady, et al., No. CR05119ESH (D.D.C. filed May 3, 2005) available at http://sec.gov (Litig. Rel. No. 19213 (May 3, 2005)) (actions brought in federal district court alleging telemarketers broadcast nationwide hundreds of thousands of  fraudulent “wrong number” stock tips); see also SEC v. Joshua Yafa, Michael O. Pickens, et al., available at http://sec.gov (Litig. Rel. No. 19213 (Jul. 18, 2005)) (actions brought in federal district court alleging stock promoters engaged in phony fax scam).

[13] See, e.g., SEC v. O’Grady, et al., No. 05CV00868, supra note 12, at paragraph 21 (pp. 7-8) of the complaint:

Hey Tracy, it’s Debbie! I couldn’t find your old number and Tammy said this was your new one – I hope it’s the right one.  Anyway, remember Evan, that hot stock exchange guy I’m dating?  He gave my dad that stock tip on WLSF and it went from under a buck to like three bucks in two weeks and you were mad I didn’t call you?  Well I’m calling you now.  This new company is supposed to be like the next Tommy Bahama and they’re making some big news announcement this week.  The stock symbol is MAUG.  He said it’s cheap now, like $.50.  Sorry I’m eating but I’m starving.  It’s $.50 now and it’s going up to, like, 5 or 6 bucks this week, so get as much as you can.  Call me on my cell – I’m still in Orlando .  It’s 407-XXX-XXXX.  Dad and I are buying a bunch tomorrow and I already called Kelly and Ron, too.  Anyway, I miss you.  Give me a call.  Bye.

[14] XBRL Voluntary Financial Reporting Program on the EDGAR System, Rel. No. 34-51129 (Feb. 3, 2005), 70 FR 6556 (Feb. 8, 2005); see also Chairman Cox, Remarks at the 12th XBRL International Conference, supra note 1.

[15] See Securities and Exchange Commission Draft Request for Proposal for New, Performance-based Contract for the Ongoing Support of the Electronic Data Gathering, Analysis, and Retrieval (EDGAR) Platform at the website of the General Services Administration’s “Federal Business Opportunities,” available at http://www.fbo.gov. The draft RFP follows a Request for Information (RFI) (issued Oct. 20, 2005), which asked potential vendors for preliminary information and expressions of interest. The draft RFP initiates a period of exchanges with industry leading up to the issuance of a final RFP, scheduled for mid-January 2006, and a contract award, scheduled for mid-summer. A pre-solicitation conference on the EDGAR proposal was held at the Commission in early December 2005.

[16] See supra note 6.

[17] See Order Protection Rule, at section II, Regulation NMS, Rel. No. 34-51808 (Jun. 9, 2005), 70 FR 37496 (Jun. 29, 2005).

[18] See, e.g., Kapps v. Torch Offshore, Inc. (Commission’s amicus curiae brief filed Jul. 26, 2004 in case on appeal from the Eastern District of Louisiana to the 5th Circuit Court of Appeals) and Merritt v. Merrill Lynch & Co. (Commission’s amicus curiae brief filed Jun. 2004 in case on appeal from the Southern District of New York to the 2nd Circuit Court of Appeals), available at http://www.sec.gov.


Modified: 01/18/2006