Speech by SEC Chairman:
Remarks at the Commission Open Meeting
Chairman Harvey L. Pitt
U.S. Securities and Exchange Commission
December 11, 2002
This is an open meeting of the U.S. Securities and Exchange Commission on December 11th, 2002.
As every American investor knows, the year since the collapse of Enron has been a difficult one, and there is still a tremendous amount of work to be done to help ensure the long-term health of our capital markets. So, too, it has been a challenging time for the Commission as an institution.
I believe my colleagues agree that our investor protection mission is simply too critical at this juncture in our nation's history to let the difficulties of the recent past hinder the continuing fulfillment of our mission. Even during this transition period, we are committed to an aggressive course to assure the utmost integrity in our markets. The American investor deserves no less.
Since the beginning of our fiscal year in October, we have continued our record pace in the enforcement area, bringing over 100 cases. We also have proposed 11 rules and rule amendments, and have adopted 2 rules (not including any action we take today). In addition, we have held four public hearings, two each on market structure and credit rating agencies, and have announced December roundtables on the international impact of the Sarbanes-Oxley Act.
I know my colleagues share my tremendous admiration and respect for the incredible efforts of the Staff of this agency during this past year. In the finest tradition of this country, when the call went out, Staff throughout the agency stepped up to the plate and knocked the ball out of the park again and again.
As busy as the past year has been, the tremendous efforts of our Staff will only increase in the coming weeks and months. In calling for reform, the Congress directed the Commission to complete what I believe is the most extensive rulemaking agenda over the shortest period of time in this institution's 68-year history. In January alone, we will consider nine final rules and produce four major studies to fulfill our obligations under the Sarbanes-Oxley Act. To put that in perspective, in all of 2000 the Commission adopted 23 final rules. The Staff's efforts toward completing this task have been extraordinary. I urge our friends and critics alike to join together with the five of us in expressing unwavering support for the efforts of the hardworking women and men of this agency in the coming months as they strive to fulfill this agency's mission.
And, I can't think of three better examples of the Staff's unflagging dedication to our mission to protect investors than their recommendations on today's calendar.
Repeal of the Trade-Through Disclosure Rule
For the first item, the Division of Market Regulation recommends the repeal of the options Trade-Through Disclosure Rule. The Commission adopted this rule in November 2000 to provide an incentive for the nation's options markets to establish an intermarket linkage. The very fact that we are considering repealing this rule represents the success of the Staff in forging an effective intermarket linkage plan among the options exchanges that puts these exchanges on course to making the linkage operative within the next few months. In fact, testing began last week, and I understand that it has been going well. Once established, this linkage will foster competitive pricing among the options exchanges and make it more likely that American investors will obtain the best available price for their purchases and sales of options.
Specifically, the linkage plan now limits the ability of a broker-dealer to execute a customer's option order at a price worse than the best available price being quoted by one of the options exchanges (also known as a "trade through"). The linkage plan also limits an exchange's ability to withdraw from the plan without the Commission's prior approval and sets an implementation timetable. With these enhancements, the Commission's Trade-Through Disclosure Rule is no longer required to be on the books.
Relief for Internet Investment Advisers
Our second item is a recommendation from the Division of Investment Management that we adopt a new rule to permit so-called Internet investment advisers to register with the Commission rather than the states.
Today one-third of Americans invest in the markets through 401(k) plans, IRAs and similar self-directed retirement plans. Most experts agree that investors need help making the right decisions for themselves and their families. Some of these investors have turned to seeking advice from investment advisers accessed through the Internet. Technology available through the Internet has the promise to deliver investment advice to those who need but otherwise might not be able to afford investment advice.
The new rule would permit Internet investment advisers to register in one place -- at the Commission. By reducing the cost and complexity of their registration process, without diminishing investor protections, this forward-looking rule should make Internet adviser services more readily available to the huge number of Americans who will approach retirement in the next 20 years.
Enhanced Portfolio Disclosure
Today's last item is a recommendation from the Division of Investment Management to enhance disclosures for mutual fund investors. The proposed rules would require mutual funds to disclose their complete portfolio holdings four times a year in filings with the Commission - instead of twice a year as currently required. Many mutual funds already voluntarily provide more frequent information about their holdings, and I expect that this requirement could be implemented without significant disruption or cost to the industry.
To provide useful disclosure directly to mutual fund shareholders, and to avoid bombarding them with unwieldy lists of information, the proposed rules would require semi-annual shareholder reports to list the fund's most significant holdings and provide a tabular or graphic depiction of the fund's investments across asset classes. This disclosure is intended to allow shareholders to discern "at a glance" how their money is invested. Investors who want more detailed information can obtain it directly from the fund or from our Web site.
Finally, this proposal would improve disclosures on mutual fund expenses. Specifically, it calls for shareholder reports to disclose the fees shareowners paid during the period covered. It also seeks to demystify the "expense ratio," which represents the percentage of a fund's assets used to pay operating expenses, enabling investors to understand the impact of expenses in real dollars and cents.