SEC Speech: Remarks to the Forum Club of Southwest Florida (A. Levitt)
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U.S. Securities and Exchange Commission

Speech by SEC Chairman:
Remarks to the Forum Club
of Southwest Florida

by  Chairman Arthur Levitt

U.S. Securities & Exchange Commission

Naples, Florida

December 1, 2000

Thank you. It really is my pleasure to be here today, and to speak to so many residents of Naples and students from area schools. These past almost eight years, the greatest part of my job has been talking with America's investors, listening to their concerns, answering their questions, discussing their ideas for a better marketplace. While listening closely to the voice of this country's investors has been my great privilege, it has also been an enduring reminder of a simple truth: markets exist by the grace of investors.

At the Commission, it is our mandate to craft a marketplace that is freer, fairer, and above all else, better serves the interests of America's investors. By garnering the benefits of technology, removing longstanding impediments to competition, and educating and empowering investors, we allow the forces of competition to shape the kind of markets the public deserves – markets whose hallmarks are efficiency, integrity, and fairness.

Above all else, the Commission is focused on preserving and promoting confidence in America's capital markets. At the most basic level, investors today commit capital because they have faith in the quality and the integrity of America's markets. That public trust does more than fuel markets – it makes markets possible. The dynamism of our market system depends entirely on integrity, professionalism, and the public confidence they inspire.

Now, some might ask, "Does it really matter if the numbers in a prospectus are just slightly off, or if an investor receives a stock price that is only a little bit worse than the best market price?" The answer is simple. If investors lose faith in the integrity of our markets' prices, if they believe that they are not receiving high-quality information, or that their interests are being placed secondary for any reason whatsoever, they will go elsewhere.

We are living in a time when investors are increasingly able to shift their capital in and out of markets cheaply and easily; it may not always happen overnight, but the history of markets teaches us it can happen quickly. As those of you here today with a bit of gray hair know well, no market has a divine right to the savings of America's investors – we have seen capital move from stocks, to gold, to oil and gas, to real estate, and these days, back to stocks.

What's more, investors today, as a practical matter, have access not only to U.S. markets but almost any market in the world. If the integrity of our financial reporting and the mechanisms of our markets ever lose their luster in the eyes of America's investors, those companies and those markets that vigilantly guard a reputation for quality will draw them away. And the road to restoring lost confidence is a long one indeed.

I firmly believe, then, that maintaining and bolstering public confidence in America's markets begins with educating investors themselves. This, in turn, drives greater competition as market participants must increasingly compete on the basis of value. Ultimately, this creates an even higher standard for our markets, and with it, a renewed public trust in the quality and integrity of our markets.

For those market participants who are adding real value, informed investors are good news indeed. By rewarding the firms that serve them well, informed investors drive our markets to become, and remain, the most innovative, technology-smart, and investor-focused markets in the world.

What's more, today's investors have the opportunity to be the most educated consumers in the history of the free market. Consider what is at the fingertips of today's retail investors: access to on-line trading and web pages devoted solely to financial news; access to stock quotes and pricing information; access to corporate filings and financial disclosure. And it's never been clearer that a new breed of investor – more informed, more inquisitive, and more in touch with financial activity than ever before – is emerging from the Information Age.

These past almost eight years, I have attended forty-one Town Hall meetings across the country. And just a few weeks ago, talking to investors in Atlanta, I fielded questions on loan-loss reserves, payment for order flow, and the impact of Nasdaq's proposed SuperMontage. That would have been hardly imaginable just a few years ago.

In increasing numbers, investors are directly involved in managing their assets, researching their investments, and making their own important financial decisions. Investors are becoming more than just the end customers – they are becoming a more integral part of the process of buying and selling securities. In many respects, they have injected themselves into the traditional role of the middleman: developing investment strategies, analyzing trends, considering new opportunities. And consider how today's more informed consumer has affected our marketplace: Lower trading costs, greater transparency, and more efficient pricing information.

To garner even greater benefits from the power of informed investors, the Commission recently adopted rules that will require greater disclosure by markets and brokers of how they execute their customers' orders. Now, order execution is not something retail investors have been focused on, or have even fully understood, in the past. But today, more and more, investors want to know how and where their trades are executed, and whether they've received the best possible price. They are coming to understand quickly what professional traders have long known – that execution quality matters.

To those who think the concept of execution quality sounds merely academic, consider this: if your order is executed just a nickel away from the best price available, the difference could end up costing four or five times the commission that many on-line brokers advertise today. And until recently, this fact has been lost on many investors. While execution quality takes some effort to consider, it is more than worth it for most investors.

Investors expect – and have a right to expect – that they will receive the best price available in any market center of our national market system. In this vein, the execution quality disclosure rules marshal the most powerful force in our market – the relentless demands of informed investors – to drive the most efficient order routing patterns and to stimulate market center competition based on superior executions.

In the past, some major brokerage firms have been frustrated in their efforts to get information from our markets about execution quality, while some personal finance journalists, trying to report on execution quality have been shut out by certain markets. In an era of unprecedented access and information, how can it be that many investors today simply do not know what happens to their orders after they click "Submit"?

The execution quality disclosure rules will function on two levels. First, market centers – that is, traditional exchanges, electronic markets, and dealers – disclose to the public, on a monthly basis, the critical components of execution quality, such as the prices at which orders were executed, the speed of executions, and fill rates for limit orders. Second, brokers report which market centers they sent orders to, as well as any payment for order flow arrangements they have with the market.

The incentives created by this regime, I believe, will serve investors well – putting even more information in the hands of the investing public. Academics can publish comparative analyses of execution quality achieved by market centers, institutional investors can hire consultants to analyze market center reports, and the financial and consumer press can offer side-by-side comparisons of, for example, speed and price improvement rates. Best of all, competitors can scrutinize each other's reports, and compete on the basis of quality and value.

But that's only half of the equation. While concepts such as order execution and routing practices implicate the structure of our markets, quality information is the lifeblood of our markets. Without it, investor confidence erodes. Liquidity dries up. Fair and efficient markets simply cease to exist. As the quantity of information increases exponentially through the Internet and other technologies, the quality of that information must be an unwavering priority.

High-quality information begins with a high-quality financial reporting process. There's no question that America's reporting system has been, and remains, the very highest in the world. But in recent years, the dramatic transformation of the accounting industry has been marked by a rise in the types of non-audit services firms provide their audit clients. As a result, auditors who provide consulting services for their audit clients are now under heightened and sometimes conflicting pressures, which may result in a compromised audit to protect a more lucrative consulting contract. With so much at stake – the confidence of America's investors – we simply cannot afford to allow any doubt to settle in over the integrity of the numbers.

Two weeks ago, the Commission passed new rules that I believe will help guarantee that the integrity of this country's financial information remains second to none. The rules identify certain non-audit services that, if provided to an audit client, would impair an auditor's independence.

In addition, the rules require disclosure of fees by firms who offer IT consulting services to their audit clients, thus allowing investors to decide for themselves if a firm's practices are in line with the public interest. And audit committees will now disclose whether they considered the types of non-audit services performed and the fees involved.

High quality information, however, can only sustain enduring public trust if it is dispersed in a manner that is timely, comprehensive, and openly available to the public. Plainly put, when important financial information travels only to a privileged few, or when that information is used to profit at the expense of the investing public, or when it comes by way of favored access rather than by acumen, insight, or diligence, we must ask, "Whose interest is really being served?" If investors see a stock's price change dramatically – but are given access to critical market-moving information only much later – we risk nothing less than the public's faith and confidence in America's capital markets.

That's why the Commission recently adopted Regulation FD, for fair disclosure. Today, when companies disclose material, nonpublic information, they must disseminate this information broadly. If, for instance, corporate officers wish to inform Wall Street analysts that the company may not make its upcoming quarterly earnings estimate, this same information must be simultaneously disclosed to the public, through a press release or other comparable avenue.

This issue of fair disclosure goes much deeper than just a fundamental of good business. In this country, we pride ourselves on the principles of integrity and fairness, for having the purest form of meritocracy in the world. We teach our children that a person gets ahead through hard work and diligence. We ground ourselves in a trust that, through equal opportunity, everyone has a chance to succeed. America's marketplace should be no exception. Instead, it should serve as a beacon of these ideals, an example of evenhandedness and equality, a testament to the timelessness and legacy of our principles.


It's this last point – the notion of an enduring legacy – that I keep coming back to when I think of how best to capture the idea of safeguarding the preeminence of America's markets. Like preserving a family business or a time-honored institution, you tend to take a much longer view on things, to stay more focused on building something that will endure, to consider how your decisions and actions will affect the future, yourself or your children, years, even decades, down the road.

I've always believed we should approach America's markets in much the same way. Too often, there is the temptation to make decisions or to follow a course that promises short term profits or fixes, but at the expense of long term gains or solutions; a tendency to forget our ties to what came before, to differentiate the fleeting from the timeless, to ignore our duty to what lies ahead.

Instead, as we grapple with the profound and far reaching changes sweeping our markets, what must serve as both our compass and our guide is an unwavering commitment to the public interest. When we work to guarantee that investors have access to information that is timely and accurate, when we work to ensure that customers get the best price available, when we embrace innovation and new technologies to craft a better marketplace, when we honor our pledge to put the public trust before all else, we are protecting more than just our capital markets, we are honoring something even greater – the faith of America's investors.

Thank you.