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U.S. Securities and Exchange Commission

Speech by SEC Staff:
The Investor's Bill of Rights: A Commitment for the Ages

Remarks by

Lynn E. Turner

Chief Accountant
U.S. Securities & Exchange Commission

SEC Institute, Washington, DC

June 18, 2001

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 Mr. Turner and do not necessarily reflect the views of the Commission, the Commissioners, or other members of the Commission's staff


It is always good to be among friends and I consider Jimmy Barge and Andy Saxlehner as two of my best friends. Let me thank Andy for once again giving me the privilege to speak at a conference of the SEC Institute. These conferences are some of the finest I have attended. And without a doubt my mom would thank Jimmy for such a generous introduction.

Good-Bye to a Champion for Investors

I want to dedicate my remarks today to the memory of Commissioner Paul R. Carey who passed away last Thursday (June 14, 2001). Paul meant a lot to those of us who worked closely with him at the Commission. His wit and cheerful attitude, his warm friendship and strong leadership are going to be sorely missed. I remember how when we would go into his office he would sit patiently, listening and attentive to what the staff had to say. There was one thing you could always count on -- Commissioner Carey was a staunch defender of the rights of investors. He worked day in and day out right up to his last day to serve the public and investors. While I have lost a mentor and friend, investors around the world have lost a true champion.

The American Investor

One reason I think Paul was so passionate about his role was he realized, perhaps better than the rest of us, that investors today come from all walks of life, young and old, rich and not so rich. They are often ordinary people, investing to provide for their future, for their children's education, and for retirement someday. Today, one-half of all Americans are invested in the stock market.

Over one in five stockholders is under the age of 35, and one in eight is over the age of 65. Interestingly, half of those stockholders have income of less than $57,000 and only 18 percent have family incomes that exceed $100,000. Indeed, the average stockholder today is the average American who lives next door, an aunt or uncle, a close friend or family member.

Americans, more than ever before, are willing to place their hard earned savings and their trust in the U.S. capital markets. They are willing to do so because they have confidence in the integrity of those markets.

There is one thing all investors in this country have in common. They have all taken their money and provided it to an enterprise that has sought out their investment. And the fact that the enterprise and its management and corporate board has sought out and taken that investment gives these investors certain undeniable rights.

The Investor's Bill of Rights

Rights for investors, just like individual rights, are some of the oldest and most traditional of American values. Similar in concept to the original Bill of Rights that amended our Constitution in 1791, investors' interests must be protected through mechanisms that promote fair capital markets, honest managers and full and fair disclosure. I call these basic investor rights, which are vitally important if our markets are to be efficient, "The Investor's Bill of Rights."

Let me share my perspective on them with you.

  1. All investors have the right to equal and fair treatment.

  2. Investors have the right to officers and directors who treat the stockholders' money with fiscal responsibility and due care as if it were their own.

  3. Investors have a right to management - from the board of directors on down - that fosters a corporate culture of integrity, honesty and adherence to the spirit as well as the letter of the law.

  4. Investors have the right to officers and management who shoot straight - who tell the owners of the company the complete story, without omission, without hype, without spin, and without delay.

  5. Investors have a right to officers and directors who foster a corporate culture in which people don't cut corners just so they can report favorably on the achievement of individual or corporate goals.

  6. Investors have a right to management that understands their job is to manage the business, not the earnings.

  7. They have the right to a management team that clearly understands it is the steward of the stockholders' company, that it serves the stockholders, that it is not the stockholders' master.

  8. Investors have a right to timely and consistently transparent disclosures that reflect the true economics of the business, including complete and unbiased financial disclosures of all matters management or the auditors would want to know if they were investing in the company themselves.

  9. Investors have the right to independent auditors that act on behalf of investors as challenging skeptics who must be convinced, rather than vendors who must make sales.

  10. Investors have the right to an independent, inquisitive, financially literate and actively engaged audit committee that views its mandate broadly and that acts as the representative of shareholders.

  11. Investors have the right to an active board of independent, knowledgeable and diligent directors who understand they are elected by and for all of the shareholders, not the CEO.

  12. Investors are entitled to a corporate governance system that will ensure the company and management will seek the approval of investors on important matters affecting shareholder interests such as new or expanding stock option plans.

  13. Investors have a right to real analysis performed by real analysts, who place the investors' best interests before their relationship with management and a mission to bring in the next deal.

  14. Investors have the right to fair securities markets, where trades are executed at the best possible price.

  15. Investors have the right to timely and transparent disclosures of actual fund performance by all funds that take their money, and

  16. Investors have the right to regulators and standard setters who put the investor first, and that encourage rather than impede investor protection and efficient markets.

Obligations of Investors

Just as being a citizen in this country has certain obligations such as voting and paying taxes for the services we receive, so does access to the U.S. capital markets bring with it responsibilities for investors. These obligations have a cost and require an effort that if not made, will leave the investor with little room to complain.

So just what are some of these obligations? Well, they start with an obligation to perform your own due diligence and analysis with respect to the investment you make, before the investment is made. I have little patience for investors who read the disclosures a company has made for the first time after they have joined in a lawsuit. Investors need to read the quality disclosures many companies make before they invest. They need to inquire about, and assess, the quality of management. They need to understand the business model and strategy of the company. They need to analyze the available financial data and compare the company's actual achievements as set forth in the financial results to what management said they would do.

Often personal research is the best. Victor Kiam knew little or nothing about electric razors. He even shaved with a blade. But he set about correcting that. He asked retailers about shavers and learned that while Norelco dominated the market, retailers thought Remington was the best product. Kiam actually tried the Remington in his own bathroom each morning. He tried it versus the razor. He tried it versus all the major electric brands. Then, when he was satisfied that the Remington really was the best, he went out and bought the company.

This type of hands on analysis is important. Knowing the products and the industry of the company you are investing in is critical. Investors need to look at and analyze data such as the actual cash being generated from operations and spent for such things as acquisitions. Go a step further and figure out if management is realizing the types of returns you are investing for. Ask if they have done what they said they would do and achieve. One only has to look at the graveyard of dot.coms, startups and IPO's that were not successful in the last year or two to realize that a failure to fulfill this obligation can result in odds that might be better at a casino in Las Vegas. And look at the numerous acquisitions in recent days that are coming to light as having only a small portion of their value remaining from what was originally paid, especially when management was paying grandiose multiples of book value. To investors in these companies I say, vote your proxy and hold management accountable.

Investors also need to have a longer-term view than just the next ninety days until the next quarterly earnings release is issued. They say Rome wasn't built in a day and I can guarantee you a successful business doesn't happen overnight. Give management the time necessary to execute their business and strategic plans. This takes more than a quarter and punishing companies and their management every time they miss expectations for a quarter will only result in management acting accordingly. After all, we all are a product of our environment.

Investors have an obligation to carefully evaluate professionals from whom they seek investment advice and financial planning. This reminds me of a financial planner, who I once heard say to his client, "I've reviewed your financial picture, and if we manage your money properly, there should be plenty for both of us." Keep in mind, that brokers are in business to make money for themselves first. Ask for references and inquire of people who you know and trust and might be able to make recommendations. Don't be persuaded by cold calls, don't let them talk you into investments you have not researched, and sign only papers you have read.

Investors also need to speak out on issues affecting them. Too often investors are like the third string player on the bench, never seen and never heard from. Boards of Directors and management of the companies you invest in, regulators such as the SEC, accounting and auditing standard setters, as well as your congressional representatives, all will benefit from your input. I strongly encourage you to provide us with your views.

But for now, let me move on and expand on a few of the investors' rights I discussed, especially as they relate to management's role when it comes to financial reporting and disclosures.

Balanced, Unbiased Reports to Investors

Let me challenge Chief Financial Officers (CFOs), controllers, directors of financial reporting, and other members of financial management who handle investor relations and public disclosure functions in a company, to treat all investors in a balanced and fair fashion. Selective disclosure of material information to some but not all analysts and investors is, in my opinion, indefensible. Would you as a CFO be willing to look at those investors you had not informed about important facts, and tell them you had told others, who in turn had capitalized on that information in the markets? Do you really believe that is ethical and condone such practices? I have yet to see a CFO who is willing to answer "yes" to this question in public, and I believe that confirms that selective disclosure is totally improper. I believe it is the lesson we all learned a long time ago; if you weren't willing to tell your mom about what you were up to, you probably shouldn't have been doing it!

Honest and fair dealings with investors and analysts also extends to press releases. "Everything But Bad Stuff" or EBS press releases do not present a complete or transparent picture. The Washington Post appropriately has labeled them as "hypothetical" earnings. Often they appear to be trying to lead investors away from the "real" numbers, from real net income, and from real cash inflows and outflows. For example, press releases that add back expenses to earnings such as marketing costs, costs to start up new businesses or product lines, and interest, fail to note these are real costs paid for with "real" cash. And they fail to note management often intends to exclude the costs or losses only until the new product or business becomes profitable. Then, like the magic in Cinderella, they turn into regular operations overnight. Have you ever seen "profits" generated by the employees' pension plans investments and not recurring operations subtracted out? Or what about those who always want to add back just selected "noncash" expenditures such as goodwill amortization. What about subtracting out non-cash revenues - have you ever seen that before? If management is really so mesmerized by cash flows, how about disclosing to investors the value of stock issued or the amount of cash paid for the investment, the amount of subsequent cash flows generated, and the actual rate of return earned in future years from these investments? Why does that seem to be missing from ongoing press releases? It would seem if these returns were what was originally represented to investors, then companies would be willing to disclose them. Perhaps the announcements in recent days highlighting a number of acquisitions that have resulted in humongous losses in value, including losses for investors, yield the answers to these questions investors need to ask management.


CFOs need to establish themselves as strong leaders on the executive management team. This means they need to have the spine and resolve to "just say no" when the CEOs or others pressure them to manage the numbers, especially when others are having difficulty managing the business. CFOs need to remember the lesson in the article in CFO Magazine titled, "Jailhouse Shock." That article listed 22 CFOs who were serving time or awaiting sentencing. In several cases, the CFO was spending years behind bars and away from family, a career destroyed, and the embarrassing notoriety of being labeled a fraud on the front page of your local, if not national, newspaper. Let me read just a few for you:

    CFO Miniscribe - 2 years

    CFO California Micro Devices - 2 years, 8 months

    CFO Phar-Mor - 2 years, 9 months

    CFO Ferrofluidics - 5 years, 3 months

    CFO Bernard Food Industries - 6 years

    CFO Lumivision - 10 years

    CFO Bennett Funding Group - 30 years

And as of the date of that magazine four of the CFOs were waiting sentencing, facing terms of 5 to 115 years in prison. Remember, manipulating the numbers, even when trying to play it as close to the edge as possible, has its price. CFOs need to just say, No!

CFOs also need to establish formal written policies setting forth not only high quality accounting policies, but also reasonable, effective internal controls that will ensure the financial records reflect all the company's policies, generally accepted accounting principles, and safeguard the company's assets. These policies and control procedures also should ensure that all the information necessary for a complete accounting and disclosure to investors of all relevant information is made on a timely basis.

Engaged Audit Committees

I have been reading many of the proxies filed this year. I have noted more audit committees meeting four to six times a year and engaging in substantive discussions as opposed to a couple of meetings a year during breakfast. I encourage you to read the audit committee report for Coca Cola, which I believe is an excellent example. Coca Cola is a household name and this report has been written so investors in households can understand it. It doesn't read like a report written by a corporate attorney to be read by a plaintiff's attorney. Kudos to Mr. Buffett for that type of plain English report to the company's investors.

One item that has caught my attention with respect to the proxy disclosures is the range of audit fees. A number of those testifying before the Commission in its public hearings on auditors' independence raised a concern about the "low-balling" of audit fees. Obviously audit fees are greatly influenced by such factors as the size of the company, the industries in which the company operates, and the quality of the company's financial systems, internal controls, and internal audit function. However, some of the audit fees at the low end of the range raise the question of whether the fees are sufficient to ensure the performance of a quality audit.

The SEC now requires the disclosure of the fees paid to the accounting firm by a public company for the audit of the company's financial statements, which is performed for investors, as well as the fees paid to the accounting firm for all other services. These disclosures allow investors to see the economic impact on the firm of the audit fee, and the economics and pull on the firm and partner from the billings for all other services. Now, for the first time, investors and audit committees will be able to assess the potential impact on the quality of the audit and auditor's independence of the fees being charged. I hope these proxy disclosures cause audit committees to consider whether they are compensating their auditors sufficiently and fairly, to ensure that the auditors are able to provide the well trained, highly experienced personnel required to perform the necessary procedures and steps for a high quality audit. And certainly we will be able to see if fees are "low-balled" when there is a change in auditors. In my opinion, this is not a place to shortcut the spending of the company's and investors' dollars.

Upward Trend In Restatements

Finally, let me touch on a topic that has been in the press recently. We have seen a disturbing trend and rise in the number of restatements. Unfortunately, we become aware of most of these restatements just like investors do, when we open up and read the morning newspaper. According to a recent study by Financial Executives International (FEI) restatements topped 150 in 2000. An Andersen survey pegs this number at greater than 230. Perhaps more important than the number of restatements is the resulting staggering investor losses totaling tens of billions of dollars, and aggregating by some estimates to be more than $100 billion in the past six to seven years. And while some in the profession argue that a couple hundred restatements in one year and $100 billion in losses over the last several years are not significant in relation to 10,000 to 12,000 actively traded public companies and a total U.S. market capitalization of $14 to $16 trillion, I don't think the average U.S. investor is going to buy it.

The Securities and Exchange Commission - the Investor's Advocate

In America, we carefully protect our individual rights, as emphasized in the Bill of Rights. Likewise, at the Commission, we have in the past and will no doubt continue in the future to serve as the advocate for investors and their rights. Let me assure you, when we find that investors' rights have been denied or abridged, we will act. For example, in light of the concerns over abusive practices in financial reporting, the Commission formed the Financial Fraud Task Force. And if you doubt the determination of the Task Force, then just consider the recent Sunbeam enforcement release where management and the individual auditor partner were charged with fraud. And as I have mentioned, we no longer have to search out District or U.S. District Attorneys to work on cases. They clearly understand today the significance of financial fraud and how the resulting losses can affect the lives of people in their communities. As a result, we are seeing those who chose to deny investors their rights, who committed financial fraud by cooking the books or inappropriately managing earnings, serving significant jail terms.

With that sobering note in mind, let me ensure you that in the two days of this conference, you undoubtedly will hear from some the most respected people in the accounting profession. I encourage you to listen to their counsel, as I believe it will assist you in guarding the rights of investors.


All participants in today's capital markets have an obligation to honor and protect investors' rights. Investors are the customers for the markets. And needless to say, we are dependent on investors and on their faith, trust and confidence in the markets. Faith, trust, and confidence are the lifeblood that makes the markets work. Lose investors' trust and confidence and we will see the markets wither as they have in the past and can again in the future.

Remember the full-page advertisement Chrysler once ran in the Wall Street Journal with a big picture of Lee Iaccoca. On top of the ad were these words: "There's no great mystery to satisfying your customer. Build them a quality product and treat them with respect. It's that simple."

Thank you.


Modified: 07/13/2001