U.S. Securities & Exchange Commission
SEC Seal
Home | Previous Page
U.S. Securities and Exchange Commission

Speech by SEC Chairman:
Consumer Federation of America Financial Services Conference


Chairman Harvey L. Pitt

U.S. Securities & Exchange Commission

Jury's Hotel, Washington, D.C.
November 29, 2001

These remarks reflect solely the personal views of Mr. Pitt, and do not necessarily reflect the views of the Commission, the individual members of the Commission, or its Staff.

Before I became SEC Chairman, Barbara Roper gave voice to my own personal fears when she predicted that my Chairmanship "could be great" or it "could be a disaster." Well, I strive never to be average. In that vein, I predict this speech will either be very good or very bad! At least I'm certain it will be short. Steve Brobeck suggested I speak for twenty minutes and then allow time for "questions from the audience, if agreeable." I hope you will be! Agreeable, that is.

I am delighted to be here with you. And, I want to thank Barbara for her gracious invitation. As you know, Barbara is a renowned expert on how financial policies affect ordinary Americans. As such, she is the first person reporters call for the last word on investor protection. She's also a go-to source for honest evaluations of whatever I say or do. I find it personally reassuring that, whenever I want to know how I'm doing, I need only pick up a newspaper and read Barbara's latest assessment! Barbara has a well-deserved reputation as a tireless, tenacious, and uncompromising consumer advocate. I can assure you that, as SEC Chairman, I strive for Barbara's approval!

I also want to thank Steve Brobeck. Under Steve's leadership, CFA has grown to become a vital organization, active on a broad range of issues. As an aside, it occurs to me that Steve would have made a terrible criminal, because when it comes to consumer advocacy and public policy, his fingerprints are on everything. Steve is also a visionary, whose foresight led to the creation of "America Saves," a public-private partnership that facilitates the ability of average Americans to modify their lifestyles to value saving and investing.

The SEC is a proud partner with CFA on investor education initiatives, including America Saves, which began as a pilot program in Cleveland last February. The program already has enrolled more than one thousand lower and middle income Cleveland residents into a program of regular saving. We want to build on that momentum, as the program is rolled-out in cities all across America.

We also want to build on our partnership with CFA. The SEC and CFA share a common goal -- to champion and protect investors. The trust and faith investors place in our capital markets fuels incredible economic growth, improves our collective standard of living, and makes it possible for innovators to see their ideas blossom and come to fruition. But, investors are willing to commit their capital to markets only if they have confidence that those markets are fairly and honestly run, are fully transparent, and affirmatively minimize the risk of loss from fraud and manipulation.

This afternoon, I'd like to discuss some of the challenges and opportunities we must meet, in partnership with you and our other constituencies, to ensure that U.S. markets are transparent and hospitable in this new era to the entire spectrum of investors, and can facilitate capital raising. In particular, I'd like to talk about two of our important initiatives, improving financial disclosure to make more understandable and better information available to investors, and a program of real time enforcement that will speed investigations and seek to limit investor losses. Like you, I start from the position that we need to focus on whether what we are doing, or propose to do, benefits investors.

It is axiomatic that confidence in our markets begins with the quality of the financial information available to help investors decide whether, when and where to invest their hard-earned dollars. Comprehensible information is the lifeblood of strong and vibrant markets. Our current disclosure system is the best in the world, and sets the standard by which all other systems are measured. Yet, as more individuals become direct participants in our markets, and face increasingly difficult investment decisions that affect their lives, savings goals and retirement security, we must improve the usefulness of our existing disclosure system.

While our existing disclosure system has served us well for nearly 70 years, it is based on the now far too narrow concept of "periodic" (that is, quarterly and annual) reporting. I passionately believe that our disclosure system can be strengthened and supplemented, so that it will put information into investors' hands more promptly, and better help investors sort through the massive amounts of materials they now receive, but that often are not user friendly. Financial statements can trip up even financial experts. We need to make financial information comprehensible to average investors as well as to sophisticated financial analysts. It is in the interest of investors, and at the top of our agenda, to ensure that financial statements read plainly, easily and simply; but not if doing so comes at the expense of masking, obscuring or skewing a public company's true financial status.

While we want to pursue plain-English financial statements, what we have in mind differs from the so-called "pro forma" financial statements some companies have started using to highlight specific components of their financial results.

Unstructured and undisciplined, "pro forma" financial disclosure starts by rejecting the bedrock of all our financial disclosure requirements -- Generally Accepted Accounting Principles, known to many simply as GAAP. There is no comparability between these unstructured "pro forma" disclosures from company to company, and even within some companies, from quarter to quarter.

At a minimum, it seems to me that companies that prepare so-called "pro forma" statements deviating from GAAP must show the investing public how their "pro forma" presentations vary from GAAP, and tell investors whether all deviations from GAAP follow a consistent methodology, as opposed to presenting the most favorable light possible. And, of course, there is a strong need for companies to reconcile "pro forma" disclosures with mandated GAAP financial statements. These concepts are not novel; but they are critical. The Financial Executives Institute and the National Investor Relations Institute have done corporate and investor America a good and useful turn by suggesting "best practices" public companies should consider before inventing their own "pro forma" disclosures.

When we turn to the disclosure regimen we hope to implement, a core principle is that our current disclosure system should not be discarded, but should be supplemented and improved to make our markets even more efficient and more responsive to investor needs. In the system we envision, companies would assume an affirmative obligation to disclose unquestionably significant information whenever it arises and becomes available, instead of being able to wait to disclose the information when the next-scheduled quarterly or annual report is due.

Technology will play a very exciting role in the process of furnishing more, better, current and understandable information to investors. The Internet is capable of disseminating critical information quickly. It is inherently customized: users can find as much or as little information as they want and quickly. In rethinking our existing disclosure system, we need to use technology to put user-friendly information into investors' hands more promptly. The Internet enables us to keep our current periodic disclosures as hyperlinks from new, summary and trend-defining, disclosure reports. We are searching for a Chief Technology Officer to advise us on many issues, including using technology to simplify disclosure documents without sacrificing any part of the wealth of information investors already receive.

Cyberspace has made it increasingly easier for individual investors to go out and look for timely information. This is both a blessing and a curse. Unfortunately, we all have witnessed the willingness of otherwise thoughtful people to believe what they read on unverified websites and unregulated Internet bulletin boards: claims of sure things by individuals who probably were (or could have been) snake oil salesmen in prior lives. Small investors are easy prey for cyberspace sharpshooters who spread disinformation, or use their virtual pulpits to promote the sale of their own holdings at a profit. While there always will be people who allow dreams of untold wealth to distort their better judgment, we have redoubled our efforts to protect investors from fraud and manipulation.

This leads me to another new initiative we've embraced for the benefit of investors, "Real Time Enforcement." As most of you know, conventional wisdom is that potential enforcement actions must often await completion of a lengthy investigation, and can be brought as long as five or six years after a fraud already had been perpetrated on unsuspecting investors, and long after any ill-gotten gains have been dissipated.

Make no mistake, I applaud being careful and thorough, and assuring that any allegations we level are fully and factually justified. But, if it takes five or six years to complete an investigation, investors may receive little recompense, and the wrongdoers may benefit from the methodical pace at which their nefarious acts are ultimately addressed. Our "real time enforcement" policy aims to improve our protection of investors by enabling us to act quickly and expeditiously.

It means we seek to learn of violations quickly and, where investor interests are being disserved or abused, take immediate action to undo or halt the effects of misconduct. Faster enforcement can help prevent continued fleecing of public investors and dissipation of assets, and will promote investor confidence in the integrity of our markets. As a result, you will see us moving faster to obtain temporary restraining orders, freezes of assets, and appointment of court monitors to oversee enterprises that commit, or used to commit, securities fraud.

Our goal is to provide more effective and quicker recompense for investors, and better coverage of the markets with our limited enforcement resources. In addition to bringing our resources to bear as efficaciously as possible, we have undertaken a companion effort to encourage those subject to our regulations to self-report violations as soon as they become aware of them, self-correct those problems, and self-remediate those who have been injured by violations of law or policies, in return for credit when it comes time to pay the check.

Our program encourages companies to take responsibility to identify and publicize securities violations, call them to our attention, and redress the consequences of their misconduct. Companies may be required to undertake an internal investigation with truly independent counsel -- to confirm that we know all the facts. Such an internal review will be subject to our thorough review.

This approach lets us leverage limited resources. If public companies and regulated entities effectively undertake to do the job we might otherwise start from scratch, we can provide immediate notice to investors of the misconduct that gave rise to our enforcement interest. We also will be better able to preserve assets pending the completion of a thorough independent review, and assure that, at the end of the process, the public has learned of, and received recompense for, any wrongdoing. In return, we will consider giving some "credit," but only if doing so is appropriate in view of any benefits bestowed upon investors. Law enforcement officials and criminal prosecutors have long utilized this approach and recognized its value.

Some observers fret that, perhaps, this reflects a more tolerant attitude on our part, or perhaps only on my part, toward securities violations or financial fraud. As we used to say in Brooklyn, from whence I hail, "in a pig's eye." We will continue to pursue securities misconduct aggressively and expeditiously. Those who are counting on a lack of aggressiveness on our part to police improper market activities will be sorely disappointed.

These are just two of our initiatives. CFA has an important role to play in making these and other initiatives a reality. We encourage your input and look forward to working with you. Years ago, when we sought comments on rule proposals, we'd generally hear from Wall Street, and only Wall Street. Not any more -- not when the vast majority of today's investors live on "Main Street," not Wall Street. Today, when we put out rule proposals, we hear from CFA. You have been vocal on issues affecting ordinary Americans -- ranging from the frequency of mutual fund disclosure, to how brokers can get paid. These are important issues, and there are no easy answers to any of them.

One of the tenets of my Chairmanship is that government is a service business, and that the SEC needs to listen to all of its constituencies, as well as to speak to them. I have spoken to a number of our business constituencies already, and advised them that we will not make them come to us -- we will solicit their views.

But, in fact, investors are our first constituents. It is my impression that these important constituents only get to weigh in on important policy issues -- if at all -- when we formally propose new rules or amendments to existing rules.

While that may work for businesses and institutional market participants, it does not really place investors and consumers on an equal footing, since they cannot usually retain sophisticated counsel to submit their views in the course of a formal rulemaking proceeding. That's why this Spring we will reach out to investors by convening our first-ever, but assuredly not our last, "Investor Summit," to discuss policies and proposals that impact them. We want to give all Americans an opportunity and an avenue to weigh in on the broad policy objectives that ultimately could impact their ability to send their children to college or retire comfortably. We'll use the Internet to broadcast the summit so that anyone can participate. We'll ask people to write us and call us so that we can hear the broadest possible range of viewpoints. We want to solicit and hear Corporate America's concerns, to be sure, but not solely their concerns; we want and need to hear the concerns and aspirations of America's investors too.

We eagerly anticipate continuing to work with CFA to make sure that we discharge our obligations prudently, generously and in the spirit with which the federal securities laws were adopted: to protect investors and maintain the integrity of the securities markets. While I cannot predict what your response will be to what I have outlined today, I can tell you what comes to my mind. Those who know me won't be surprised that it's a line from the movies, from which I believe all true wisdom emanates -- in this case, it's Bogey's memorable last line in Casablanca -- "I think this is the beginning of a beautiful friendship."

Thank you.



Modified: 11/29/2001