Speech by SEC Chairman:
Remarks Before the Annual Meeting of the Bond Market Association
Chairman Harvey L. Pitt1
U.S. Securities and Exchange Commission
New York, New York
April 25, 2002
I don't know what is harder: following a group of superstars, including the likes of Secretary O'Neill and former Fed Chairman Volcker, or attempting to speak before the cocktail hour! Suffice it to say it is a daunting task to attempt both! The stakes are high for me to deliver a short, but interesting, speech. Daunting though it is, I am pleased to be with you this afternoon.
We all know that bonds have helped protect and build America. But did you know that bonds have also produced some great art, music, and other entertainment in this country? A recent article in the Smithsonian Magazine brought this point home to me.2
Consider Irving Berlin's 1941 song, "Any Bonds Today?"
The tall man with the high hat [as Berlin called Uncle Sam] will be coming down your way. Get your savings out when you hear him shout, "Any bonds today?"
Irving Berlin wrote "Any Bonds Today" at the request of former Treasury Secretary Henry Morgenthau. According to the "Important Events in Treasury's History" page on Treasury's web site, Berlin presented the song to the Treasury Secretary on May 22, 1941. I'm sure Treasury will be marking the date in appropriate style next month - especially since Berlin assigned all royalties for the song to Treasury!
So, obviously, one of the reasons that Treasury Secretary O'Neill is a hard act to follow is that he can get songs written about his products. No one writes songs like, "Any Rules on SPEs Today?" or "T+1, not T+3." Nobody writes these songs even though these are very important issues. And, although I can't sing about them, I would like to talk to you about these topics this afternoon. I thought I would update you on our progress on some issues of mutual concern, and then use my remaining time to hear your comments and try to answer your questions. The four topics I want to address are: transparency, the T+1 initiative, special purpose entities, and Securities Act Reform initiatives.
You and the Commission have been working together for years to improve debt market transparency. Transparency is fundamental to fair debt and equities markets. It permits investors to assess the quality of their executions by comparing the price their broker offers to the marketplace's best price. Accurate information also improves the quality of markets by allowing markets to "discover" the true price at which specific securities trade.
Comprehensible information, readily available to all investors, is the foundation of all strong and vibrant markets. A better-informed investor makes for a better marketplace - information breeds confidence, and confidence is the bedrock of our financial markets. Investors are willing to commit capital to a particular market only if they have trust and faith that the market is transparent.
And today, more than ever, investors need to feel confident that markets in which they invest their hard-earned dollars are fair. Accordingly, transparency goes hand-in-hand with market surveillance. By facilitating public availability of data, we can also facilitate market surveillance by allowing regulators access to the data they need to monitor the market. In short, the investing public gets "the best of both worlds."
One significant step taken recently to improve bond market transparency has been the NASD's TRACE system for reporting, collecting, and disseminating last sale information on corporate bonds. I am encouraged that the NASD is well on its way to implementing TRACE. Despite a setback resulting from the events of 9/11, the NASD is moving forward vigorously. It has established a new target date of July 1st, published its technical specifications, and is well advanced in the testing and member-training phases of implementation. Most importantly, the Bond Transaction Reporting Committee, formed to provide input to the NASD's Board, is already taking an active role in addressing the implementation of TRACE.
With only two months remaining until the NASD's target date, we must continue aggressively to make corporate debt markets transparent. The Bond Transaction Reporting Committee can do its part by setting an aggressive, concrete schedule for moving past the first phase of TRACE reporting. I look forward to continuing to work with you toward this goal.
The municipal bond market has also made strides to improve transparency more recently. As a result, investors are now armed with better pricing information about the most actively traded bonds. The municipal securities market is further along than the corporate debt market, but it has yet to achieve the ultimate goal of transparency - real time reporting of transactions. While efforts to move to real time reporting must ultimately be tied to T+1 - because computer systems must be integrated - there's a lot to do in the meantime to improve transparency.
I therefore was pleased that the Municipal Securities Rulemaking Board is moving forward with plans to improve price transparency in the municipal bond market in anticipation of the arrival of T+1 settlement and real time reporting. Last month, the MSRB proposed to increase the scope of its daily transaction report of frequently traded bonds by including transactions in bonds that are traded 3 or more times a day, instead of the current 4. This will more than double the number of issues for which the Board provides next day trading information.
The MSRB must accelerate the process of introducing more transparency into this market, first by continuing to increase the number of frequently traded transactions reported one day after the trade date, and second, by reducing the period of time for disseminating comprehensive daily trading information. Two weeks - indeed, even one week - is an eternity in a trading environment. The industry must support the MSRB's efforts to make this market even more transparent for the benefit of our joint client - public investors. Achieving full transparency is a critical step forward towards our ultimate goal - fair, efficient, and liquid capital markets in which investors have confidence.
Now let me turn to the subject of T+1.
Over the last few years, the explosive growth in trading volume has presented numerous new challenges regarding the securities transaction processing. The securities industry has responded to these challenges with a major initiative to shorten the securities settlement cycle for most broker-dealer transactions, from three days after the trade, to one day after the trade, affectionately known as T+1. The goal is to shorten the cycle to T+1 beginning in June 2005. While this may seem a long way away - especially to those who just packed kids off to college last fall and will attend their college graduations, we hope, in June 2005 - it is not that far off. Like a college student majoring in engineering, the industry is on a tight schedule to achieve its goal by June 2005. To achieve T+1, firms will have to focus their efforts and dedicate appropriate resources. Many of you may be waiting for us to propose to reduce the settlement cycle to one day; let me assure you the rule proposal is on its way.
The push to reduce the transaction settlement period underscores one of the lessons learned in the wake of 9/11: settlement processes are vulnerable to outside interruption. By reducing the overall amount of transactions required to be in settlement at any one time, we significantly reduce systemic risk.
There may be other significant benefits to reducing the settlement cycle to one day. First, it would allow investors to obtain the proceeds of securities transactions sooner. Second, it would benefit investors and the industry by minimizing credit and market risk, maximizing automation in back office procedures, reducing the number of failed trades, and presumably producing overall cost savings. There are also significant costs. The SIA estimates that the industry will wind up spending almost $8 billion to accomplish T+1 goals. We will consider these costs, and the scope of the benefits, as part of the T+1 rule proposal.
We applaud the industry's efforts to increase the efficiency of the post-execution process. To be successful, this project must include all market participants and the process must be transparent. The Bond Market Association has been extremely active in this project. Your work preparing the codes of practice for fixed income securities is extremely important and very much appreciated.
Special Purpose Entities
In the wake of Enron's collapse, much has been said about special purpose entities. Investors have become increasingly interested in the sufficiency of disclosure regarding off-balance sheet obligations and contingencies, including use of SPEs. Investors need to know more about liquidity risk, market price risks, and the effects of "off-balance sheet" transactions. If a company's liquidity is dependent on the use of off-balance sheet financing arrangements, such as securitization of receivables or obtaining access to assets through SPEs, investors also need to know the factors that are reasonably likely to affect a company's ability to continue using off-balance sheet-financing arrangements. Such matters could affect the extent of funds required within management's short and long-term planning horizons.
Much has been said about SPEs since the collapse of Enron. Our discussions have focused on improving disclosure and accounting for SPEs. We recognize the significance of SPEs in the functioning of our capital markets. Our focus is on investors and making sure they have clear and intelligible information.
The FASB is well along in its project to improve accounting standards for the consolidation of SPEs. I know that the Bond Market Association has a keen interest in this project, especially with respect to "collateralized debt obligations." The FASB is expected to issue an exposure draft before the end of June, and I encourage you all to study it carefully and write to the Board with your comments.
Securities Act Reform Initiatives
Finally, the Bond Market Association has submitted proposals to our Corporation Finance Division on two important subjects. Over the years, there have been several suggestions regarding a system of registration and registration forms for asset-backed securities. More recently, the Association has urged us to move forward on Securities Act communications reform. As you know, we have been preoccupied with a few other things of late, but let me update you on the status of these projects.
Communications reform will be part of the general Securities Act reform project that we hope to get to later this year. The asset-backed securities project has been on the Division's radar screen for some time, but the press of other business has always kept the project from moving forward. Both the Commission and I are extremely fortunate to have Alan Beller, one of the world's foremost authorities on corporate and securities laws, as Corp Fin's Director. Alan is familiar with the issues surrounding asset-backed securities and he also recognizes that for every dollar of IPO offerings there are vast dollars of asset-backed securities offerings. Consequently, he is seeking to make an asset-backed securities project a priority. In addition, I know the Association has suggested possible action in a handful of targeted areas that could proceed independent of the larger project, and the Division will be looking at these as well.
A host of other issues, which time and the likely limits of your rational patience prevent me from addressing today, certainly are on both your and our agenda. I encourage you to continue engaging our Staff in dialogue and working with us to resolve issues.
In closing, I would be remiss if I didn't express the Commission's enormous gratitude for the Bond Market Association's extraordinary work following the terrible events of September 11th. I continue to marvel at the tremendous efforts and cooperation of so many at a time when we were all in shock and mourning. In elevating the public interest over all other concerns, industry and government came together and ensured the successful and meaningful reopening of our capital markets. Our experience following September 11th evidenced the extraordinary power of cooperation and partnership between the public and private sectors. It is a legacy we must preserve and expand, especially as we work with the industry and other regulators to strengthen business continuity planning and government securities clearing based on lessons learned in those dark days.
Thank you. I'd be pleased to happy to take your comments and questions.
||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.|
||Beth Py-Lieberman, "Any Bonds Today? When Uncle Sam Passed the Hat in World War II, Americans Came Up with $185 Billion to Buy U.S. Bonds," 32 Smithsonian 64 (Feb. 2002).|