Speech by SEC Chairman:
Remarks before the New York Financial Writers Association
Chairman Harvey L. Pitt
U.S. Securities and Exchange Commission
New York, New York
June 13, 2002
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.
Ladies and gentlemen of the financial press:
Before I begin, and even before I thank Mike Kandel for his undeservedly gracious introduction, I want to congratulate tonight's student scholarship recipients. You are each a step closer to realizing your dreams. Cash the checks, but hold on to your dreams.
I also want to take a moment to congratulate Paul Steiger, tonight's very deserving recipient of the prestigious Elliott V. Bell award. I was surprised to learn that Paul and I have been at our respective occupations for approximately the same length of time thirty-five years! As I told Paul before dinner, I appreciate and share perhaps more than most of you here the anguish Paul and his staff experienced on and after September 11th, when they were rooted from their offices and daily routines.
As you all presumably know, our New York office also experienced serious dislocations and disruptions in the wake of the 9/11 terrorist attacks. In our case, our entire Northeast Regional office was physically destroyed. It is a testament to the grit and determination of all our SEC employees that the New York Staff was able to regroup and reconstruct the important work they do. I'm very proud of the SEC's New York Staff, and I know Paul is very proud of the Journal's New York Staff. Paul and I are both grateful neither of us lost a single employee on that horrific day. Indeed, as we remember those who are no longer with us, we all of us in this room should be grateful we are together tonight, celebrating awards, honoring scholarship recipients, and renewing old friendships.
And speaking of old friendships, that brings me full circle back to Mike Kandel, definitely an old, and obviously an older, friend. Thank you, Mike, sincerely, for the kind introduction. I can't recall any financial writer saying such nice things about me since it was discovered I'm registered to vote as a Republican! And, I especially appreciate your tact in not referring to me as the "other" guy who regulates analysts!
Mike and I have known each other for many years, dating all the way back to 1933, when I wrote the Securities Act. Mike was a young reporter back then, telling his readers that, judging by the '33 Act I authored, I was "too soft" on the industry, the legislation didn't go far enough, and I was too beholden to special interests . . . especially those of my former clients. Mike is also responsible for my being here tonight; I'll let you decide for yourselves whether he should be condemned or applauded for that decision. Perhaps we can take a vote when we've finished our discourse.
Before opening myself up to your questions, I do want to discuss a serious topic with you the important relationship between the SEC and the financial press, especially in these troubled times.
I'll start by thanking you for inviting me to speak here tonight. It may surprise some of you to hear me thank you, but I genuinely welcome this opportunity. You and we have a symbiotic relationship; you who cover our financial markets depend upon us to identify, and/or respond to, major market developments and issues, and we supply the substance for your reportage and commentary. By the same token, we at the SEC are very reliant on a free and independent press to ferret out and call to our attention emerging issues and problems, and to carry our messages to the investing public. Being here gives me a chance to tell you what we're doing, what we're about and, hopefully, through you, to get some of that message across to investors.
Because the SEC is part of the government, our relationship with you isn't, and shouldn't be, entirely non-adversarial. You have an obligation to monitor what we do, assess how well we do it, and report on whether we are living up to our obligations. We in government need to be held accountable; only a free and unfettered press fulfills that responsibility. In short, although I'd much rather hear you consistently sing our praises, we know your important function doesn't let you limit yourselves to playing such a role.
The important thing to realize, however, is that agencies like the SEC are multi-dimensional. We do not have only one function, or one characteristic. Our collective personality is not embodied in a single person, not even in our Chairman. We have many components, filled with different people, believing in different principles and employing different methodologies. Sometimes, when I read some of what is written, that fundamental truth seems obscured. Perhaps a bit of explanation is in order.
Many of you know that, like Mike Kandel, I was born, raised and educated in Brooklyn, which should still be, but alas isn't, the home of the Brooklyn Dodgers. What you might not know is that, growing up in Brooklyn, long before I dreamt of becoming a lawyer, let alone becoming SEC Chairman, I had a premonition I was destined for a significant relationship with the press. This premonition flowed from the fact that, in high school, one of my favorite books was "The Autobiography of Lincoln Steffens."
Steffens, one of the earliest muckrakers, wrote at the height of the New York newspaper wars in the late 1800s and early 1900s. He covered Wall Street for what was then the New York Evening Post, but he was on the police beat when Theodore Roosevelt became New York's Police Commissioner.
My favorite chapter in Steffens' autobiography is entitled "I Make a Crime Wave."1 The chapter title is probably self-explanatory, but in case it isn't, I'll note that, in the chapter, Steffens describes how he and fellow reporter Jacob Riis started to report New York City street crimes more fully, and sensationally, in their papers. Other reporters followed suit, and suddenly, New York's papers were chock full of crime stories.
Of course, we all know the power of the press. Once these crime stories started running, they spurred others to do the same, and the City was abuzz with rumors and speculation that its citizens were under assault from muggers, robbers, burglars, thieves and con artists. Public panic ensued. Levelheaded citizens felt that this upsurge in criminal behavior was both an outrage and a horror! And, they understandably asked where the police were and why the citizenry wasn't being protected from these atrocious crimes.
As you can imagine, Police Commissioner Roosevelt was under enormous pressure to "Stop this Crime Wave!" Roosevelt also knew there was no crime wave. The same number of muggings, robberies, burglaries and scams had been going on for years. In fact, there actually had been a recent reduction in the number of many crimes! To put it bluntly, there was a disparity between reality and perception.
The disparity between reality and perception stemmed from the fact that Steffens and his colleagues had started doing a more focused job of reporting known crimes and, in doing so, created the impression that crime was both rampant and on the upsurge. That, as you might imagine, riled the citizens of New York. I suspect you can guess where I'm going with this piece of journalistic history. One place I'm not going, however, is to suggest, even for a second, that recent news of financial shenanigans and corporate wrongdoing is a product of imaginative reporters intent on "mak[ing] a crime wave." It isn't.
But, to the extent that press reports help create perceptions, not merely report them, we confront a fundamental tension in the nature of financial reporting. I don't have a solution for this seeming conundrum. Suffice it to say that only financial writers and their editors can decide what to report, how to report it, and when it should be reported. There are, however, some fundamental truths none of us can deny.
First, there are problems in what companies are, and, concomitantly, in what companies are not, telling their shareholders. I had occasion recently to look at an annual report prepared in 1937 by the Brockway Glass Company. It is worth taking the time to read this report, which was filed shortly after our annual reporting requirements went into effect. The text covers only 4-1/2 pages; although terse, it is actually quite informative. The "Condensed Statement of Condition" Brockway's financial statement is a mere two-facing-pages ledger, with only six line entries on either side of the ledger, and no footnotes!
Coming off a year of record earnings, and presumably in a position to preen, Brockway actually did nothing of the sort it told its shareholders that
- obsolescence in machinery and methods,
- increasing and more exacting Federal and
- State labor laws, and
- compensation, unemployment and retirement taxes,
all made it "almost impossible to predict or hope for a continuance of such a level of earnings . . . ." Today, those of us at the SEC aspire to go "Back to the Future," as Hollywood would say, because this kind of disclosure is user-friendly, and designed to inform; it isn't intended merely as a way of avoiding liability.
Second, there unfortunately are some less than honest folks on Wall and Main Streets. While they are not the majority by a long shot, they certainly have had a disproportionate effect in eroding investor confidence in the integrity of our markets and our corporate managers. These are things that deserve to be reported in daily newspapers and broadcast for all to see and hear.
But I think it behooves all of us to step back, take a breath, and recognize where Enron's aftermath has brought us. Thanks in large part to all of you, one place Enron has brought us is to the collective realization that, even though we may have the best capital markets in the world, and the best regulatory system, they are not enough. More much more needs to be done. Some of us have known this secret for years. The events that have produced Enron, Global Crossing, Adelphia, WorldCom, and a host of other currently infamous corporate names, did not just occur. They have been festering for years; now we know that these pressures can no longer be ignored.
The SEC is assiduously devoted to doing the job that needs to be done. If you compare the pace and level of activity at our agency over the past nine months, you'll see they dwarf any comparable period in our agency's history. Starting with a fundamental revision of what, when and how information is disclosed to investors, our disclosure system long the world's paradigm is in the process of being retooled to help investors learn what they need to know, when they need to know it, and in words that make sure they actually grasp what they are being told.
We are at work on the most dramatic and far-reaching changes in corporate governance since the agency's formation. In that effort, we have been blessed by the partnership we enjoy with the New York Stock Exchange and Nasdaq, both of which have shown themselves determined to ratchet up the standards we have a right to expect of our corporate leaders. We are talking about important responsibilities for independent directors, who will form a majority of our nation's largest and best capitalized companies. These efforts include new responsibilities for audit, compensation and nomination committees.
We have proposed rules to impose personal responsibility on corporate leaders for their corporations' disclosures. It is unthinkable, in this, the 21st Century, that any CEO or senior corporate officer could even contemplate saying that he or she wasn't focused on the details of what was, and was not, disclosed to investors. And, where corporate leaders disserve those to whom they owe a fiduciary's duties, we are seeking meaningful penalties, stripping them of corporate offices, salaries, bonuses and stock options.
At the same time, we have instituted a dynamic program of "real time enforcement," by which we are seeking to protect investors from scam artists before funds are dissipated, and the scammers flee the jurisdiction. We are having unparalleled success in these efforts, and the best is yet to come.
To improve the level, quality and reliability of financial statements and financial disclosures, we are embarking upon the creation of a rigorous private sector regulatory system for the accounting profession. Next Thursday, June 20th, at our next open meeting, the Commission will consider publishing for public comment an unprecedented series of rules that will establish the framework for a new accounting profession regulatory oversight board. The framework is designed to assure that auditors of public company financial statements meet the highest legal, ethical and competence standards ever imposed on the accounting profession.
We believe this approach will upgrade the performance of auditors, and give investors assurances they can take to the bank that there are plenty of watchdogs making certain numbers they are told are numbers their companies actually achieve. If legislation is enacted into law later this year to achieve the same result, we of course will recede and implement Congress' mandate. But, if for any reason there is no legislation, our forthcoming action next Thursday will ensure that the first system of comprehensive regulation of the accounting profession in history can be in place before the end of this calendar year.
Why am I reviewing all of these initiatives with you? The answer, I'm afraid, is that, although investors are being told how terrible corporate, accounting and brokerage behavior has been, and how inadequate aspects of our regulatory system have proven, they are not getting the message that we the SEC are embarked upon an unparalleled reform crusade designed to make our markets infinitely better than they've ever been in the past.
If you have doubts about the wisdom of some of the things we're doing, then by all means let us have it. Come to think of it, you have let us have it! But, we also rely on the press to let investors know there are real reform efforts underway; that the defalcations of the past are being relegated to the past, and will not likely be part of our bright future. Investors look to your news pages and to your broadcasts for guidance, and what you say is vitally important to restoring confidence in our markets. So, we in the regulatory system look to the press to make investors aware real reform is underway.
We appreciate your reporting, and not just because it sometimes brings glory on the hard-working men and women of the SEC. Your reporting on the SEC's enforcement actions is part of what bolsters confidence in our markets. It reminds investors there is a tough cop on the beat, looking out for their interests. Your reporting also warns the financial community from boardrooms to trading floors that the SEC will not stand still for and will not tolerate any violation of trust in our markets. That, too, is good for the markets.
Since becoming SEC Chairman, I've emphasized to our Staff and to the investors we serve that the SEC is first and foremost a service agency. No matter what else the SEC accomplishes during my tenure, I insist that we perform as a service agency, working with companies and other market participants to make sure they are fulfilling their duties to investors. The men and women who invest in our markets are the SEC's most important clients, and I will do everything in my power to ensure that we serve their interests zealously, doggedly and creatively.
As SEC Chairman, a job I relished from my first tour of duty at the agency nearly thirty-five years ago, I have a dream I'd like to share with you. My dream is that you won't have to continue to write about crime waves in the financial world. My dream is that the rules for conducting the public's business in the markets will be so clear, and the penalties for malfeasance, misfeasance and nonfeasance so high, that no one will think seriously about crossing the line; my aspiration is that no one will cook corporate books, lie about a company's prospects or sell worthless stock to an unsuspecting retiree. My hope is that, going forward, no investor loses a dime due to fraud.
Is this realistic? Unfortunately, it isn't. There will always be greedy people and outright crooks who will try to evade the rules, rather than comply with them. But that reality is not going to deter us from updating and retooling the rules we work under and making it absolutely clear to people in our financial markets what is right and what is wrong. That's why we will keep reworking the rules for our markets rules that were written nearly seventy years ago, in a far different time, to serve far different needs so that they are applicable for the 21st Century, and so that investors, and those who report the news to them, once again attain a high level of confidence in our markets and those who serve and regulate them.
Restoring investor confidence isn't easy. I hadn't realized this when I took the job, but there really are a lot of critics and skeptics out there, shooting at us! And rulemaking doesn't make for the sexiest news stories. But, bear with us. We are constrained by rules dating back to the days of manual typewriters and carbon paper, while you and the rest of the world are on computers, cell phones and BlackBerrys! I am grateful to the financial reporters who "invest" the time to understand that the rules we propose the faster disclosure rules we proposed yesterday, the new accounting regulatory regime we will propose a week from today, and the myriad of additional rules we have been churning out at a breakneck pace are all aimed at stopping the abuses that festered over the past five or ten years. Reporting on the rules, even if unglamorous, is an important way investor confidence legitimately can be raised.
You have an important role to perform in restoring investor confidence, as do we. It is my hope that we can approach this critical task with mutual respect, and even admiration, on occasion. We at the SEC are obligated and committed to, and we are absolutely excited about, improving the system and restoring investor confidence. You can help us enormously to achieve that goal by making sure investors are aware of, and understand, the many significant and unprecedented initiatives we have underway. I sincerely hope you will.
Thank you. And now, I'll be happy to try to answer any questions you have.
1 The Autobiography of Lincoln Steffens, p. 285 (1931).