Statement by SEC Chairman:
Proposal of Regulation AC
Chairman Harvey L. Pitt
U.S. Securities and Exchange Commission
Open Meeting, SEC Headquarters, Washington, D.C.
July 24, 2002
Our next matter is a recommendation by the Staff of the Division of Market Regulation that the Commission propose a rule that would require analysts to certify that research reports they issue represent their actual views and to provide disclosures as to whether they have received compensation for the opinions expressed in those reports. This rule is the latest but not the last in a series of initiatives we have taken over more than the last twelve months involving potential conflicts of interest of research analysts.
In May, with the leadership of the House Financial Services Committee and its Subcommittee on Capital Markets, and in partnership with the New York Stock Exchange and the NASD, we adopted groundbreaking reforms to minimize and disclose conflicts of interest facing research analysts. Those reforms, in the shape of SRO rules, were developed after careful consideration both before and after they were submitted for public comment in February, and, among other things, address potential conflicts resulting from the dual roles often played by sell-side analysts.
To be effective in the long-term, rulemaking must not only follow the administrative requirements of notice and comment, which lengthens the process, but also must follow a deliberative fact-based process. We approved those SRO rules only after a series of examinations last summer in which we found serious conflicts of interest by some analysts.
We first identified these problems in our oversight of the securities markets, and the Subcommittee on Capital Markets placed a spotlight on this issue in hearings last summer. The Commission publicly described the conflicts of interest and our preliminary exam findings in testimony before the Subcommittee during those hearings last summer.
The SRO rules adopted in May, which made significant structural changes in how analysts do business, go a long way towards guarding against these potential conflicts of interest and providing investors with better information about the analysts' and the firms' relationships with public companies while forbidding some relationships altogether.
In addition, we announced in April our commencement of a comprehensive investigation of analyst practices designed to serve two purposes first, to ascertain whether the new SRO rules provide sufficient protection for investors, or require supplementation, and second, to ascertain whether anyone violated existing law. We are also looking for immediate compliance with the new SRO rules.
After completing our joint inquiry, we anticipate that the SROs and the SEC will propose additional rules. The SROs and the SEC also will consider whether new rules are warranted as a result of the legislation that the conference committee reported out today, which recognizes many of the issues on which we have been working so long.
SRO rules and Commission rules are complementary. Our rules define what is illegal, and the SRO rules take that two steps further by addressing unethical and incompetent behavior, whether legal or not. The rules that the Staff is recommending today I believe will put in place a strong framework under which analysts must attest to their belief in the views they espouse in their research reports and disclose whether they are directly compensated for their opinions, thereby enhancing investors' ability to evaluate the utility of any analyst reports to their investment decisions.
Our yearlong efforts demonstrate our desire to resolve these issues, and to ensure that investors can have confidence in what they are told. The proposal before us today, those that have come before it, and those that will likely follow it, are all testaments to how seriously we take this issue.
Before I turn this over to Annette Nazareth, I want to recognize her and her hardworking staff especially Larry Bergmann, Jamie Brigagliano, Tom Eidt and Raquel Russell who have been dedicated to this issues for many, many months. I also know that the Market Regulation staff has been assisted greatly by General Counsel Giovanni Prezioso, and his staff, as well as the staff of other divisions and the Office of Economic Analysis. I'd also like to take this opportunity to thank Lori Richards, and the staff of the Office of Compliance Inspections and Examinations, for their great work in identifying key issues both in their examinations last summer, as well as for their work on the current joint inquiry.