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U.S. Securities and Exchange Commission

Speech by SEC Chairman:
Remarks at the September Symposium
On Corporate Governance and Accounting Reform


Chairman Harvey L. Pitt

U.S. Securities and Exchange Commission

Women in Housing and Finance
Washington, D.C.
September 20, 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.

It's now commonplace to talk about a crisis of investor confidence. But the fact that it's commonplace doesn't make it any less real, or any less tragic. Since capitalism's inception, there've always been instances of some trying to game the system, cut corners, or take what doesn't belong to them. But, we've recently witnessed massive corporate, accounting and securities industry breaches, marked by a lack of ethics and integrity that've been festering for years.

Investing in the stock market today isn't a luxury, or a preoccupation of the idle rich; it's a necessity for all of us, and that's why a majority of Americans are now invested in our stock markets. Ordinarily, this would be a wonderful thing. But if ordinary citizen-investors are deceived, and lose money to those who rig the markets or game the system, then having so many individuals in our markets could become regrettable. That's why the problems in our system need to be fixed, and as soon as possible.

At the SEC, we've battled these problems for the past year. My fellow Commissioners and I inherited these problems, which were years in the making, although sometimes it's a little hard to tell that. Among the five of us, Cyndi and I go back the longest together, all the way to January! In those nine months, we've embarked upon massive reforms for our markets, and those who make them work. Many of our solutions are now codified in the Sarbanes-Oxley Act, which became law in August. For the next six to nine months, we'll be implementing Sarbanes-Oxley, and finalizing our additional initiatives. It's a daunting task.

Among our major tasks under the new legislation is creating a new private sector regulatory regime for the accounting profession. We must pick five "prominent individuals of integrity and reputation who have a demonstrated commitment to the interests of investors" to serve as our first Board, which will register all accountants, oversee standard setting for their conduct and independence, discipline them if they err, and perform regular quality control reviews to make sure firms are functioning at the highest professional levels. We must appoint the Board by October 28th, but we hope to complete the effort by the end of this month, to give us more time to focus on start-up issues. We've received over 400 hundred names of people thought qualified to serve from every constituency, and from the investing public. We will pick the five board members unanimously.

We're also reforming our disclosure system. Last month, we adopted two rules required by Sarbanes-Oxley. The first, like our rule proposal last spring, requires CEOs and CFOs to certify that quarterly and annual reports disclose everything investors should know about their company. The rule is effective immediately, and assures true accountability of corporate leaders. We also adopted rules accelerating deadlines for corporate insiders to report transactions in their company's securities, including transactions with their company. Under Sarbanes-Oxley, these deadlines are now only two days - down from periods up to 410 days the Commission put in place a few years ago.

And these are just the beginning. We've a huge amount of work ahead of us, but my colleagues and I will do everything we can to give full impact to the protections the Act seeks to effect. Corporate governance has become a prime concern of ours since the recent scandals erupted, largely because it affects the quality of financial statements and the stability of companies - matters about which we have a longstanding interest, and a legitimate obligation to address. Our corporate governance system requires that corporate leaders be faithful to the interests of shareholders and act with both ability and integrity.

Most of the problems we've seen recently result from a failure of company executives to honor their fiduciary duties. To restore public confidence in the integrity of senior corporate managers, companies must demonstrate a strong commitment to the development and enforcement of rigorous corporate governance standards. Sarbanes-Oxley has touched on some of these areas, and corporate governance is getting much-needed attention in other quarters as well, including the New York Stock Exchange and Nasdaq, who we asked to work with the corporate and shareholder communities to review their corporate governance and listing standards, including important issues of officer and director qualifications and codes of conduct of public companies. Their thoughtful efforts represent a significant step in addressing major concerns raised by recent events. We're working hard to pull together a comprehensive rulemaking to address these issues, which include:

  • requiring stockholder approval of all stock option programs;
  • requiring a majority of Directors be independent;
  • requiring audit, compensation and nominating committees be comprised entirely of independent directors; and
  • tightening "independence" requirements" to reduce the ties between independent directors and the company or its executives.

The quick pace and the breadth of these reform proposals encourage me, and we look forward to their finalization.

We're undertaking other governance reforms. Yesterday, we proposed requiring mutual funds and their advisers to disclose to shareholders and clients how they vote the proxies for the securities they hold. Greater transparency of proxy voting should encourage mutual fund directors and investment advisers to exercise their fiduciary responsibilities in an appropriate manner, particularly since there are conflicts of interest associated with proxy voting.

Beyond these issues, we're forging ahead on all cylinders. Our "real time" enforcement program is producing quality results, and reassuring investors that, if corporate executives and professionals cross the line, they will pay, and pay heavily where it hurts the most. We've set records in the number of proceedings brought, director and officer bars sought and received, assets frozen, dollars returned to investors, and other appropriate relief.

We're also investigating the performance of rating agencies and the implications of hedge fund growth. And, next month, we commence "interactive" market structure hearings designed to enable us to resolve thorny issues left unresolved for far too long. I've asked Commissioner Glassman to take the lead in structuring our hearings, and she's moving ahead at full speed. Other tasks include developing standards of conduct for corporate lawyers who practice and appear before the Commission. This is'nt a task for the faint of heart!

These are just some of the initiatives in which we're engaged. It's a dramatic and exciting time to be at the SEC. Over the next two years, we'll dramatically remake our regulatory system, a system that will comply with our legislative mandate, and that will restore investor confidence that ours are indeed the best, the most liquid, the most resilient, and the fairest capital markets in the world.



Modified: 09/23/2002