Speech by SEC Chairman:
|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.|
I regret that I cannot be with you in London today. Unfortunately, the press of Commission business required me to be in Washington yesterday and today. I want to apologize to the Financial Times and to the other sponsors and participants for this unavoidable last minute development. The opportunity to address leading regulators and members of business and finance is crucial to globalization of markets and to the program of the United States Securities and Exchange Commission. I am pleased, however, to be able to participate by video link.
When I took office as Chairman of the Commission in August 2001, making sure the Commission played a leading role in the successful globalization of markets was among my highest priorities. Two of my earliest appointments to leading staff positions demonstrate that commitment. Our Chief Accountant, Bob Herdman, was in charge of global professional practice at his prior firm. Our Director of the Division of Corporation Finance, Alan Beller, who is with you today, spent more than seven years of his legal career practicing in Paris and Tokyo. Bob and Alan bring more international experience to their vital positions than at any time in the Commission's history.
You and I both know now, of course, that intervening events have diverted attention from my global agenda. First, there was the tragedy of September 11th, which touched all of us. The tremendous outpouring of support and assistance from around the world helped our Country and our markets rebound with strength and determination. In some respects, all of us are still recovering, and, in some respects, we never will.
Then came the series of corporate collapses with which we are now all too familiar. They uncovered a pattern of corporate greed and malfeasance. We witnessed breathtaking failures of corporate governance, revolting misfeasance by corporate leaders, and the complete abdication of responsibility by too many charged with providing checks and balances to the system - directors, audit committees, outside auditors, legal advisers, analysts, and others.
These scandals erupted after years in the making. But, even before the scandals erupted, I knew we needed to improve the efficacy of our regulation. Last fall, we launched the most aggressive reform agenda in our history. The corporate scandals and collapses spurred us to accelerate and broaden our efforts. We recognized that the system of self-regulation of the accounting profession was broken beyond repair and that a new system was needed. We embarked on a program of long-needed disclosure reforms to improve the quality and increase the timeliness of disclosure. We called on the New York Stock Exchange and the Nasdaq to improve corporate accountability and corporate governance through strengthened listing standards. We launched investigations of research analysts and their firms. And we commenced inquiries regarding credit rating agencies, hedge funds, and market structure.
The President and Congress also responded forcefully. In March 2002, the President announced his "Ten-Point Plan to Improve Corporate Responsibility and Protect America's Shareholders," based on three core principles: accurate and accessible information, management accountability, and auditor independence. Starting with hearings in the summer of 2001, the House Financial Services Committee and its Subcommittee on Capital Markets, under the leadership of Chairman Michael Oxley and Ranking Member John LaFalce, as well as Subcommittee Chairman Richard Baker and Congressman Paul Kanjorski, was an early proponent of analyst reforms. In April, the House of Representatives passed important legislation addressing oversight of the accounting profession and the weaknesses in corporate governance and disclosure.
The stunning scandal and top-line financial fraud of WorldCom provided the climax. At that point, the magnitude of the corporate implosions was staggering. It was front-page news everyday. It occurred as more Americans than ever before are invested in the stock market. More than 53% of American households participate in our securities markets, and they demanded action.
The major result to address the precipitous loss of investor confidence was the Sarbanes-Oxley Act of 2002. On July 30, President Bush signed the Act into law. For the U.S., this is the most important securities legislation affecting public companies since the Securities and Exchange Commission was formed in 1934. The reforms in the Sarbanes-Oxley Act are broad ranging, including provisions affecting the governance of the accounting profession, disclosures by public companies, corporate governance and enhanced criminal penalties for securities fraud. I am personally pleased that the legislation adopted the majority of our recommendations for solving these crises.
While the new law was prompted by problems encountered in the U.S., these problems are global in dimension. As a result, numerous other jurisdictions are considering regulatory reform patterned after our own. Many EU countries and the European Commission are reexamining their existing oversight and governance systems. In that regard, we support the work that the European Commission has undertaken as part of the Financial Services Action Plan, as well as the review of corporate governance issues being performed by the Commission's High Level Group of Company Law Experts.
In implementing Sarbanes-Oxley, we will be fully faithful to its letter and spirit, and we will also be fully mindful of the impact of regulation on both U.S. and global markets. In doing so we will continue a tradition that we have been following for many decades. Our philosophy is simple - U.S. persons invest around the globe, and therefore the interests of U.S. investors and U.S. markets are best served if foreign companies trade in our markets and meet our disclosure and accounting standards. I am well aware that there are those, especially outside the United States, who believe that recent events call our disclosure and accounting rules into question. However, I am confident, first, that our standards best serve the needs of our investors, and, second, that following the improvements that we have made and are in the process of making, including those mandated by the Sarbanes-Oxley Act, our standards are and will be the equal of any, and the standard for many.
At the SEC, we have a huge amount of work ahead of us to seize the opportunity to effect dramatic changes in the way our capital markets are regulated that is afforded by the Sarbanes-Oxley Act. We have begun the process of reaching out to foreign issuers, regulators, and markets to obtain their views regarding the cross-border issues raised by the Act - even before many of the new rules that the Act requires are proposed. We intend to continue this process.
While we will not always share the same vision on every issue, there is much we can learn from one another, and much that requires us to work together. The cooperative spirit that has served us so well in the past must be our guiding principle as we marshal our collective resources to meet the challenges that lie ahead.
Over the last ten years, we have seen an exponential increase in investments around the globe. To put this growth in perspective, consider the following statistics: U.S. Holdings of foreign securities reached almost $2 trillion by year-end 2001, up more than 500% from 1991. Foreign holdings of U.S. securities were approximately $5 trillion, up 425% over the same period.
The number of foreign companies listing in the United States also has increased exponentially. Consider that in 1981 we had 173 foreign companies registered with the SEC. By 1991 that number had increased to 439, and, by the end of 2001, well over 1300 foreign companies were registered with the SEC. This development benefits all those involved. It provides foreign companies with access to a deep and liquid source of capital - as well as a "currency" in the form of listed stock available for acquisitions in the U.S. It provides U.S. investors with increased opportunities for the allocation of their investments. And it increases the integration of the global economy.
Given all of these benefits, we want to continue to encourage and facilitate access by foreign issuers to our markets. In order to encourage foreign companies to register with the SEC and list in the U.S. markets, the SEC has in place a number of formal and informal initiatives that are designed to facilitate foreign company access to the U.S. public capital markets. Some of these initiatives date back to the beginning days of the agency. For example, in 1935, the Commission crafted a rule in order to exempt foreign companies from the operation of our rules governing proxy statements as well as from Exchange Act Section 16, which relates to reports by insiders of transactions in their company's securities and recapture of so-called short-swing profits by those insiders.
Starting in the early 1980's, we adopted a series of rules that accommodate foreign private issuers. Our basic reporting framework requires foreign private issuers to file annual reports with the Commission but permits foreign companies to do their interim reporting with the Commission on the basis of home country regulatory and stock exchange requirements. Thus, for example, foreign companies currently are not required to submit quarterly reports unless they do so in their home markets. We also have adopted rules that permit foreign companies to disclose executive compensation on an aggregate basis rather than an individual basis. As an administrative matter, we review on a confidential basis draft registration statements of first-time non-U.S. corporate and governmental issuers. There are numerous other examples of how we have modified rules to accommodate foreign companies. We intend to continue our adherence to this important international perspective and philosophy as we move forward.
As we continue our reform of our disclosure and auditing processes, we need to consider how any changes we make will affect foreign as well as domestic issuers and investors. The Sarbanes-Oxley Act generally makes no distinction between U.S. issuers and foreign private issuers listed in the United States. It applies equally to all who seek to access U.S. capital markets. And we are committed to implementation of the Act that is fully consistent with its purpose and intent.
Some have called for the Commission to exercise its exemptive authority. The Commission has general exemptive authority under the statutes that it administers. We have used it wisely to permit sensible regulation under, for example, the Securities Exchange Act of 1934, to take account of changes in the markets, technology, and other factors over the 68 years since that Act was adopted. No one should believe, however, that similar latitude exists to use exemptive authority broadly in the case of legislation that was enacted with unmistakable clarity of purpose about 68 days ago.
We intend to implement fully the Sarbanes-Oxley Act for all companies, foreign and domestic. That is our mandate. And, as we write our rules to implement the Act, foreign companies can expect that many of the new rules will apply to them. But we are prepared to consider how we can fulfill the mandate of the Act through our rulemaking and interpretive authority in ways that accommodate the home country requirements and regulatory approaches of the home jurisdiction of our foreign registrants and potential registrants. As we proceed with implementing the Act, we will therefore also seek a better understanding of any conflicts that may exist, as well as their potential resolution. In the case of the scope and integrity of disclosure, I believe that Sarbanes-Oxley calls for us to continue our long-standing policy. Basic disclosure standards have been and will be generally the same for U.S. and foreign issuers that access our markets. I believe that this approach is commonly accepted as part of the international capital markets. Markets generally have been thought to act consistently with their legitimate interests when they impose disclosure standards in connection with listings or offerings in their markets. This philosophy extends to certification of disclosure or other procedures to ensure the integrity of disclosure. There are a few notably successful examples of international approaches to disclosure, the most noteworthy to date being IOSCO disclosure standards for cross-border offerings and initial listings of equity securities, which were endorsed by IOSCO in 1998.
In many cases, however, markets, including those in Europe as well as in the United States, apply their own standards. These standards can include certifications. Again, in Europe, there appear to be certification requirements as to the accuracy of disclosure that must be provided in prospectuses and listing documents for securities that will be listed on certain exchanges. These requirements are imposed as a condition to listing, and are separate from any other disclosure requirements that may be imposed on an issuer. I therefore am gratified that, while there has been some discussion regarding the disclosure requirements imposed on issuers under Sarbanes-Oxley, foreign issuers have for the most part indicated an ability and willingness to comply, and an understanding for the process.
In implementing Sarbanes-Oxley, we are mindful of the accommodations that we have made to foreign private issuers in our disclosure regime. For example, as I noted earlier, we require annual reports for such issuers but otherwise the timing of interim disclosures by these issuers is triggered by home country requirements. Our newly adopted rules regarding certification evidence a continuation of this philosophy.
There are a number of provisions of the Sarbanes-Oxley Act that go beyond disclosure. The Act introduces federal law and the Commission into a number of areas of corporate governance and internal corporate activity in ways that are new. Examples include requirements for an audit committee of independent directors for listed companies and prohibitions on loans extended or arranged by a company to its officers and directors.
The audit committee provisions in particular could have a potentially broad impact on internal corporate governance practices of reporting companies. For example, the Act includes provisions designed to strengthen the role of audit committees. By April 26, 2003, we must adopt rules directing U.S. markets to adopt their own standards prohibiting listing securities of any issuer that is not in compliance with new standards of audit committee responsibility and independence. Under these standards, an issuer's audit committee must be composed of independent directors and must be directly responsible for the appointment, compensation and oversight of the issuer's audit firm. The committee also must establish procedures for handling complaints regarding accounting or internal control matters of the issuer, including confidential methods for addressing concerns raised by employees. Many foreign jurisdictions do not require issuers to have audit committees, although some are studying their possible use. Also, some countries, such as Germany, require that employees, who would not be viewed as "independent" under the Act, serve on the supervisory board, whose responsibilities include audit oversight functions.
We are aware of the fact that requirements such as these can come into conflict with internal corporate structures and legal requirements in home jurisdictions of foreign private issuers. Some of the requirements for audit committees under Sarbanes-Oxley may go beyond or conflict with local requirements. More subtly, some of the abuses addressed by the Sarbanes-Oxley Act may be addressed in other jurisdictions in different ways from those required or mandated by the Act.
We have begun the process of dialogue with foreign issuers and regulators, and we expect that to continue. A very important part of our rulemaking processes involves the comment process. It is not only required by U.S. law, but also is a crucial element in allowing us to get our rules right. It is a public and transparent process that allows communication between the Commission and all interested parties. Foreign issuers have often been reluctant to participate in that process. In the case of proposed rules implementing the Sarbanes-Oxley Act in particular, I urge foreign companies and their advisors to comment on our rule proposals and to let us know when our proposals conflict with local law or local stock exchange requirements, or where problems that proposals are intended to address are addressed in alternative ways in other jurisdictions. We cannot promise that our final rules will always accord with your concerns, but we do promise to listen, and carefully evaluate them.
If a foreign company was considering a U.S. listing before Sarbanes-Oxley, neither the Sarbanes-Oxley Act nor our rules implementing the Act should dissuade the company from going ahead now. Yes, there will be new disclosure and other requirements, but the SEC as an institution, and I personally, desire to make it inviting for global business to offer and list their securities in our markets. I am confident that the U.S. markets will emerge stronger and with greater transparency and comparability among listed companies.
Among our other major tasks under the Act is creating a new private sector regulatory regime for the accounting profession. Sarbanes-Oxley mandates the creation of a Public Company Accounting Oversight Board to oversee the audits of public companies. The Board will operate as a non-governmental, nonprofit corporation and will consist of five full-time, independent members, two of whom must be certified public accountants. The SEC must appoint the initial board by October 28, 2002, and the Board must be ready to operate by April 26, 2003.
As soon as the members of the board are named, they and we must work together on start-up issues. This includes everything from hiring staff and finding office space to proposing rules and adopting initial and transitional standards. After the Board is up and running, the Board's first order of business will be to register all accountants that audit public companies. The Act provides that this registration process can take another six months and that over this time the principal focus will be on U.S. audit firms.
The Board also is charged with establishing standards and rules relating to auditing, quality control, ethics, and independence. The Board will oversee standard setting for auditor conduct and independence, discipline auditors if they err, and perform regular quality control reviews to make sure firms are functioning at the highest professional levels. The Board will work as a complement to the enforcement efforts of the Commission and also focus on ethical and competence requirements. We have seen success of such a two-tier system of regulation for the securities industry. We believe our work with this private sector Board will be in the best tradition of cooperative oversight, and we look forward to its being up and running in the new year.
The Act provides that a foreign public accounting firm that prepares an audit report of an SEC-registered issuer, including a foreign private issuer, must, like a U.S. accounting firm, register with the Board and be subject to its oversight. The Act provides that the SEC, or the Board subject to our approval, may exempt any foreign public accounting firm from any provision of the Act or the rules promulgated under the Act. Once the Board is operational, we and it will need to determine a plan to consider and address issues regarding foreign firms. The Board, together with the SEC, will explore the issue of whether there is a basis and a need for exempting foreign audit firms. Ultimately, our decision must be based on the fundamental regulatory objectives behind Sarbanes-Oxley and must be consistent with our mandate of protecting investors, maintaining market integrity, liquidity and transparency, and promoting capital formation. We will look with interest at the auditor oversight actions taken in other countries in making this determination.
In addition to considering the accounting issues raised by Enron, regulators around the globe have been moving forward on numerous other accounting and financial reporting issues in an attempt to keep pace with global markets. During the last 12 months, there have been tremendous changes in the financial reporting infrastructure within the European Union. Perhaps the most significant of these was the adoption of a regulation that will require the use of International Accounting Standards by 2005 as the official accounting standards for almost 7000 EU listed companies. Because of the ramifications of having most European issuers using a single set of accounting standards by a specific date, the 2005 deadline provides an interesting target date for the SEC to bear in mind as we reform our financial disclosure and auditing processes. If, by 2005, there has been sufficient progress in the improvement and short-term convergence of accounting standards, in the development of a process and structure for consistent interpretation and application of IAS, and in the enhancement of financial reporting infrastructure, then I believe that 2005 could become a target date on which it may be appropriate for the SEC to determine whether foreign private issuers from EU member countries should be required to continue to reconcile from IAS to U.S. GAAP. Our FASB and the IASB are committed to working together to produce high-quality accounting standards across the major international capital markets. They recently have announced the desire to undertake an historic and very important joint project aimed at eliminating the key differences between existing U.S. generally accepted accounting principles and international accounting standards. The staffs of both Boards, together with the staff of the Securities and Exchange Commission, have been working together on the scope of this project. The SEC has encouraged both the FASB and IASB to develop reasonable and pragmatic short-term solutions to eliminating as many accounting principle differences as possible.
Once we have achieved consistent standards, we must also achieve some level of consistent interpretation, application and enforcement. Critical elements that need to be considered to attain consistent interpretation and application of IAS - indeed of any accounting standards - are ethical preparers of financial statements who are both competent and motivated to provide transparent financial reporting, independent audit firms with effective quality controls, and active regulatory oversight.
We realize that the U.S. is not alone in its concerns about investor protection and market integrity, and I applaud the global securities community for the way it has stepped forward to meet the challenges of the past year. The International Organization of Securities Commissions, or IOSCO, of which the SEC is proud to be a member, has set forth an ambitious work plan to develop instruments and principles to guide national regulators to more and more effective regulation. Closer to home, as to developments here in Europe, our Chief Accountant, Bob Herdman, has shared with me word of the encouraging work being done by CESR, the Committee of European Securities Regulators, and CESR-Fin, its Standing Committee on Financial Reporting.
In the past year, IOSCO members drafted the Multilateral Memorandum of Understanding concerning Consultation, Cooperation and the Exchange of Information. This MOU, conceived in the wake of September 11, establishes an international benchmark for cooperation and information sharing among securities regulators, and will facilitate the investigation and prosecution of cross-border securities violations. The MOU also provides incentives for member countries to raise their national standards. The rapidity with which this MOU was negotiated is unprecedented, and I congratulate all IOSCO members for their Herculean efforts in doing so.
Also over the past year, in response to Enron and other corporate failures, the Technical Committee of IOSCO has designated a high level subcommittee to develop principles in the areas of auditor oversight, auditor independence, and disclosure and transparency, and the Committee will be considering these principles in the very near future. These principles will not prescribe a certain type of regulation or a particular regulatory structure, but rather will establish the objectives that the international community believes should be accomplished by regulation in each of those areas. The principles promulgated by IOSCO are taken very seriously by the SEC and are reflected in the SEC's regulatory regime. The SEC has long supported and promoted IOSCO, and will continue its active collaboration with IOSCO and other international and regional organizations to develop the highest standards of regulation.
Many of our efforts to date in the international realm have involved working with foreign regulators in a systematic and coordinated way to craft comprehensive policies that make sense for us all. Regulators around the globe have worked cooperatively to forge excellent working relationships. These relationships have proven invaluable, especially in enforcing our respective securities laws. We need to expand these relationships to cover the entire gamut of securities regulation and capital raising.
I think it would be worthwhile to mention a few of the areas involving financial reporting and disclosure in which regulators from a number of jurisdictions are wrestling with common problems and seeking to develop solutions which, if not identical, will at least be consistent and complementary. I have mentioned that we are aware of work being done by CESR and CESR-Fin here in Europe. It is encouraging that this group is working to address important infrastructure issues such as interpretation and enforcement of accounting standards and other matters. On the IOSCO front, earlier this year, IOSCO issued a Cautionary Statement on the use of Non-GAAP Results Measures. This action was directed at the use of company-specific results in earnings releases that are inconsistent with official accounting results and are misleading. Another example of IOSCO cooperation is its monitoring of accounting standard setting. And the activities of the IASB and the FASB to pursue short-term convergence projects also are a perfect example of working together to develop common solutions.
Another example is the developing discussion regarding periodic and current disclosure. As I mentioned earlier, IOSCO has developed (and many countries have adopted) a common approach to disclosure in the case of cross-border offerings or initial listings of equity securities. Many more investors, including retail investors, purchase securities in the secondary market rather than in offerings by issuers. And yet there is currently no commonly accepted approach to periodic disclosure in the secondary markets. I believe that common standards for annual reporting by public companies are an essential first step. I also believe that more frequent periodic reporting, for example on a quarterly basis, would be a desirable international objective.
But current or ongoing disclosure is also a crucial objective in today's markets. Information and communications technology and the speed of trading and investment decisions make it imperative to have a strong system of current or ongoing disclosure. Otherwise capital allocation decisions are imperfect guesswork. As those of you who follow the Commission's rules proposals know, we have put forth an aggressive proposal to move towards a system of current disclosure. The President's Ten-Point Plan and the Sarbanes-Oxley Act encourage that proposal and additional steps to implement our concept of current disclosure.
In some circles, there are discussions of whether, in light of the movement towards required current disclosure of material information, it is necessary also to pursue quarterly or other periodic disclosure, or at least whether annual reports are sufficient if there is a system of mandated current disclosure. I believe that current disclosure is most useful as an ongoing indicator of change in information, and that therefore current disclosure is most useful against a background of robust periodic disclosure, including quarterly disclosure. But this is one of those areas where further discussion can produce results that, while not identical, can lead to improved disclosure on a global basis.
Before I conclude, I'd like to say a few words about the European Community's Proposed Directive on the consolidated supervision of financial conglomerates which, as you know, would establish minimum requirements for group-wide supervision of "financial conglomerates" and "mixed financial holding companies" doing business in the EU. While I understand the Proposed Directive has the noble intent of facilitating more effective prudential oversight of cross-sector groups, questions surrounding its potential extraterritorial impact have generated considerable concern at the SEC and among U.S. securities firms. If, for example, the EU authorities charged with making the "equivalence" determination take the position that the SEC's supervision of securities firms at the holding company level is not equivalent to the EC's standards, the likely result would be to increase the cost to U.S. firms of doing business in Europe, and place them at a competitive disadvantage with European-based firms.
At a time when the SEC is carefully evaluating the impact of U.S. rules and regulations on foreign entities, in an attempt to move to more global markets, I am concerned about the possible extraterritorial imposition of standards on U.S. firms by the EC in the form of "equivalence" determinations. To the extent that "equivalence" signals an effort to move towards an approach based on reciprocity, I welcome the effort. But to the extent "equivalence" is really a means of having a "co-ordinator" in the EU evaluate the quality of the U.S. regulatory regime, that approach will be counter-productive and will not add to investor protection. Of course, I share many of the EC's concerns about how to contain and supervise risks posed by financial conglomerates, and believe that the U.S. approach to the supervision of securities firms is as effective as that in the Proposed Directive. SEC staff has been discussing the issue of equivalence and reciprocity with EC representatives, and how our respective approaches can best address the need for group-wide supervision of financial conglomerates in today's global markets. We believe those discussions will be productive, and I look forward to continuing this dialogue, with the goal of reaching a prompt, sensible and mutually satisfactory outcome.
There are, of course, numerous other subjects worthy of discussion. I have tried to touch on some today. Regular interaction, like this, among leading regulators and members of business and finance is crucial to globalization of markets and to the program of the United States Securities and Exchange Commission. As I have indicated, we want to do everything we can to encourage an on-going constructive dialogue with foreign issuers and regulators. I urge you to comment on our rule proposals and to let us know when our proposals conflict with local law or local stock exchange requirements, or where problems that proposals are intended to address are addressed in alternative ways in other jurisdictions. We can and must learn from each other.
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