Highlights from the SEC Chairman's Remarks in Financial Services Roundtable

On April 1, 2005, William H. Donaldson, Chairman of the Securities and Exchange Commission spoke before the Financial Services Roundtable in Palm Beach, Florida. Participants in the roundtable represented a wide cross-section of the financial services industry in the United States. Mr. Donaldson used the opportunity to discuss his ideas on how the SEC and financial services industry can work together to improve financial markets and keep them a source of prosperity. Mr. Donaldson was careful to qualify his remarks as his own and not representing those of the SEC or SEC staff.

“This has been a turbulent period in the history of the American economy, but if we learn from the experience, we’ll see it as an opportunity to improve the way business is done. And in particular, it can be an opportunity to strengthen the financial services industry and make it more competitive globally for the long haul.”
“There has been real progress as regulatory reform has taken hold, and as many business leaders, including those in the financial industry, have abandoned the misguided and unethical practices that were so prevalent in the final years of the 1990s. At the same time, one need only read the front page of the paper to be reminded that more work remains – for regulators and the industry – to root out wrongdoing. If I could use an analogy, we aren’t in a sprint. We’re on a long-distance run, and for that we need to keep our staying power.”
“I think you would agree that the most transformative corporate reform measures of our day have been the changes ushered in by the Sarbanes-Oxley Act of 2002. I don’t think I need to review its specifics, since most of you – and the corporate clients you serve – live with the law on a daily basis. There is, of course, a lively debate about the costs of compliance with the law’s requirements. In line with the long-term orientation I’ve just discussed, I hope you’ll agree that the Sarbanes-Oxley reforms should yield extraordinary long-term benefits in the form of improved financial reporting, better management control, and more ethical behavior by companies and gatekeepers. This, in turn, should lead to sounder corporate governance, better and more reliable reporting, improved corporate performance, enhanced investor confidence and, ultimately, a lower cost of capital.”

“Let me focus for a moment on Section 404 of the Act. The regulations that implement Section 404 require a company’s management and auditors to report on the effectiveness of internal controls over financial reporting. Section 404 may have the greatest long-term potential to improve financial reporting. At the same time, it may also be the most urgent financial reporting challenge facing corporate America and the audit profession in 2005. In the short haul, it certainly seems to be the most expensive of the Sarbanes-Oxley reforms, and it has attracted a fair amount of criticism on that score.”

“We’ve been listening to all sides in the 404 discussion. The Commission is monitoring the roll out of Section 404 to ensure that its benefits are achieved in the most sensible way. Indeed, we included several measured extensions over this past year to accommodate the first wave of reporting, and we will hold roundtable discussions later this month to hear feedback. We have also established an Advisory Committee on Smaller Public Companies, to consider whether the costs imposed on smaller public companies by this provision, and others within Sarbanes-Oxley, are proportionate to the benefits.”

“If we find that firms are generally doing a good job of disclosing the conflicts so that their customers can make informed decisions, then in some respects that’s the end of our task. Of course, we may need to address instances of poor disclosure by outlier firms, but if the industry as a whole seems to be effective in conveying critical information to the customer base, it’s unlikely that we would need to introduce structural regulatory changes. In this respect, there’s a lot the industry can do to make future regulation unnecessary. On the other hand, if there’s widespread indifference to adequate disclosure of a particular conflict or rampant abuse, then it’s often the case that we will need to address that conflict with regulation.”

“We are also working to strengthen the governance of self-regulatory organizations. As I’ve said before, I am concerned that the pressures raised by the conflict between an SRO’s self-regulatory functions and its market operations, and the pressures that do arise in an increasingly competitive marketplace, may hamper an SRO’s ability to fulfill its regulatory mandate. This concern is, if anything, heightened by the growing movement here and abroad toward public ownership of trading markets.”

“I’d like to look ahead and talk about what you might expect from us in the future. First, let me mention a change in emphasis that informs a lot of what we are doing, and give you a few examples of this change in action. We are in the process of revamping our own approach to oversight in order to equip the Commission to better anticipate, find and mitigate areas of risk, fraud and malfeasance. The effort is exemplified by the establishment of our Office of Risk Assessment, which brings together professionals experienced in seeking out potential areas of concern. We want our efforts and oversight to be more anticipatory and preventative – we want to look over the hills and around the corners.”

“I expect the Commission to take action on our proposal – known as the “hard 4 rule” – to address late trading in mutual funds. Our staff is analyzing information regarding technological alternatives to a hard 4 rule that may be effective in addressing the problem of late trading, without imposing unnecessary burdens on investors, funds or intermediaries. This follows the Commission’s vote last month to require that fund boards decide whether to charge a redemption fee in order to address abusive market timing. We also requested comment on whether we should standardize terms for these fees, in order to facilitate their imposition and collection.”
“The final item I’d like to mention is Regulation NMS, which I expect the Commission to take action on next week.”

“The trade-through rule that the Commission has proposed is pro-competition – in the best tradition of the market-reform initiatives that the Commission has spearheaded over the last several years. Much of the public debate over the trade-through rule has focused on one type of competition – competition between markets. But there are two kinds of competition that we intend to foster. One is competition between markets and the other is competition between orders.”

“Let me conclude with a few observations. I know there’s a feeling in some quarters that the reforms of the last few years have been too fast and furious, that there is redundancy in our efforts and those of the States and other regulators, and that some of our enforcement and inspection activities amount to stealth rulemaking. Let me assure you that we hear these concerns and we take them seriously. In particular, we have stepped up our partnership with the association of State securities regulators.”

“In closing, let me assure you that I have a keen appreciation for the work all of you do in financial services – I was a member of the industry myself, for many years. While the industry has experienced some turmoil in recent years, out of it has come positive results. The Commission’s reforms have addressed many problems that needed fixing. And of equal or greater importance, I believe there is a growing recognition, throughout the industry, that the abuses and questionable practices of the past cannot be repeated. This counts as real progress, and our challenge now is to continue building on it.”

The full text of Mr. Donaldson’s remarks can be found at the SEC web site

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