Public Statement by SEC Chairman:
Remarks at SIA Compliance and Legal Division Seminar
by
Chairman Harvey L. Pitt
U.S. Securities and Exchange Commission
Palm Desert, California
March 11, 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.
Thank you.
The events of the past six months have tested the mettle and resiliency of our Country, our capital markets, and your industry. The investing public's confidence in our capital markets is critical; without it, we have no capital markets. So too, must the investing public, and each of you and your firms, have confidence in us. Sometimes, this is easier said than done. In my first six months as Chairman, we've been faced with unprecedented crises. There weren't, and still aren't, any templates for resolving events like 9/11 and Enron. They require calm, reflective thought, and the capacity to differentiate between those issues that are prominent because they are important and those whose seeming importance derives from their prominence.
I have learned a great deal in these six months, although I hope not to have future occasions to put the lessons I've learned to further use! I know these events were both tragic. In the first, thousands of innocent people lost their lives, and our capital markets went down; in the second, thousands of innocent people lost their life's savings, and trust in our capital markets went down. When a crisis hits, the stakes are unquestionably high. I wish we could undo these events, but we can't. As the old maxim goes, we must learn from history, or be doomed to repeat it.
Just what can we learn from these disasters?
In the aftermath of September 11th, we showed the world just how well those entrusted with the care of our capital markets could function. The securities and banking industries showed their ability to put aside competitive instincts and pull together to make our markets work. Political leaders provided unvarnished support for the efforts that were undertaken. We saw that communications are key. We saw how government, industry self-regulators, and industry leaders, can work together to respond quickly and effectively to problems. I cannot say enough about the strength and courage of the leaders of this industry, under very trying circumstances. And my admiration and gratitude to Treasury Secretary O'Neill, Federal Reserve Chairman Greenspan and CFTC Chairman Newsome, are boundless after the privilege of working closely with them.
The key components of our 9/11 recovery plan were relatively simple — we focused on real problems, decided we all had to work cooperatively, and came up with rational responses. Politics were put aside, and leaders of both political parties rallied behind the President, who demonstrated incredible leadership in a time of unbelievable stress. The press and media were very helpful, spreading the message of calm, helping regulators and industry officials communicate what was happening and how problems would be solved. We all focused on real enemies and real issues. The world marveled at our accomplishments, and we proved to ourselves, and the terrorists, that we are above petty bickering, or political warfare, when the overarching interests of this country are involved.
We need to approach the Enron aftermath in the same spirit with which we responded to September 11th. Fortunately, we have real leadership. Last week, President Bush laid out a substantive, serious and thoughtful program to respond to the lessons of Enron, and he directed the agency I'm privileged to Chair to implement his program, and be certain we have done all we need to do to minimize the chance of future Enrons. We intend to do just that. To do so, we need to work cooperatively with those who are so vital to our capital markets — the securities industry, the accounting profession, the self-regulatory bodies, corporate management, and the investing public. No one should take that to mean we will be soft on wrongdoers. We will enforce the law, and enforce it swiftly.
Our capital markets are the best in the world. Our current disclosure, financial reporting and regulatory systems are the best in the world. But we can, and need to, do better. I believe we will. And, to those who question our resolve, or our bona fides, all I can say is "Just watch." We have been given a mandate, and we will fulfill it, just as promptly as is humanly possible. As legal and compliance personnel, you are key participants in our reform efforts.
An impressive facet of the securities industry is its foundation on private-sector regulation. Congress long ago wisely realized it isn't enough to have vigorous laws. The highest ethical standards and the most demanding competence requirements also must be imposed. Government can focus on illegality. But, the highest ethical standards and the best standards of competence must come from, and be enforced vigorously by, the affected industry or profession.
We seek to utilize that base for the accounting profession. Rather than self-regulation, however, we espouse private-sector regulation. Our thought is that persons unaffiliated with accounting firms should govern the new private-sector regulator we envision. The new regulatory board should also have the ability to tap into the expertise of a small number of accountants to ensure that the new regulatory body has all the technical expertise it requires. The system we envision will subject the profession to affirmative ethical requirements, and compel auditors to be well grounded in appropriate ethical and crisis management techniques, and to achieve a high level of competence. We are seeking to ensure that accountants not only comply with the law, but also exceed it by conforming to the highest ethical and competence standards.
Integrity must start in your office. Stephen Carter wrote, in his book entitled Integrity, "Integrity is like the weather: everybody talks about it but nobody knows what to do about it. Integrity is that stuff we always say we want more of."1 He's right. So what do we mean when we talk about integrity? Carter's definition is a great starting point. He writes, "Integrity . . . requires three steps: (1) discerning what is right and what is wrong; (2) acting on what you have discerned, even at personal cost; and (3) saying openly that you are acting on your understanding of right from wrong."2
This three-step process — discerning right from wrong, acting on it, and saying it publicly — is incredibly challenging. But in many ways, it accurately captures your job description. The defining qualifications of legal and compliance professionals are not necessarily your education and training, although those are important elements to be sure. It's your judgment and your integrity and the duty of care that you apply to your job that are critical.
In Horizons for a Profession, Robert Roy and James MacNeill identified some of the same challenges you face this way:
When to speak out, when to be silent, how to say or write that which is necessary but awkward, courage to face up to the need for doing so, talent to be firm yet diplomatic, imagination to see beneath and beyond the surface, perceptivity not only for what has happened but also for what may happen, constancy in ethical behavior, sagacity to avoid errors of omission as well as those of commission: these and other attributes like them are qualities, not definable as knowledge but inherent in individuals.3
Roy and MacNeill point out that these and other attributes are the qualities that make a person a professional and not a mere technician.
Confidence in our capital markets cannot be maintained if the public believes everything is a game to enable corporations to rely on lawyers and other professionals, who in turn rely on a literal reading of the law or governing principles. The notion lawyers too often adopt is, if it's technically legal, it must be ok! But lawyers are not mere technicians. They are professionals retained for their counsel. Helping a client fall within very literal legal prescriptions, even when doing so flies in the face of what the particular legal prescriptions were obviously intended to accomplish, endangers public confidence, and is surely ill advised.
A core issue arising in Enron's wake is enhancing existing and planned legal standards with ethical and competency standards not only for accountants but also for lawyers, officers and directors and others. The public cannot be served if professionals who serve as gatekeepers merely follow the letter of the law, but not necessarily its spirit. We need to move away from wooden, rigid, literalism, and encourage all upon whom the present system depends to adopt a bias in favor of the needs of the investing public.
And your work in this regard has never been more critical. Compliance and legal functions are "bread and butter" functions of a firm, and must be adequately staffed and resourced. Committing resources on the front-end to ensure that violations never occur is vital. I applaud those firms that make this a part of their business model — firms that ensure that compliance and legal functions work hand-in-glove with business units. You must ensure that you have developed systems of supervision that are adequate to prevent and detect violations of the law. Firms must commit resources to ensure that they are supervising their associated persons.
Firms also must ensure that they are treating their customers fairly in all respects. That means seeking the best possible execution of their orders, ensuring that they receive adequate disclosure about risks, costs, and fees, and that the securities recommended to them are truly suitable for the customer. Firms also must ensure that they have sound internal controls and risk management procedures. Recent events demonstrate the need for sound controls over risks. We must conceive of the inconceivable. The Twin Towers of the World Trade Center, once the most prominent features of the New York skyline, are gone. Our business institutions — seemingly so strong — are no less vulnerable. They rest on a bedrock of trust, and if that trust disintegrates, their survival cannot be taken for granted.
One concern I have is the fate of legal and compliance personnel in firms trying to cut costs and improve bottom line results. There is often a temptation to cut back, or skimp, on compliance assurance, on the theory that compliance and legal staff do not increase the bottom line. That view, of course, is terribly mistaken. Compliance and legal staff contribute to the bottom line in the most important way possible — they assure that their firms retain and improve their reputation, thus allowing their firms not only to remain in business but to continue to thrive in this unpredictable milieu. Cutting back on compliance is a sure-fire prescription for disaster and the erosion of public confidence.
For our part, when we find problems, we will act quickly. If we identify problems in our exams, we will bring these problems to your attention and discuss them with you sooner rather than later. Examiners will hold exit interviews in which they will outline their tentative conclusions about problems they have found, even before they send a deficiency letter. Investors are better protected and served if you and we direct immediate attention to fixing problems, however minor. As you know, ignoring problems or allowing them to fester certainly won't make them go away.
On the frontlines, you see problems often before we do. We want to encourage you to talk to us about the problems you are seeing develop or on the horizon. A principal goal of ours is to resolve problems before they arise. It also reflects our view that trying to prevent problems from arising is the most effective way to protect investors. It's the same philosophy as preventative medicine. It's not as exciting as E.R., but it sure is effective. If you come to us in good faith, tell us what your uncertainties or questions are, we will try to help you resolve them without playing "gotcha." We want to have a meaningful dialogue with all whose conduct we regulate to make sure we're not missing anything. This does not mean that we won't take action; violations will be met with swift and appropriate responses.
We have done our utmost to make clear our policy on cooperation. As is traditionally the case, those who bring their concerns and problems to us, and who are prepared to make amends to investors for any losses, will be given "credit" for their cooperation. Some have interpreted our recent §21(a) statement in this regard as meaning that we will be granting amnesty. Don't you believe that for a second! Others think we have set the bar too high. They may be closer to the mark, since the bar should be high. But that does not mean it should be impossible to receive meaningful recognition for steps taken to protect investors, make them whole, and assist the Commission in responding to difficult problems.
When markets react to trauma, crisis and uncertainty, the need is great for all of us to work together, cooperatively, not adversarially. This does not mean that we will relax our vigorous enforcement program, but it does mean that we seek to avoid problems before they arise, and to that end, will reward those who do not wait until they're caught, or until they realize they have no alternative. Bring those problems to us, and let us assist you in achieving your formal and informal objectives.
In closing, I want to echo the words of President Bush in his address last Thursday at the Malcolm Baldridge National Quality Awards. He said:
The free enterprise system draws upon the best in people: creativity, ingenuity, energy, a desire to make life better for ourselves and for others. The whole design of free market capitalism depends upon free people acting responsibly. Business people must answer not just to the demands of the market or self-interest, but to the demands of conscience.
I applaud all of you for your efforts in making sure that you, and the business people you oversee, answer to the demands of conscience. You are important transmitters of corporate culture. Businesses have cultures and most of the disasters that find their way to us have their roots in a cultural pathology within the business. Compliance people are the ones who insist that things be done the right way, and by doing so, you spread values throughout your enterprise.
The SEC supports you in what you do. We rely on you to do the right thing. We welcome your suggestions and observations and we look forward to working with you.
Thank you.
Endnotes
1 Stephen L. Carter, Integrity 6 (1996).
2 Stephen L. Carter, Integrity 7 (1996).
3 Robert H. Roy and James H. MacNeill, Horizons for a Profession 1 (1967) (emphasis in original).
http://www.sec.gov/news/speech/spch544.htm
