The past three years have been a period of enormous change and challenge for the SEC. The aftermath of the financial crisis, the passage of legislation that imposes extensive new responsibilities on the agency, and the growth in the size and complexity of the financial markets have demanded that the SEC become more efficient, creative and productive to achieve its mission. While we have made significant progress in many areas, much work remains to be done. My testimony today will highlight a number of the actions we have taken over the past three years to reform and improve SEC operations. In addition, I will describe our progress on implementation of financial reform legislation, upcoming challenges, and the agency’s FY13 appropriations request.

Operational Improvements and Recent Accomplishments

As you know, the SEC has responsibility for approximately 35,000 entities, including direct oversight of about 12,600 investment advisers, 9,900 mutual funds and exchange traded funds (ETFs), and over 4,500 broker-dealers with more than 160,000 branch offices. We have responsibility for reviewing the disclosures and financial statements of more than 9,100 reporting companies and also oversee approximately 450 transfer agents, 15 national securities exchanges, eight active clearing agencies, and nine nationally recognized statistical rating organizations (NRSROs), as well as the Public Company Accounting Oversight Board (PCAOB), Financial Industry Regulatory Authority (FINRA), Municipal Securities Rulemaking Board (MSRB), and the Securities Investor Protection Corporation (SIPC). Due to recent changes in the law, smaller investment advisers will transition from SEC to state oversight during 2012, but with the corresponding addition of advisers to private funds, we estimate that the agency will still oversee approximately 10,000 investment advisers with about $48 trillion in assets under management. During FY 2012 and FY 2013, we also expect to fully implement our new oversight responsibilities with respect to municipal advisors and entities registering with us in connection with the security-based swap regulatory regime.

…continue reading: Changes and Challenges at the SEC

The Commission has authorized that a Study be sent to Congress expressing the views of the Staff on the cross-border scope of the private right of action under Section 10(b) of the Securities Exchange Act of 1934. However, my conscience compels me to write separately to record my views on the Study. I write to convey my strong disappointment that the Study fails to satisfactorily answer the Congressional request, contains no specific recommendations, and does not portray a complete picture of the immense and irreparable investor harm that has resulted, and will continue to result, due to Morrison v. National Australia Bank, Ltd.

In the United States we have a strong belief that, whether rich or poor, we are all entitled to our day in court. Sadly, for many American investors this is no longer true.

If American investors are defrauded by a company that they have invested in – and that company is listed on a foreign exchange – investors may be unable to have their day in court and seek redress against this company for its lies and misrepresentations. Thus, investors have been stripped of a traditional American right.

This was not always the case. For decades, federal courts applied the same standard to determine whether U.S. federal securities law applied to frauds that took place, in whole or in part, outside of the United States. Under that standard, Section 10(b) of the Securities Exchange Act of 1934 (the “Exchange Act”) and other antifraud provisions applied “when there was ‘significant U.S. fraudulent conduct that directly caused the plaintiffs losses’ (the conduct test) or when there were ‘significant effects’ on the U.S. securities markets (the effects test).”

…continue reading: Defrauded Investors Deserve Their Day in Court

It is an honor for me to participate in the Public Company Oversight Board’s public meeting to discuss proposals to enhance auditor independence, objectivity and professional skepticism, including the potential of imposing rules setting a maximum term limit for audit relationships. Sadly, many people in official Washington seem prepared to jettison the interests of investors without reason as would occur in the proposed JOBS legislation, which as currently written would unnecessarily savage important barriers against fraud and manipulation of markets. We should never be afraid to experiment with opportunities for reducing unnecessary regulatory costs, particularly for smaller companies. At the same time, we shouldn’t let anyone’s financial agenda be a pretext for allowing the unscrupulous a free rein to abuse savers and investors. In its current form this legislation has too many elements that are simply fantasies, such as that a company with $1 billion in revenue is a “small business”, when that is 10-20X too high a threshold.

When Jim Doty and I were at the SEC, the Commission created an entire set of registration statements and ’34 Act filings (eg, Form 10-KSB) geared for small companies to lower their costs in raising capital or being public companies. Companies could elect the simpler forms if they wished, although they might pay a market penalty for providing less information. We allowed things like requiring two years of audited financials rather than 3 years, and three years rather than five years of selected financial data. We simplified disclosure requirements for smaller firms with less than $25mm in revenue (about $41mm in today’s dollars), but nobody got a free pass for fraud and there was still transparency for investors in current results.

…continue reading: Proposals for Auditor Independence and Audit Firm Rotation

In autumn 2008 the developed world’s banking system suffered a severe crisis. In response the world’s regulators and central banks have focused on building a more stable banking system for the future: less leveraged, more liquid, better supervised and with even the largest banks able to be resolved without taxpayer’s support. The implementation of that bank-focused regulatory agenda is still unfinished, but much progress has been made.

Looking back to the year 2007/08, however, it’s striking that the crisis did not at first look like a traditional banking crisis, but rather one related to a new phenomenon: shadow banking. Initially the problems seemed concentrated in the US, where the development of non-bank credit intermediation was most advanced, and many of the events which marked the developing crisis related to non-bank institutions and markets.

…continue reading: Shadow Banking and Financial Instability

I will first give some general remarks on the reasons for the low level of U.S. IPO volume this decade and the implications for job creation and economic growth, and then make some suggestions on the specific bills that the Senate is considering.

First, there is no doubt that fewer American companies have been going public since the tech stock bubble burst in 2000, and the drop is particularly pronounced for small companies. During 1980-2000, an average of 165 companies with less than $50 million in inflation-adjusted annual sales went public each year, but in 2001-2011, the average has fallen by more than 80%, to only 29 small firm IPOs per year. The patterns are illustrated in Figure 1.

…continue reading: Considering Causes and Remedies for Declining IPO Volume

Recently, the House of Representatives passed H.R. 3606, the “Jumpstart Our Business Startups Act.” It is clear to me that H.R. 3606 in its current form weakens or eliminates many regulations designed to safeguard investors. I must voice my concerns because as an SEC Commissioner, I cannot sit idly by when I see potential legislation that could harm investors. This bill seems to impose tremendous costs and potential harm on investors with little to no corresponding benefit.

H.R. 3606 concerns me for two important reasons. First, the bill would seriously hurt investors by reducing transparency and investor protection and, in turn, make securities law enforcement more difficult. That is bad for ordinary Americans and bad for the American economy. Investors are the source of capital needed to create jobs and expand businesses. True capital formation and economic growth require investors to have both confidence in the capital markets and access to the information needed to make good investment decisions.

…continue reading: Investor Protection is Needed for True Capital Formation

The Commission’s core mission is to protect investors. William O. Douglas, a former chairman of the Securities and Exchange Commission, who went on to serve as a Supreme Court Justice, described the SEC’s role by contrasting it with a well-represented industry. Chairman Douglas said: “We’ve got broker’s advocates, we’ve got exchange advocates, we’ve got investment banker advocates, and we [the SEC] are the investor’s advocate.”

Not much has changed since Chairman Douglas spoke those words at his first press conference as SEC Chairman in 1937. The industry, with its lobbyists and spokespeople, remains the loudest voice – in fact, one could say that things have gotten much worse. As a result, investors need an advocate today more than ever.

…continue reading: Shining a Light on Expenditures of Shareholder Money

Professor Lucian Bebchuk testified yesterday before the Subcommittee on Financial Institutions and Consumer Protection of the United States Senate Committee on Banking, Housing and Urban Affairs. He participated in a hearing on “Pay for Performance: Incentive Compensation at Large Financial Institutions.” In addition to Bebchuk, the other witnesses testifying in the hearing were Kurt Hyde, Deputy Special Inspector General of the Troubled Asset Relief Program; Professor Robert J. Jackson, Jr., Associate Professor of Law at Columbia Law School; and Michael S. Melbinger, an executive compensation expert appearing on behalf of the Financial Services Roundtable.

In his testimony, Bebchuk explained how compensation practices at financial firms should be reformed to eliminate excessive risk-taking incentives. He described two distinct shortcomings of pay arrangements: first, excessive focus on short-term results; and, second, excessive focus on results for shareholders. He then discussed how pay arrangements should be designed to address each of these problems. In particular, Bebchuk explained how pay structures  should be designed to induce executives to focus on long-term rather than short-term results, as well as to induce such executives to take into account the consequences of their decisions for all those contributing to the bank’s capital (rather than only for shareholders). Bebchuk suggested that the rules proposed by regulators last spring be strengthened to ensure that financial firms provide executives with such incentives. Because of the importance of providing such incentives for financial stability, he concluded, ensuring that financial firms  provide such incentives should be regarded as a regulatory priority.

Bebchuk’s written testimony is available here.

The Commission has failed to fulfill its legal obligation. It has appointed a member to the Public Company Accounting Oversight Board (“PCAOB”) who has no demonstrable record of investor advocacy. Thus, the Commission has failed to satisfy its basic statutory mandate to appoint an individual who, among other factors, has “a demonstrated commitment to the interests of investors.” [1] Accordingly, I do not support and must respectfully dissent for the reasons outlined below.

Congress established the PCAOB in response to scandalous audit failures, like Enron and WorldCom, that cost investors billions. In doing so, Congress entrusted this Commission with the significant responsibility of appointing the members of the PCAOB. In exercising this responsibility, the Commission is required to abide by the statutory criteria to appoint individuals “who have a demonstrated commitment to the interests of investors.” [2]

…continue reading: PCAOB Board Appointment Disregards Investor Interests

Last November, the FDIC, jointly with the Federal Reserve Board of Governors (FRB), the Office of the Comptroller of the Currency (OCC), and the Securities and Exchange Commission (SEC), published a notice of proposed rulemaking (NPR) requesting public comment on a proposed regulation implementing the Volcker Rule requirements of the Dodd-Frank Act. On December 23, the four agencies extended the comment period for an additional 30 days until February 13, 2012. The comment period was extended as part of a coordinated interagency effort to allow interested persons more time to analyze the issues and prepare their comments, and to facilitate coordination of the rulemaking among the responsible agencies. In addition, on January 11, 2012, the Commodity Futures Trading Commission (CFTC) approved the issuance of its NPR to implement the Volcker Rule, with a substantially identical proposed rule text as the interagency NPR. We look forward to receiving comments on the NPR.

In recognition of the potential impacts that may arise from the proposed rule and its implementation, the Agencies have requested comments on whether the rule represents a balanced and effective approach in implementing the Volcker Rule or whether alternative approaches exist that would provide greater benefits or implement the statutory requirements with fewer costs. The FDIC is committed to developing a final rule that meets the objectives of the statute while preserving the ability of banking entities to perform important underwriting and market-making functions, including the ability to effectively carry out these functions in less-liquid markets.

…continue reading: Implementing the Volcker Rule