These remarks reflect the personal views of Commissioner Atkins and do not necessarily reflect the views of the Commission or its individual members.
Many thanks to the editors of the International Financial Law Review for their gracious invitation to speak at tonight's awards dinner. And, congratulations to the winners of this year's awards. Last year, to say the least, was a difficult environment in which to work, and all of us hope for the best for this year — not only for the robustness of the international capital markets, but most importantly, for the success of our efforts in Iraq and the safety of our servicemen in the field. As we are only too acutely aware, all of these issues are closely intertwined, including the intensely human aspect of our efforts and the immense hope and promise for a better, safer, more stabile world that they embody.
The U.K. and each of the Member States of the European Union are crucial allies of the United States. Our friendship and mutual respect is of the utmost importance as we look to the future in these uncertain political and economic times. The events of the past few years, including the economic crises, affect all of us. Much of the attention has focused on failures of U.S. corporations, such as, of course, Enron, WorldCom, Global Grossing, and now HealthSouth. Yet, U.S. investors are not alone in experiencing recent profound failures, some of which were caused by questionable accounting practices, bad management, and poor internal controls. Names like Robert Maxwell, Polly Peck, Royal Ahold, Swiss Air, Phillip Holzmann, and Vivendi come to mind. Therefore, restoring investor confidence by strengthening corporate governance is of great importance to the world's financial markets. It is not an issue unique to the U.S. or the E.U.
Financial crises have yielded a legislative reaction many times in the past. Dr. Robert Higgs, a noted Stanford University professor, wrote a book a few years ago called Crisis and Leviathan. His primary thesis is that government's command-and-control system of resource allocation expands at the expense of the private, cost efficient, market economy when government responds to an insistent but ill-defined public demand that it "do something" about a crisis. He traces a number of crises in American history — some financial, some military — and reveals how the market sector has given way in those cases.
Last year, in fact, the market decline and large corporate failures led to just such a general sense that politicians should "do something." Because these corporate failures stemmed from lax accounting and corporate governance practices, "Corporate Responsibility" became an important political issue in the United States, for the first time in perhaps 70 years. In late July of 2002, Congress passed the Sarbanes-Oxley Act, with only three members voting "no." Since then, corporate responsibility still remains as a critically important political issue in the U.S.
Sarbanes-Oxley contains many advances for corporate governance, although it also represents what formerly would have been an unimaginable incursion of the U.S. federal government into the corporate governance arena. Historically, the individual states generally had exclusive jurisdiction over corporate governance matters. Sarbanes-Oxley attempts to provide fundamental mechanisms to prevent the misdeeds that led to investor losses. These mechanisms are intended as best practices. Many are not outright requirements, but are requirements on corporations to disclose aspects and then let the market decide what importance to put on that disclosure.
Because of the very strict, short timeline that Sarbanes-Oxley gave us to adopt rules implementing the Act, most of our rules at the proposal stage adhered very closely to the statutory language, with few exceptions or exemptions for special circumstances. Since U.S. regulators are bound by law to take into account commentary submitted by those who would be affected by proposed rules, we had hoped that comments and objections would help us to tailor our rules to make them workable in the U.S. and abroad. Ultimately, we received a great deal of comment, including many from non-U.S. commenters. I believe, and hope that you agree, that the final rules that we have adopted demonstrate our responsiveness to those comments. Through the comment process, we have been able to craft rules that are more than just a political reaction to a crisis.
Fundamentally, Sarbanes-Oxley acknowledges the importance of stockholder value. Without equity investors and their confidence, our economic growth and continued technological innovations would be slowed. Sarbanes-Oxley strengthens the role of directors as representatives of stockholders and reinforces the role of management as stewards of the stockholders' interest.
A lesson from the recent corporate failures in America is the importance of corporate culture and what we call the "tone from the top." A CEO's tolerance or lack of tolerance of ethical misdeeds and a CEO's philosophy of business conveys a great deal throughout the organization. The role of directors is to monitor and oversee that situation on behalf of stockholders. Directors are not and can never become full time employees. There will always be a natural tension between directors as business advisors — a vital role — and their role as monitors of management on behalf of the stockholders' ownership interests.
It is my hope that Sarbanes-Oxley may indirectly help directors in this regard. The law's effect, I believe, will be to make board members more inquisitive. Therefore, questions that might have seemed to be "hostile" to management two years ago will now be seen to be in furtherance of a director's function. Since some of the recent problems concerned corporate managers using the corporation as a personal "piggy bank" or other theft by management of corporate assets, Sarbanes-Oxley's emphasis on a board's oversight function is certainly a step in the right direction.
While acknowledging these benefits of Sarbanes-Oxley, and in pursuing our primary mission to protect investors, we have to be mindful of the special considerations and needs of our non-U.S. issuers. For many years, U.S. investors have been seeking opportunities to invest in the securities of non-U.S. issuers, including, of course, European issuers. The SEC has long recognized the importance of the globalization of the securities markets both for investors looking for increased diversification and international entities looking for capital-raising opportunities in different, and sometimes larger, markets. In addition, allowing non-U.S. issuers access to the U.S. securities markets gives these non-U.S. issuers "acquisition currency" to make acquisitions in the U.S.
Of course, Sarbanes-Oxley generally makes no distinction between U.S. and non-U.S. issuers. The Act does not provide any specific authority to exempt non-U.S. issuers from its reach. The Act leaves it to the SEC to determine where and how to apply its provisions to foreign companies. The SEC is well aware that new U.S. requirements may come into conflict with home-country requirements on non-U.S. issuers. As we move forward to implement Sarbanes-Oxley, we have tried and we will continue to try to balance our responsibility to comply with the Act's mandate with the need to make reasonable accommodations to our non-U.S. issuers.
Europeans and Americans have fundamentally the same goals with respect to strengthening corporate governance. Despite the federal thrust of Sarbanes-Oxley, the basic philosophy in the United States is for the individual states and the stock exchanges to determine their corporate governance requirements. Similarly, a group set up by the European Commission did not propose harmonization of corporate governance standards among the Member States. Instead, the group recommended that the Member States should each set forth minimum standards of conduct. The proffered rationale for this approach is that the corporate governance standards of the Member States are necessarily different and flexibility is critically important.
The European approach generally stresses the importance of the non-executive Chairman of the Board. While it certainly may be beneficial, depending on the company, to separate the board chairman from the company's chief executive for oversight purposes, the separation of these two positions will not necessarily cure all corporate governance issues. For example, I would note that both Enron and WorldCom had non-executive chairmen and, of course, this separation did not prevent corporate failures.
The SEC is interested in finding the "common ground" between the U.S.'s and the E.U.'s approach to these issues. Since the passage of Sarbanes-Oxley, the SEC has hosted two interactive roundtables on the application of the Act to non-U.S. issuers. Further, the SEC has met with numerous foreign delegations and European securities regulators. I think I can state with confidence that the process is working and that your active participation in our rule-making process has helped the SEC understand the particular needs of non-U.S. issuers. Just because our approaches are different does not mean that they cannot work together effectively.
If a foreign company considered a U.S. listing before Sarbanes-Oxley, neither the Sarbanes-Oxley Act nor our rules implementing the Act should dissuade the company from doing so. Not surprisingly, there will be new regulations and calls for disclosure. I believe that a primary goal of the SEC should be to make it inviting for global businesses to offer and list their securities in our markets. Sarbanes-Oxley does not have an effect on this goal.
Let me briefly discuss two of the specific Sarbanes-Oxley issues that probably most concern this group:
Many non-U.S. issuers already have independent audit committees as part of their corporate governance structure and the global trend appears to be toward setting up such audit committees. I have often stated that a one-size-fits-all approach never works, and this is especially true in the non-U.S. issuer context. However, there is almost universal support for some form of independent check on company management by a disinterested board. For example, in the U.K., the value of independent directors is emphasized in the recommendations of Derek Higgs regarding corporate governance, building on the earlier work of the Cadbury Commission.
Non-U.S. issuers have provided the SEC with critically important information regarding corporate governance. For example, through our comment process, we incorporated necessary changes to accommodate the requirement of non-management employees' serving as members of a company's audit or supervisory board. These employees would often not meet our definition of independence. The SEC has no interest in creating conflicts with local law, especially when these employees actually represent non-management interests. Accordingly, in our rule proposal, we provided that, under certain circumstances, these individuals would be exempt from the independence requirements.
The SEC was directed by Sarbanes-Oxley to adopt final rules regarding "minimum standards of professional conduct" for attorneys. We acknowledge that we are in unchartered waters with these new rules. They have been referred to as the first significant effort by Congress to mandate the U.S. federal regulation of lawyers.
We proposed rules in December of 2002. We received approximately 170 comment letters regarding our proposal, including over 40 from foreign parties. Our proposed rule was controversial in many ways. It took an expansive view of who could be found to be "appearing and practicing" before the SEC. It reached attorneys licensed in foreign jurisdictions, whether or not they were also admitted in the United States. And it raised issues of jurisdiction and enforceability.
Our recently released final rule is less controversial. It has been significantly modified because of the many thoughtful comments and suggestions that we received. We have exempted from the rule certain foreign attorneys -- we call them "Non-Appearing Foreign Attorneys." In order to satisfy this test, the attorney generally must (1) be admitted as a lawyer outside the U.S.; (2) not hold himself out as practicing U.S. securities law; and (3) only incidentally act on SEC filings while he carries on his practice in his ordinary course outside the U.S.; or appears and practices before the SEC only in consultation with a U.S. attorney.
We have also specifically stated that even if an attorney is subject to our new rule, that attorney shall not be required to comply if our rule conflicts with local law. Again, I would like to emphasize that your input in the comment process and at our various SEC roundtables was critical in reaching this reasoned and balanced approach to Congress' directive in Sarbanes-Oxley.
We have issued a new proposal with respect to the "reporting-out" or "noisy withdrawal" aspects of Sarbanes-Oxley's attorney directive. We received many comments on our proposal that required an attorney to disclose material violations of securities laws to the SEC. Not surprisingly, we received many strong objections to this requirement. We are now asking for comment whether it makes sense for the company to disclose when an attorney resigns because he believes the company did not respond adequately to a material violation of securities law. This new approach would not require the attorney to disclose any information other than to his client. As proposed this new requirement would apply to non-U.S. issuers. It would also require rapid reporting to the SEC — two business days from receipt of the notice.
Revelations of corporate mismanagement, malfeasance, and/or incompetence have undermined the world's financial markets in a profound way. As we address this profound effect on the markets, we need to be mindful of the fact that morality and ethics cannot be legislated into existence. Government controls alone — too often paternalistic — will never be a solution if individuals and individual firms are not upholding their own end of simple business ethics through their own effective compliance. Internal controls and the culture of an organization are basic structural aspects to reinforce the inherent nature of most people to do the right thing.
These are trying times for the investing public. As we try to reach the other side of this period of strain, I would like to quote a statement made by then SEC Chairman William O. Douglas on January 7, 1938: "By and large, government can operate satisfactorily only by proscription. That leaves untouched large areas of conduct and activity, some of it susceptible of government regulation but in fact too minute for satisfactory control; some of it lying beyond the periphery of the law in the realm of ethics and morality. Into these areas self-government, and self-government alone, can effectively reach."
These wise words uttered within a relatively short period of time after the largest financial markets crisis in the United States crystallized the difficult task at hand. We have, I believe, made significant steps over the last year to restore worldwide confidence in the U.S. financial markets. We are working hard to be more vigilant and more faithful defenders of the public trust. The cooperative spirit between Europe and America that has served us so well in the past must be our guiding principle as we attempt to accomplish our collective goals.
I regret that I cannot be at your dinner to answer your questions in person. However, I invite you to contact me in Washington if you have any questions. Your assistance and guidance is most welcome as we strive to improve and further globalize our financial markets.
Thank you very much.