Thank you, Paul, for that lovely introduction. And thank you to the Investment Company Institute for inviting me here this morning. Each year, the Institute convenes this gathering of professionals who play such a central role in our capital markets, and I'm honored that you have asked me to speak with you. Ninety-two million Americans entrust $9 trillion of their investment dollars to investment companies.
They depend on these investments to meet the vital financial needs of life, such as retirement security and their children's education. These millions of Americans have been hit very hard by the economic crisis. They exemplify the interests of all Americans and their families that policy makers must hold foremost in mind when deciding how best to reform the U.S. system of financial regulation.
The ICI web site bills my remarks as a "regulatory update." In normal times, perhaps, that might connote a rather low-key discussion of a few rule proposals or enforcement issues of the moment. Not today; and not when we are working our way out of the most serious economic and regulatory crisis since the Great Depression.
Since you graciously provided me with this opportunity, I thought I'd use it, first, to tell you what we are doing now and, second, to give you my views about what our system of regulation should look like in the future.
Understanding that there is no time to waste, the SEC is acting aggressively to transform itself into a stronger, better, and more agile regulator. Our goals are to do more of what we do best and to do all the rest better than ever before.
We have started to revitalize our enforcement program. Led by Rob Khuzami, our new Director of Enforcement, we will revamp the Enforcement Division so that we bring the cases that count, we bring them as quickly as fairness allows, and we achieve results that impress upon wrongdoers the folly of breaking the federal securities laws.
In the last three months, we obtained 27 temporary restraining orders stopping fraudsters in their tracks, compared to seven over the same period last year. I know this group is aware of our action this week regarding the Reserve Fund and its senior officers. In that case, we are acting not only to redress wrongdoing but also to get money to as many investors as possible, as quickly as possible.
We have entered what will be one of the most active rulemaking periods in the Commission's history. We recently proposed rules to curb abuses in short selling. Next week, we will consider rule proposals for significant enhancements to controls around investment adviser custody of customer assets, to reduce dramatically the possibility that frauds like Madoff might happen again at a registered broker-dealer or investment adviser.
Shortly, we will consider a proposal to enhance investor access to corporate proxies, to make real the promise of universal corporate suffrage, so shareholders can act as the owners the law says they are. We are also working diligently to address problems at the credit rating agencies and recently held a public roundtable to discuss how we can better align the interests of those issuing credit ratings with the investors who use them.
Under Buddy Donohue's able and effective leadership, the staff is preparing recommendations to strengthen money market funds. We expect to consider them in June. The focus of the rulemaking will be better assuring that money market funds serve as the relatively safe and liquid investment that investors had come to expect before the events of last fall. The Report of the ICI Money Market working group will be quite helpful as we consider these recommendations.
We also have been focused on the standards applicable to target date funds, the vast disparity in returns that target date funds produced last year, and how the use of a target date in a fund's name potentially may mislead or confuse investors. And yet another issue on the horizon, is re-consideration of Rule 12b-1, which as you know, permits fund assets to be used to pay for shareholder distribution and servicing expenses.
All that is just the beginning. There is so much urgent work to do.
Topping our agenda is regulatory reform. We are lending our voice to the formulation of a structure that will protect our financial system today and for years to come, and will be based on key principles.
These principles are those bequeathed to us by the New Deal reformers who created the SEC 75 years ago, as well as much of the regulatory apparatus that has served us so well for generations. While the time plainly has come to update that apparatus to serve the needs of today and tomorrow, the time will never come to discard the underlying principles.
I believe these are the principles that we must follow:
First, any system of regulation must take as its touchstone the protection of individual well-being. At the SEC, as you know, we call it investor protection. Though we are not, as some would have you believe, focused solely or even primarily on retail transactions, and we regulate institutions and markets, our focus has been and must remain on how our actions benefit the workers, savers, and investors of the United States.
We must and do attend to the safety of institutions, particularly those that are significant to our financial system, but as a means to an end and not as an end in itself.
Second, any system of regulation should be designed to facilitate fair and efficient financial markets, not to supplant them. Events of the last year provide a brutal reminder that markets are neither self-regulating nor self-correcting. A strong and steady regulatory hand is needed to assure their continued survival. But that hand must not be so intrusive as to point to winners and losers, lest we lose the benefits of competition.
Our regulatory system must accommodate lively competition for capital. Competition for capital forces our markets to be both innovative and efficient. Competition for capital ensures that money flows to where, over the long run, it does the most economic good. Our new system of regulation must balance the difficult tasks of ensuring the safety of financial institutions while protecting the continued vibrancy and competitiveness of our capital markets.
Despite the economic devastation of the 1930s, the New Deal reformers possessed the wisdom and foresight to recognize that competitive capital markets are essential to allocate risk efficiently and promote economic prosperity. They did not attempt to banish risk from the capital markets; instead, they fashioned a regulatory structure that would channel competitive forces to manage risk efficiently. Stable markets that manage risk and allocate capital effectively are essential for economic prosperity.
Third, any new regulatory system must promote and preserve public trust in our financial markets. Markets do not work well unless investors believe they do. And investors will not believe that markets work well unless they do, in fact. That means, above all, that investors must know that the information upon which they base their investment decisions is the truth, the whole truth, and nothing but the truth.
Some may believe that there may well be extraordinary circumstances in which the truth is withheld from the markets when the very survival of indispensable financial institutions is at stake. But make no mistake, when the truth is withheld, we all pay a very high price. Without that essential confidence that they have truthful and complete information upon which to base their decisions, investors will avoid our financial markets for ones that are more transparent, or they will demand risk premiums for their continued participation.
The efficient allocation of capital is simply impossible without transparency. To state the obvious, markets rely on words and numbers. They must both be true; and any new regulatory structure must preserve the integrity and independence of those charged with the responsibility for setting standards of financial disclosure.
Investors also need to be confident that when they transact in markets the architecture will work. Amidst all the economic devastation, it is understandable that we forget that over the last year, despite record volumes and enormous volatility, our markets have priced, processed, and cleared hundreds of billions of dollars in customer orders in an orderly and generally fair way.
The New York Stock Exchange, for example, had an average daily trading volume of approximately 4.1 billion shares in the fourth quarter of 2008. These trades were processed efficiently and effectively.
Finally, when investors transact through intermediaries, they must be able to trust that those intermediaries deal with them honestly and fairly and with investors' well-being as their sole goal.
We can have a system of financial regulation that accommodates these principles. That system should include —
Let me elaborate briefly.
There is a need for a regulator entrusted with the responsibility for our capital markets.
I must underscore that independence is an essential attribute of a capital markets regulator that protects investors. There are other agencies of government that touch on what we do, just as what we do touches on other agencies of government. But Congress created only one agency with the mandate to be the investors' advocate. The vision of the Congress when it created an independent SEC was to make sure that there was one agency of government focused single-mindedly and without dilution on the well-being of America's investors. That independence has allowed us to build expertise and a culture of investor protection. We understand that our single-mindedness and our independence are not always appreciated by those we regulate. So be it. Independence is indispensable. We can be independent and still not be vigorous, but we certainly can't be vigorous if we are not independent.
If there was ever a time when investors need and deserve a strong voice and a forceful advocate in the federal government, that time is now. Investors are not the strongest political force; they are disparate in their backgrounds and not especially well organized or funded. It is precisely because investors don't always have the most clout that they deserve and need a strong, independent regulator dedicated to providing for fair financial dealings, timely and meaningful disclosure of information, and protection from unscrupulous actors.
In addition, any capital markets regulator must be integrated. Necessary components of capital markets regulation include regulation of the processes by which investments are offered and sold; of the intermediaries who sell investment products or who offer advice; of the disclosures that must be made by those whose securities trade in the capital markets; of the exchanges or other facilities on which investment products are traded or through which they are cleared and settled. And of course, all these areas must be closely monitored, and the rules must be aggressively enforced.
Capital markets regulation is of a single piece. Splitting it into smaller pieces, I strongly believe, would be a disaster.
Our banking institutions need to be safe, they need to be sound and they need to treat their customers fairly. This too is an essential component of financial regulation. For now, I leave it to others to describe precisely how they should be regulated and who their regulators should be. It is sufficient to acknowledge that, where banking institutions are public companies, there are sometimes different views among regulators about how safety and soundness concerns should intersect with concerns for the soundness of our capital markets and for investor protection.
This may surprise you, but I regard this tension as healthy, creative even. Different regulators appropriately have different perspectives. It is important, I believe, to preserve these multiple perspectives. That is why I think it is useful to maintain the separation between market regulation and banking institution regulation. The best solutions come from the clash of legitimate, varying viewpoints.
Finally, there needs to be a government entity whose responsibilities include the monitoring of our financial system for system-wide risk, with the tools to forestall emergencies. Moreover, we need to improve our capacity to wind up financial institutions that are no longer able to function. I believe there is substantial consensus about the need for these regulatory functions.
There is, though, rather less consensus about the precise form such a regulator should take — whether a single entity, a College of Regulators approach, or a hybrid as FDIC Chairman Sheila Bair proposed this week: a single regulator for systemically significant firms coupled with a systemic risk council to provide macro-prudential oversight of risk. Regardless of the form, it should have access, largely through the functional regulators, to sufficient information to provide a view of the financial system as a whole. And it should have sufficient power to direct prudential regulators to strengthen capital requirements and to direct institutions they regulate to reduce leverage as circumstances require. That said, there are many important issues around the definition of authority for such a regulator.
I'm inclined towards the structure envisioned by Chairman Bair. Given the various components of effective financial regulation, I have long been concerned about excessive concentration of power — which really means excessive concentration of point of view — in a single regulator.
But at the end of the day, what will most ensure the success of a new regulatory structure is the clear commitment to vigorous regulation and oversight of our financial markets and institutions.
Though I've briefly sketched out this morning my view of how a new regulatory system as a whole should work, I will be candid with you: my heart is with investor protection. Indeed, it is to that cause that I have literally sworn an oath. And so, let me end these remarks with a promise. In the weeks and months ahead, I will do whatever I can to make sure that the interests of investors are preserved in the debate on regulatory reform. Of course, though I am Chairman of the SEC, I am just one person. You must be heard too. I ask you to join me in ensuring that our markets are well regulated and that our investors are left fully protected.
I am certain that bold and innovative regulatory reform can be accomplished in a way that is consistent with the principles I have laid out this morning. I am also convinced that getting it right will require hard work, attention to detail, and an over-riding commitment to furthering the public interest. I know we can do this.
Thank you for listening. I would be pleased to answer any of your questions.