Speech by SEC Chairman:
Remarks before the Foreign Policy Association


Chairman William H. Donaldson

U.S. Securities and Exchange Commission

New York
September 25, 2003

Ladies and gentlemen, Minister Cimoszewicz and distinguished guests: Good evening, and thank you for giving me this opportunity to speak tonight. I want to begin by acknowledging the great work of the Foreign Policy Association, and in particular the efforts of your president, Noel Lateef, in organizing this World Leadership Forum, dedicated, as it is, to the topic of how we can restore confidence in the global economy. Noel and others at the FPA have brought together a remarkable collection of world leaders and distinguished commentators. They have, I am sure, enriched the debate over the past two days on this multi-faceted topic.

As the SEC goes about its duty of regulating America's securities markets, we are keenly aware of the links between our markets and others throughout the world. And we appreciate the benefits of expanding cross-border trading and investment --creating new jobs, enhancing competitiveness, and fostering economic growth. We are vigilant about cooperating with our counterparts in other countries, because we want to help ensure a level playing field that provides a favorable climate for commerce.

Since I am before the guests of the Foreign Policy Association, it would be natural for me to talk only about the international issues confronting the SEC, and how resolving these issues will inject new confidence into the global economy and spark economic growth. I will touch on what we are doing on the foreign front, but I want to focus my remarks tonight on something of more far-reaching significance. And that is the need to restore the moral and ethical underpinnings of America's corporate and financial institutions -- at a time when so many of these institutions are still recovering from revelations of serious malfeasance.

Restoring these underpinnings is closely linked to the process of restoring confidence in American business. But this process is not simply a matter of pushing and pulling the right economic levers. With the United States still in a heightened security environment at home, while also waging a war against terror abroad, policymakers must contend with new fiscal burdens and understandable economic anxiety. Add in a bursting of the economic bubble, following a 10-year bull market . . . the startling disclosures by a number of American companies in recent years . . . the resulting incidence of serious erosion of business principles, and this has produced a landscape that resembles the financial equivalent of "The Perfect Storm."

Recovering from such a storm — and restoring public confidence — has been, and is, no small challenge. Indeed, it is a major, long-term undertaking, and our leadership throughout the world depends on this recovery. There has been progress, symbolized by the passage of Sarbanes-Oxley and its implementation. But there have also been more recent setbacks, including unfortunate governance failures at the New York Stock Exchange, and the abusive trading of mutual fund shares. In the end, public confidence will only be restored when companies in the United States and abroad are willing to move beyond basic compliance and into the setting of new standards of integrity. Investors, whether in the United States or abroad, must be able to see for themselves that business has moved beyond simple compliance with the new laws, and is living up to the spirit underpinning all of our securities laws.

Before going any further, I should issue the standard disclaimer that the views I express tonight are my own and do not necessarily represent the views of the SEC or its staff.


I will turn to the new responsibilities facing business in a minute, as well as some international issues being addressed at the SEC. But first I want to quickly summarize the thrust of Sarbanes-Oxley, and touch on the SEC's efforts not only to write the implementing rules, but also to enforce them.

The sweeping reforms contained in Sarbanes-Oxley address nearly every aspect of our nation's capital markets — including both domestic and U.S.-listed foreign companies, as well as their officers and directors. The Act also affects those who play crucial professional roles ensuring the integrity of our capital markets — accounting firms, research analysts, and attorneys. The principal objectives addressed in the Act can be grouped into three themes:

Starting with efforts to strengthen the accounting profession, and to restore confidence in it, the centerpiece has been the establishment of the Public Company Accounting Oversight Board (PCAOB). In a matter of months, the joint efforts of the Commission and the PCAOB have turned what was an outline on paper into an energetic organization. The Board is absolutely vital to our markets going forward, and its chairman, William McDonough, is showing inspired leadership.

A second important element of Sarbanes-Oxley provides the Commission with new tools to enforce federal securities laws. The law strengthened our ability, and the ability of criminal prosecutors, to obtain meaningful sanctions against those who violate the federal securities laws. The law also expanded our authority to return funds to harmed investors via the creation of the so-called Fair Fund provisions.

The Commission is in the midst of significantly enlarging our professional staff, which will help get new cops "on the beat" to enforce the new rules. Indeed, the process has already begun. As an example, for the fiscal year through Monday of this week, the Commission has filed 621 enforcement actions, 161 of which involved financial fraud or reporting violations. During this period, the Commission has sought to bar 149 offending corporate executives and directors from holding such positions with publicly-traded companies. Further, we are holding accountable not just the companies who engage in fraud, but also other participants. Recent actions, for instance, signify the Commission's willingness to sanction bankers whose professional advice has been instrumental in aiding illegal and fraudulent acts by corporate clients, as well as insurance companies that would enable public companies to obscure or hide their true financial condition.

We have also worked to return funds to investors who have suffered losses, rather than merely collect those funds for the government. As part of these efforts, we have obtained the single largest civil financial penalty ever imposed for violations of America's securities laws — and the proceeds from this penalty will be made available to harmed investors.

A third element of the Sarbanes-Oxley Act is focused on improving executive responsibility, or what is called "the tone at the top." We now require certification of disclosure and financial reporting by CEOs and CFOs. The Act also instituted prohibitions on insider loans. We have implemented new provisions requiring companies to disclose annually whether they have adopted codes of ethics for their senior officers.

International issues before the SEC

Moving to international issues, the SEC will continue to take an active role in promoting the globalization of securities markets. The Commission recognizes the benefits that foreign market participants bring to our markets and our investors, and we have always given them equal treatment. The level playing field has helped to increase the number of non-U.S. public companies registered in the United States from 517 in 1992 to more than 1,300 a decade later, representing countries of all sizes, and from all regions of the world.

As part of our commitment to showing global economic leadership, the SEC is working closely with its counterparts from throughout the world on developing common approaches for regulating financial markets. Indeed, the International Organization of Securities Commissions, in which we actively participate, will soon be issuing a statement, endorsed by 15 regulators from the world's biggest securities markets. It lays down forthright international ethics standards for equity research analysts. The SEC was pleased to play a significant role in the drafting of these principles. They will help to address conflicts of interest in the equity research field throughout the world, aimed at restoring confidence in the integrity of financial markets.

We are also working hard to accelerate progress on a number of other important international issues. One such issue is the convergence of international accounting standards and the Generally Accepted Accounting Principles used in the United States. While sounding arcane, this issue has major implications for cross-border business. If the difficult issues involved in convergence can be resolved — no easy task for sure — investors and issuers alike will benefit, by increasing comparability and reducing the cost of capital.

The Commission is also working with the PCAOB on addressing oversight of those foreign accounting firms involved in auditing American public companies, and foreign companies traded in U.S. markets. This is a primary responsibility of the PCAOB, which is continuing to work with accounting regulators from throughout the world on developing collaborative mechanisms of oversight.

In addressing these issues, I trust the Commission and our counterparts abroad will be able to build on our past experience of cooperation and assistance. Our experiences have shown that cooperative solutions allow different regulatory systems to work compatibly — maximizing the quality and efficiency of our programs, and enhancing investor protections.

A New Spirit of Compliance

As I mentioned earlier, the SEC has many issues on its docket, spanning from enforcement of our securities laws to cooperating with our counterparts on a range of international issues. But the most pressing issue facing the SEC today is the corporate governance of American companies. I am pleased that there have been real improvements over the past year, particularly since the passage of Sarbanes-Oxley. But it disappoints me to say that many American businesses still have a long way to go before their corporate governance is at a place that inspires confidence in investors — either at home or abroad.

Indeed, a recent Lou Harris poll shows that the percentage of people expressing a "great deal" of confidence in big business fell by more than 50 percent from 2000 to 2003. The amount of venture capital raised this year is projected to be less than last year, and nearly seven times less than in 2001. A small but telling symbol of the corporate corruption overhang can be found in the New York Times, where in the past six months there have been more references to Enron than Intel and Exxon combined. The standing of business as a profession is at an all-time low in the minds of not just investors, but the public at large.

This is a dangerous climate in which to be operating. Because until American business has won back the trust of the public in general, and in particular investors here and abroad, we will lack the moral authority to help lead an economic recovery and restore confidence in our capital markets.

The new mandates contained in Sarbanes-Oxley present bright red-line rules, but I hope that the business community will see these lines as the bare minimum of what they need to do. Because if there is going to be a true restoration of long-term confidence in the U.S. economy, and the global economy, compliance for the sake of compliance is a non-starter.

What's really needed is not more laws, but rather the full engagement of American business leaders in an effort to advance an underlying spirit of reform. These reforms must inculcate a company-wide mindset to do the right thing, and must become part of the DNA of the corporation, from top to bottom. Moreover, if companies treat Sarbanes-Oxley and other measures as opportunities — to improve internal controls, improve the performance of the board, and improve their public reporting — they will be better run, more transparent, and more

attractive to investors. I know there will be costs associated with stepping up compliance, but these costs must be measured against the long-term benefits to each individual business, and the economy as a whole.

Until corporate America regains and enhances its leadership role in corporate governance, and gains the confidence of investors here and around the world, we will be hampered in our ability to exercise global leadership on a range of economic and political issues. And we will find it difficult to promote a long-term economic recovery.

I have spent many years in and around corporate America, during which time I have seen that we have the world's most creative, and most industrious workforce. I also have recognized that American business is populated by fundamentally decent and honest people. Indeed, these traits provide the foundation of our economic vibrance. We have hit an ethical rough patch, but I am confident that the men and women of American business can live up to a higher standard, and that they will work together to do so — for the benefit of our economy, and the benefit of the global economy.

In closing, I want to thank the Foreign Policy Association again for giving me this opportunity to speak at the World Leadership Forum. Conferences like these provide a valuable opportunity for people to exchange ideas, and develop relationships, that help to sustain our civic culture. It has been an honor to be with you, and I thank you.