Speech 

A 2007 Agenda for the Securities and Exchange Commission

By Professor David S. Ruder

Thank you, Bob Friese, for that introduction. We have known each other since you were a student at Northwestern's law school in the late 1960's. You and I were friends then, and I am pleased to count on you as one of my friends now.

I am also pleased to number so many of you at this dinner as my friends. I have known so many of you in so many environments that I simply can't find a way to call out any of you as special.

Well – perhaps I can. The person who has nurtured me, counseled me, and made my life whole since well before I came to the Commission is here - my wife Susan. I thank you for everything.

Perhaps there are others as well. I first met Stan Sporkin at the California Securities Regulation Institute in the 1970's when he was Director of the Division of Enforcement. I was then known as a conservative legal scholar who had contended that there was no private right of action under Rule 10b-5. Later Stan and I argued at a PLI conference about whether insider trading duties should be imposed on any person who had nonpublic corporate information no matter how obtained.

About six months after I became SEC Chairman I supported insider trading legislation including a misappropriation provision. The Wall Street Journal responded by calling me “just a regulator guy”. When I later saw Stan at a dinner party at Gary Lynch's house, I was highly pleased when he turned to me and said “You're OK.” Thanks Stan.

Not everything at the Commission went well when I was there. Upon arriving at the Commission, I was delighted to learn that I had a car and driver, but then found that the car could not pick me up at home.

During the 1987 Market Break I had to go to the fifth floor to find a computer that provided market information, and even then found a reporter among those crowded around the single computer located in Market Reg.

After I dissented to the first report of the President's Working Group on the Financial Markets concerning a paragraph about margins in the futures market, I spent four hours being grilled by the House Agriculture Committee.

These incidents did not bother me because at an early stage I learned to have great confidence in the Commission staff to protect me against harm.

My first learning about the protections offered by the staff came from Cecile Srodes, who is now the ASECA Executive Director, and who was then the SEC's Director of Legislative Affairs. I learned of her agility and problem solving abilities during my confirmation hearings.

Dan Goelzer and Linda Feinberg followed in Cecile's footsteps with their solid advice. I can still hear them saying: “That's not a good idea, Mr. Chairman.”

Upon leaving the hearing room after my testimony I discovered that I had left my brief case containing confidential information under the table in the front of the room. The hearings were continuing, so I could not simply walk in and retrieve my brief case. I was certain that an enterprising reporter would soon be writing about my private affairs. Cecile said not to worry, went back in the hearing room, crawled under the table at the front of the room, and retrieved my brief case. Thank you, Cecile. I am pleased to know that ASECA has a fine administrator.

All of us are loyal supporters of the Securities and Exchange Commission, even though we don't always agree with the Commission. Let me offer some comments regarding some criticisms and recommendations recently directed to the SEC.

Last week two Senators criticized the Commission's enforcement program, [1] charging that its enforcement activities are “extraordinarily lax", and that the SEC is a “troubled agency that faces serious questions about public confidence.” I believe those charges are simply wrong.

I have followed the agency's enforcement activities closely for more than forty years, and I know the Commission is vigilant and forceful in its enforcement of the securities laws, both in Washington and in the regions. Just ask the defendants in the laddering cases, the analyst cases, the specialist cases, the mutual fund cases, the stock options back dating cases, and the innumerable insider and financial fraud cases whether the Commission is lax. The answers will invariably be that enforcement, if anything, is too vigorous.

The answer to these Senators is that the Commission's enforcement program is already extremely strong and no change is needed.

Numerous recent recommendations are contained in reports from various groups that are concerned about the health of our capital markets. Since November we have had a report by the Committee on Capital Markets Regulation, [2] and a report signed by

Senator Charles Schumer and New York Mayor Michael Bloomberg on “Sustaining New York's and the US ' Global Financial Services Leadership.” [3] We are soon to receive a report from the U.S. Chamber of Commerce's Commission on the Regulation of the Capital Markets in the 21 st Century.

The argument being made is that our capital markets are losing their competitive position to other securities markets and financial centers abroad in part because of the intense regulatory environment in the United States .

The critics contend that our financial markets are losing market share to London , Hong Kong , and other foreign markets. They contend that foreign issuers do not want to list in the U.S. because, among other things:

• The Sarbanes-Oxley Section 404 certification requirements are too strict

• Our accounting standards are rule based, rather than principles based

• Our securities litigation environment poses too much risk for corporations, and

• Our securities market regulations are too intrusive.

These comments come from serious, well placed observers, and will undoubtedly influence the Commission's agenda. I have some replies.

Sarbanes-Oxley

Regarding Sarbanes-Oxley, the Commission is already offering advice about 404 to management, pushing the PCAOB to reform its auditing standards, postponing the effective date of Section 404 for small businesses, and offering a new method for foreign private issuers to exit the U.S. markets.

Accounting Standards

Regarding accounting standards, the Commission has long been a supporter of convergence of U.S. GAAP and the more principles based International Financial Reporting Standards. It has recently re-affirmed its support for a road map setting 2009 as the year in which IFRS will be accepted for filing financial statements with the SEC without reconciliation.

Litigation

There are valid concerns regarding class action securities litigation. The current liability system poses great risks for accounting firms, lawyers, and other secondary participants in the disclosure process. Class actions against corporations transfer wealth from innocent corporate shareholders to innocent purchasers or sellers of securities. The recoveries for each shareholder are not large, and transaction payments to both plaintiffs and defendants lawyers are significant.

If the Commission were to study whether changes in the law under Rule 10b-5 would be beneficial, it could ask whether current court interpretations of materiality, reliance, mental state, causation, and even privity are yielding the proper balance between investor protection and capital formation.

Interestingly, some of those who criticize our litigation system also advocate principles based regulation. Proposals to adjust the various elements of Rule 10b-5 would involve an attempt to change the principles based Rule 10b-5 to a more rule based approach.

Market Regulation

In the market regulation area, one contention is that the British system of principles based regulation is a better system. Isn't it odd that at the same time that the Commission is being criticized by Senators as being lax, London is being praised for its more informal regulatory system?

I do not believe that relaxed regulation is the key to protection of the markets. The genius of the SEC's enforcement system is that the Commission has its own vigorous and energetic enforcement division and need not beg other agencies to enforce the securities laws.

While there is no good reason why the SEC should diminish the intensity of its enforcement efforts, there are compelling reasons why the Commission should seek accommodations with its counterparts world wide in efforts to regulate the world's capital markets.

Capital market developments during the past few years have been dramatic. Automation allows securities transactions to be executed in seconds. The derivatives and futures markets are expanding exponentially. Securities and commodities exchanges have become for profit corporations and are consolidating both in the United Sates and internationally. The Chicago Board of Trade and the Chicago Mercantile Exchange are merging. The New York Stock Exchange has acquired the Archipelago electronic trading system, is about to merge with Euronext, and has entered into a strategic alliance with the Tokyo Stock Exchange. Nasdaq is seeking to acquire the London Stock Exchange.

The major task facing the SEC today is to find a way to consolidate its market regulation with market regulations abroad. The task is to create a worldwide regulatory system that will facilitate capital formation while still protecting U.S. investors. The Commission is already engaged in this analysis, and it undoubtedly will continue.

The New York Stock Exchange – Euronext merger has required the Commission to address international jurisdiction problems. On January 25, 2007 the Commission entered into a Memorandum of Understanding with the College of Euronext Regulators . [4] That document states a shared belief in the importance of local regulation of local markets. It confirms that affiliation of securities markets will not lead to the application of one country's laws to a market in another country's jurisdiction.

The Memorandum of Understanding not only seeks to settle important jurisdictional problems, but also expresses intent to consult, cooperate, and exchange information, while preserving existing MOU bilateral and multilateral enforcement agreements.

A substantial hint that the SEC will be taking a cooperative attitude with foreign securities regulators appeared recently in an article written by Ethiopis Tafara and Robert Peterson of the SEC's Office of International Affairs. [5] The article proposes a new mutual recognition framework for allowing foreign stock exchanges and foreign broker-dealers to obtain exemptions from U.S. federal securities regulations. The exemptions would be allowed if the foreign stock exchanges and broker-dealers were subject to a foreign regulatory system with substantially comparable laws and regulations, and “supervision by a foreign securities regulator with oversight powers and a regulatory and enforcement philosophy substantially similar to the SEC's.” The aim would be to avoid overlapping and duplicate registration and oversight requirements.

Notably the framework would retain the SEC's ability to enforce the U.S. securities laws in the United States .

In a recent speech, Chairman Cox recently extolled the virtues of regulatory cooperation in which the world's securities regulators would constantly re-examine their regulatory systems in order to find opportunities for mutual improvement. [6]

During recent years the SEC has been very helpful to other countries, such as China , in helping to establish their market regulatory systems. Europe has made great strides during the last decade in developing a strong system for regulating its securities markets. I believe the SEC and foreign regulators will find many areas in which their regulatory and enforcement systems are substantially similar, but there will be areas of differences. Hopefully foreign regulators and the Commission will be willing to make sufficient adjustments in their systems so that a world wide securities regulatory system based upon mutual recognition can prevail.

Adoption of a plan for regulatory cooperation does not mean abandonment of the strong enforcement environment in the U.S. With continued strong SEC enforcement of U.S. securities laws and active cooperation with securities regulators worldwide, I believe the Commission will be fulfilling its mandate to facilitate capital formation and to protect investors.

Professor of Law Emeritus, Northwestern University School of Law, Chairman U.S. Securities and Exchange Commission 1987-1989. These remarks were delivered at the Fifteenth Annual William O. Douglas Awards dinner of the Association of SEC Alumni, Inc. in Washington , D.C. , at which Professor Ruder received the Douglas award.

[1] Congressional Record: January 31, 2007 (Senate), pages S1381-S1391.

[2] Available at http://www.capmktsreg.org/index.html

[3] Available at http://www.senate.gov/~schumer/SchumerWebsite/pressroom/special_reports/
2007/NY_REPORT%20_FINAL.pdf
>http://www.senate.gov/~schumer/SchumerWebsite/pressroom/special_reports/
2007/NY_REPORT%20_FINAL.pdf

[4] Rel. 2007-8 SEC, Euronext Regulators Sign Regulatory Cooperation Arrangement (Jan. 25, 2007); Memorandum of Understanding Concerning Consultation, Cooperation and the Exchange of Information Related to Market Oversight. Available at http://http://www.sec.gov/news/press/2007/2007-8_mou.pdf

[5] Ethiopis Tafara and Robert J. Peterson, A Blueprint for Cross-Border Access to U.S. Investors: A New International Framework, 48 Harvard International Law Journal 31-68 (2007).

[6] SEC Chairman Christopher Cox, Re-Thinking Regulation in the Era of Global Securities Markets, delivered at the 34 th Annual Securities Regulation Institute, Coronado , California , January 24, 2007. Available at http://www.sec.gov/news/speech/2007/spch012407cc.htm