Speech by SEC Chairman: Remarks Before the Women in Finance Symposium
Chairman Mary L. Schapiro
U.S. Securities and Exchange Commission
July 12, 2011
Good afternoon, it is a pleasure to be here today and a delight to see all of you and bring the symposium to a close.
Having lived in the financial world since the 1980s, I can assure you that – not long ago -- we could have held a “Women in Finance Symposium” in a much smaller room. It’s heartening to see the talents and training of half the population increasingly devoted to the goal of a growing American economy. Yet, it is still the rare occasion when I can look out from the podium and see an audience of women and, I must say, it is a thrill.
It thought I’d focus on investor protection at the SEC. That’s a critical mission because of the vital role investors play in our economy: investors who allocate trillions of dollars in ways that drive the economy forward.
The cumulative success or failure of uncounted investment decisions every year has tremendous repercussions for the current recovery and future growth.
As a regulator, the SEC is not interested in limiting or guiding these investment decisions. We are, however, determined to see that investors have access to the accurate and relevant information they need to balance risk and reward and – in doing that – funnel capital to dynamic firms that grow rapidly and strengthen our economy.
Of course, good information doesn’t guarantee a wise investment decision. But, increased transparency surely increases the odds. That’s why, despite the extraordinary breadth of activity at the SEC, especially post-Dodd-Frank, we are also focused on our work that ensures that investors are getting quality information that they require.
One way in which we are helping investors is with our teams of disclosure experts. These are the men and women who review disclosure statements filed by reporting companies, to ensure that key information is provided in a manner that both is clear and reflects the SEC’s requirements.
While it’s a tried and true process, this year we established a specialized team to concentrate on large financial institutions.
- For example, as with all companies, we want investors to understand how executives at these institutions are compensated, and why a particular compensation strategy is selected. After all, the interplay between risk-taking and compensation is essential information. Are a company’s compensation packages giving executives incentives to make relatively “risky” decisions, or to prioritize short-term considerations over long-term strategies? Investors deserve to know so that they can make investment decisions accordingly and so that they can intelligently exercise their right to hold the Board accountable for their compensation decisions.
- Our disclosure teams are also focusing on the loan loss reserves that financial institutions set aside to cover potential losses. In the last year, financial institutions have been recalculating their potential exposure to this type of loss, and releasing reserves – money which goes almost directly to the institution’s bottom line. In this case, we’re concerned that filings make it clear that loan loss reserve releases are not an ongoing source of income – that, when calculating the potential for future earnings, investors should place appropriate emphasis on these one-time events.
- And, our disclosure teams are asking institutions to clarify their exposure to potential losses due to litigation and other contingencies. In the past, companies have often claimed that they were unable to accurately calculate their exposure, or they failed altogether to provide this information – arguing that doing so would prejudice their positions. We are asking that they begin providing this information if they have not been already, and that they ensure they refine their calculations over time as events and circumstances change and new information is obtained. These are not new requirements – they are currently what the accounting standard requires.
Our teams are keeping an eye on disclosures of all types – not in an attempt to dictate behavior, but simply to ensure that investors have full and accurate information needed to make informed investment decisions
A second area of recent disclosure focus has been on U.S.-listed companies with significant operations in China. As you know, it is becoming common for companies to list on U.S. exchanges through reverse mergers. However, based on some of our actions to date, a number of these companies are suspected of providing false or misleading financial statements to investors.
As you know, the financial statements of listed companies are subject to outside audits and, as a result of the Sarbanes-Oxley Act, the auditors themselves are subject to oversight by the Public Company Accounting Oversight Board, or PCAOB.
The PCAOB’s ability to inspect foreign registered firms is an important component of their oversight regime. But today, even though audit firms in China are registered with the PCAOB, the PCAOB cannot inspect them. Not surprisingly, despite audits by these uninspected firms, the veracity of some companies’ financial statements has been called seriously into question. As a result, a number of these companies have been delisted, trading has been suspended and registrations have been revoked.
There are, of course, limitations to those kinds of responses. And so the SEC is working with the PCAOB to re-energize talks with the Chinese authorities, talks aimed at determining an effective strategy for cross-border oversight cooperation and enforcement.
This week, a U.S. team is meeting in Beijing with representatives of China’s Ministry of Finance and the China Securities Regulatory Commission. They are working toward an agreement providing for joint inspections of China-based auditing firms registered with the PCAOB and for improved enforcement cooperation.
Similar negotiations have long been underway, but we believe that recent events have added urgency that a process that significantly increases the ability of U.S. investors to evaluate the reliability of the financial reporting of China-based companies be put in place.
A final, but by no means the only other area of disclosure on which we are focused is the asset-backed securities market. In the years leading up to the financial crisis, the nearly $10 trillion securitization market provided liquidity to almost every sector of the economy: from residential real estate to student loans to credit cards. Today that market is down significantly, and the “private label” mortgage-backed securities market has virtually disappeared.
We believe that would-be investors will be more likely to come back if the market becomes more transparent and they can obtain and analyze the information they need to make rational decisions. Again, an important step towards that goal is improving the quality and timing of disclosure to investors.
Last year, the SEC proposed regulatory changes that would allow investors in ABS to more easily and efficiently assess the assets underlying those securities.
Highlights of our proposal include requiring that the characteristics of the loans underlying the security be provided in detail and include an issuer discussion of exception loans – loans that do not meet accepted underwriting standards. We would require that terms and definitions be standardized, so that investors can easily compare the assets underlying different offerings.
Issuers would have to provide a computer program of the contractual cash flow of the securities – the so-called waterfall that determines which investors get paid first if asset performance declines. And, importantly, the rules would require that investors have sufficient time to process all of this information.
Another important piece of information for investors is how well issuers live up to representation and warranty obligations. So, the Commission has adopted a new provision that requires ABS issuers to disclose fulfilled and unfulfilled repurchase requests. In addition, rating agencies are required to include information regarding the representations, warranties and enforcement mechanisms in an ABS offering in any report accompanying a credit rating issued in connection with such offering, including a preliminary credit rating
A related concern is that is that investors can be confident that issuers are actually fulfilling those representation and warranty obligations. The Commission has proposed requiring a new provision in the pooling and servicing agreements that determine shelf-eligibility – the ability to offer and sell a security quickly, with a minimum of pre-sale procedure in order to address this concern. This provision would require that an independent third party periodically furnish an opinion regarding the obligated party’s decisions to repurchase loans that violated the representations and warranties, and would help to ensure that obligated parties live up to the requirements of the agreement.
Together, better up-front information, and a better mechanism to monitor the behavior of obligated parties when that information is inaccurate, will substantially increase the incentive for investors to return to this broadly important market.
We are committed, as we develop the new regulatory regime for OTC derivatives and hedge funds and credit rating agencies, to also keep our focus on the disclosure of decision-useful information for investors.
Whether it is in the areas I have discussed, or for example, in our decision whether to allow the use of international financial reporting standards, or in the mandate to publish the holdings of money market funds, or in any of a dozen other areas, we will always work to maximize disclosure to investors.
The importance of investors to economic growth – as well as our fundamental sense of fairness -- demand that financial regulatory agencies like the SEC do their best to give investors the information they need.