1 

 2 THE U.S. SECURITIES AND EXCHANGE COMMISSION 

 3 

 5 

 6 

 8 The Former Chairmen Roundtable 

 9 

 11 Wednesday, June 4, 2008 

 12 3:04 p.m. - 4:45 p.m. 

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 15 

 17 

 18 

 20 

 21 

 23 United States Securities and Exchange Commission 

 1 OPEN MEETING OF 

 

 

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 24 100 F. Street, Northwest, Room L-002 

 25 Washington, DC
 2 

 2 

 3 Members of the Commission: 

 5 

 6 Former Chairmen: 

 8 Bradford Cook 

 9 William Donaldson 

 11 Harvey Pitt 

 12 David Ruder 

 14 

 15 

 17 

 18 

 20 

 21 

 23 

 1 APPEARANCES: 

 

 

 4 Christopher Cox, Chairman 

 

 

 7 Richard Breeden 

 

 

 10 Roderick Hills 

 

 

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 25
 3 

 2 

 3 ITEM PAGE 

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 6 Introduction of Former Chairmen 4 

 8 Questions to and Discussion among Former Chairmen 9 

 9 

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 12 Closing Remarks - Chairman Cox 63 

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 15 

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 18 

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 23 

 1 C O N T E N T S 

 

 

 4 Introductory Remarks - Chairman Cox 4 

 

 

 7 

 

 

 10 Invitation to Open Discussion 56 

 

 

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 25
 4 

 2 INTRODUCTORY REMARKS 

 3 CHAIRMAN COX: Good afternoon and welcome to the 

 5 the SEC's former chairmen. This is an opportunity to discuss 

 6 in a public forum how current events fit in a broader 

 8 again my pleasure to serve as host to this historic event, 

 9 which is I hope becoming a tradition here at the Securities 

 11 Today's roundtable features former SEC Chairman 

 12 Bill Donaldson, Harvey Pitt, Richard Breeden, David Ruder, 

to 

 14 sample their unique and well-informed perspectives on current 

 15 regulatory issues, and to benefit from their experiences as 

 17 INTRODUCTION OF FORMER CHARIMEN 

 18 I'll begin the introductions with the Dean of the 

 20 1936 in Nebraska. He's the son of an insurance company owner 

 21 and a graduate of Stanford University, as well as the 

rate 

 23 and securities law as a partner at the prestigious firm of 

 1 P R O C E E D I N G S 

 

 

 4 SEC Chairmen's Roundtable, the third annual event to showcase 

 

 

 7 historical perspective of securities regulation. And it is 

 

 

 10 and Exchange Commission. 

 

 

 13 Rod Hills, and Brad Cook. This is a wonderful opportunity 

 

 

 16 SEC chairmen. 

 

 

 19 Former Chairmen, G. Bradford Cook. Brad was born in 

 

 

 22 University of Nebraska Law School. He practiced corpo

 

 24 Winston & Strawn in Chicago. In 1971 he became the General 

 25 Counsel of the SEC, and the following year he replaced Bill
 5 

 2 Rod Hills served as Chairman of the SEC from 1975 

 3 to 1977. Under his leadership, the SEC took the important 

 5 governments. He's the Founder and Chairman of the Hills 

 6 Program of Governance at the Center for Strategic and 

 8 President. He's the Founder and former Chairman of the U.S.- 

 9 Asian Business Council, and he's a Trustee of the Committee 

 11 Law School, a distinguished faculty fellow at the Yale School 

 12 of Management, and a visiting lecturer at his alma mater, 

 14 David Ruder served as Chairman of the SEC from 1987 

 15 to 1989. His time as Chairman included the stock market 

er 

 17 pressure. And that's not only an ability for which he is 

 18 always remembered, but an ability that he still possesses. 

 20 against Drexel Burnham Lambert. He launched a penny stock 

 21 fraud program, and he moved the SEC in significant ways into 

 23 As a former dean and now a distinguished professor 

ory

 1 Casey as Chairman. 

 

 

 4 initiative of halting improper corporate payments to foreign 

 

 

 7 International Studies. He also served as Counsel to the 

 

 

 10 on Economic Development. He's been a professor at Harvard 

 

 

 13 Stanford Law School. 

 

 

 16 crash of 1987, in which he exhibited phenomenal grace und

 

 

 19 He also took charge of the Commission's enforcement action 

 

 

 22 the arena of international securities law enforcement. 

 

 24 at Northwestern Law School, he now supervises the 

 25 administration of the San Diego Securities Regulat
 6 

 2 Institute, and the Northwestern Corporate Counsel Institute. 

 3 He is also the current Chairman of the Mutual Fund Directors' 

 5 Harvey Pitt served as Chairman of the SEC from 2001 

 6 to 2003. He has shown his passion for securities law in 

 8 over a long and distinguished career. Before becoming 

 9 Chairman, he was in the private practice of securities law 

 11 the President of the SEC Historical Society. He's 

 12 participated in a number of bar and continuing legal 

n his 

 14 academic career, he was an adjunct professor of law at 

 15 Georgetown, George Washington University, and the University 

 17 In 1968 he came to work at the SEC as a staff 

 18 attorney in the Office of the General Counsel. Remarkably, 

 20 the SEC and served in that capacity for three years. Today 

 21 he's the Chief Executive Officer of the global strategic 

 23 Bill Donaldson served as Chairman of the SEC from 

 1 Institute; the Ray Garrett Corporate and Securities Law 

 

 

 4 Forum. 

 

 

 7 every one of the many ways that he's applied his energies 

 

 

 10 for nearly a quarter century. He was a founding trustee and 

 

 

 13 education activities on securities law issues. And i

 

 

 16 of Pennsylvania. 

 

 

 19 in just seven years he ascended to become General Counsel of

 

 

 22 consulting firm, Kalorama Partners. 

 

 24 2003 to 2005. He arrived at the Commission with over 45 

 25 years of experience, working in business, government, and
 7 

 2 the investment banking firm, Donaldson, Luftkin & Jenrette; 

 3 and served as Chairman and CEO of the New York Stock 

 5 Management and served as that School's first Dean. 

 6 He also served in the United States Marine Corps. 

 8 spanned five presidential administrations, including service 

 9 as Under Secretary of State in the Nixon administration, and 

 11 He was also Chairman of the Carnegie Endowment for 

 12 International Peace from 1999 to 2003. 

the SEC made great 

 14 strides to address the fallout from not only the dot.com 

 15 collapse, but also the major accounting scandals that were 

 17 21st Century. 

 18 Richard Breeden served as SEC Chairman from 1989 to 

 20 service, he has been both academic and practitioner; law 

 21 school teacher, and lawyer at the prestigious firms of 

 He 

 23 also served as an advisor to both Vice President George H. W. 

 1 academia. He co-founded and served as Chairman and CEO of 

 

 

 4 Exchange. He co-founded the Yale University School of 

 

 

 7 And his varied government service in the executive branch 

 

 

 10 as a special advisor to Vice President Nelson Rockefeller. 

 

 

 13 Under his strong leadership, 

 

 

 16 incubated in the late 1990s and materialized in the early 

 

 

 19 1993. In addition to an impressive career in government 

 

 

 22 Cravath, Swain & Moore, Baker Botts, and Willkie Farr. 

 

 24 Bush and President George W. Bush on economic policy. 

 25 In July of 2002 he was appointed to act as
 8 

 2 the Southern District of New York. In that role he saw to it 

 3 that fraud and abuse at that company were stopped, 

 5 2003, while still serving at WorldCom, the Board of Directors 

 6 of Holenger International invited him to investigate problems 

 8 And in 2006 he founded the activist hedge fund, 

 9 Breeden Partners, through which he's managed to assume the 

 11 So we have a pretty impressive panel here. This is 

 12 really the integrity and the history of the SEC before us 

s 

 14 that they attracted to service over so many years, many of 

 15 whom are with us here in the auditorium today. 

wheeling and 

 17 open as we possibly can. And I'd like to start it off with a 

 18 question that is truly open-ended; and that is looking 

in the 

 20 capital markets and in the securities markets in particular, 

 21 here and around the world in the coming years?, and what 

 23 securities regulation? Based, if you like, on any aspect of 

 1 Corporate Monitor of WorldCom by the U.S. District Court for 

 

 

 4 recommending new methods of corporate governance. In June 

 

 

 7 at that company. 

 

 

 10 leadership of H&R Block. 

 

 

 13 here; and the leadership of these men and the professional

 

 

 16 And I just want to make this as free-

 

 

 19 forward, what fundamental changes do you see occurring 

 

 

 22 impact do you think that these changes will have on 

 

 24 your own experience while you were chairmen, or any aspect of 

 25 your current experience.
 9 

 2 jump in, and I'll only referee if it becomes necessary. 

 3 SPEAKER: -- call on us? 

 5 if there's a long enough period of silence, then I'll just 

 6 answer the question myself. 

 8 QUESTIONS TO AND DISCUSSION AMONG FORMER CHAIRMEN 

 9 MR. DONALDSON: Well, I'll start it off by turning 

 11 trends going on. Clearly the inadequacy of our regulatory 

 12 agencies, if you will, which were basically formed in the 

t 

 14 point; and I think in the last couple of years we've learned 

 15 that the due to the different sorts of instruments and the 

e, 

 17 the definition of the role of the different agencies, SEC, 

 18 Federal Reserve, et cetera, et cetera, are vastly changed. 

. 

 20 And then as we look at the global world, clearly 

 21 we're faced with an unprecedented cross-border investment 

 23 active investors, and so forth. And we're faced with trying 

 1 And I'm going to leave it wide open for people to 

 

 

 4 CHAIRMAN COX: I'm not going to call on anyone, but 

 

 

 7 (Laughter.) 

 

 

 10 my microphone on. And it seems like there are a number of 

 

 

 13 early '30s around a financial industry that existed at tha

 

 

 16 derivatives and all the fancy stuff that goes in marketplac

 

 

 19 And we're going to need some changes there, as we go forward

 

 

 22 environment, the rise of large nations with markets and 

 

 24 to come up with a global regulatory system, if you will. 

 25 First, after we get done figuring out what ours
 10 

 2 on a global stage. 

 3 I'll stop there and let people pick up on that. 

 5 and I'll only make one or two right now. I agree with you, 

 6 Bill, that we are in a period of unprecedented change in our 

 8 in ways that I don't think any of us would have expected ten 

 9 years ago, and we're going to have to find ways to interact 

 11 The Commission has suggested this mutual 

 12 recognition theory. It's a good idea, it has lots of 

 And I 

 14 think this kind of attitude of cooperation probably needs to 

 15 be used in consideration regulation of our own markets. The 

 17 that we're going to be looking at, in terms of investment 

 18 banks when they have access to the federal window. 

f 

 20 principles-based regulation in which we only say to the 

 21 regulated, "Well, we hope you be good people, and if you're 

 23 regulation for the U.S. So I think we need to be cautious 

 1 should look like, we're going to have to try and integrate it 

 

 

 4 MR. RUDER: I have about a dozen comments to make, 

 

 

 7 securities markets. The international markets have expanded 

 

 

 10 with foreign regulators. 

 

 

 13 problems, and it's something that needs to be pursued.

 

 

 16 concept of prudential supervision for banks is now something 

 

 

 19 On the other hand, my view, the concept o

 

 

 22 not, we'll talk to you again." is not an acceptable form of 

 

 24 about adopting what I would call the UK model in the United 

 25 States.
 11 

 2 a whole lot of money in places where there didn't used to be: 

 3 Partly the oil money, partly the money that's accumulated in 

 5 been the center of world trade for a very long time, 

 6 certainly through the 20th Century. 

 8 Africa, and the Middle East are a grouping of interests that 

 9 are different than ours. So to some extent, the question 

 11 chip? How long can we influence the world's markets? We may 

 12 not always be as attractive a market as we have been for this 

 14 the example of the SEC will be followed through the rest of 

 15 the world. 

R. PITT: I think we're going in order, so it may 

 17 be my turn. I'll leave the last word to Richard, which I 

 18 learned long ago to always do. 

 20 MR. PITT: I think that you have to look at the 

 21 question from two distinct perspectives. One is the short 

 23 people have accused Wall Street in particular of having a 

 1 MR. HILLS: I think the big problem is that there's 

 

 

 4 China. It's probably the problem that the United States has 

 

 

 7 And the center of trade is moving. China, India, 

 

 

 10 seems to me to be: For how long can the SEC be the blue 

 

 

 13 last, say hundred years. And the question is whether or not 

 

 

 16 M

 

 

 19 (Laughter.) 

 

 

 22 term and the other is the long term. Unfortunately, many 

 

 24 very short-term mentality, which for most people means what 

 25 are they doing for lunch? But I think the short term may
 12 

 2 We're in the middle of a disastrous crisis, and it reflects 

 3 certain things about our markets. 

 5 term, because some of the fundamental changes -- as you put 

 6 them, Chairman Cox -- are going to occur over time. But if I 

 8 think one has already been said much better than I can say 

 9 it. Globalization is clearly a major point, and from both 

 11 global, and the days in which regulation of our capital 

 12 markets could be confined just to our borders no longer 

 14 The second is the creation of what I'll call for 

 15 these purposes "synthetic securities". We are witnessing 

 17 instruments. They provide real economic benefits in many 

 18 cases. But the problem with synthetic securities is that our 

 20 securities to a great extent. 

 21 And so the movement towards very diverse and unique 

 23 The third issue that I would identify is liquidity, 

 1 well have a dramatic impact on where regulation also goes. 

 

 

 4 I also think that one has to look at the longer 

 

 

 7 had to identify just a handful of fundamental changes, I 

 

 

 10 perspectives. Our markets are global, our competition is 

 

 

 13 exists. 

 

 

 16 people who are crafting very, very unique and clever 

 

 

 19 entire regulatory system is geared towards largely equity 

 

 

 22 forms of securities instruments is in particular a concern. 

 

 24 which I am happy to see the Commission has identified and is 

 25 now asking investment banking firms and others to report on
 13 

 2 securities the problem that we are observing lots of 

 3 liquidity problems. 

 5 sheets assets that they would value at tremendous numbers, 

 6 but those assets are only realizable if they can stay in the 

 8 And the final form of fundamental change, which I 

 9 think is part of what's roiling our markets now is a need for 

 11 with Dave Ruder that we cannot have a marketplace in which 

 12 people are free to commit fraud and that there's no response 

 14 But the focus of prudential regulation is an effort 

 15 to try and figure out how to help people who have to comply 

n 

 17 how to meet them. I think that we are seeing a much greater 

 18 need for that kind of regulation as well as continued strong 

 20 change that certainly will be overtaking our own capital 

 21 markets, as it has already overtaken other capital markets in 

 23 MR. BREEDEN: Well, I think you've had a pretty 

 1 liquidity. We've seen with the advent of synthetic 

 

 

 4 You have companies that have on their balance 

 

 

 7 game over the long term. 

 

 

 10 improved focus on prudential regulation. I happen to agree 

 

 

 13 coming from the regulatory authorities. 

 

 

 16 with the law, understand what their obligations are, and the

 

 

 19 enforcement effort, and I think that will be a fundamental 

 

 

 22 other locations. 

 

 24 good list of some of -- those are certainly some of the major 

 25 trends and major future-looking problems. And I can't add
 14 

 2 One, I've been struck -- and I've migrated from the 

 3 regulatory side of the table over to the regulated side of 

 5 been struck by the steady growth of independently managed 

 6 funds, if you will. In my era and before I think there was 

 8 marketplace on mutual funds as the vehicle of growth with the 

 9 retail investor. And the hedge fund world has continued to 

 11 any likelihood it will change. 

 12 That has huge implications for banks, for the 

g to 

 14 figure out the other day -- I believe that the investment 

 15 funds managed where our fund is located, Greenwich, 

 17 capitalization of the New York Stock Exchange when I was 

 18 chairman. 

And so we have had this tremendous growth of funds. 

 20 And I know during Bill's era there was a lot of attention put 

 21 on that. I think how to regulate people and the funds 

y 

 23 different, and if there's five thousand funds, there are 

is -- z

 1 much too some of them, but I'll toss in a few observations. 

 

 

 4 the table, running an investment fund these days -- and I've 

 

 

 7 an awful lot of focus within the Commission and in the 

 

 

 10 grow enormously over the last decade or so. And I don't see 

 

 

 13 traditional broker-dealers, for regulation. I was tryin

 

 

 16 Connecticut, exceed comfortably the total market 

 

 

 19 

 

 

 22 business is not a simple question. Funds are very, ver

 

 24 several thousand different -- I don't know what you 

 25 can -- can anybody still hear me?, because I lost th
 15 

 2 SPEAKER: I can hear you. 

 3 MR. BREEDEN: Okay. 

 5 blessing for everyone, I guess. 

 6 Anyway, so I think we'll all be wrestling with the 

 8 investment funds over the next -- for the foreseeable period 

 9 of time. 

 11 change, the radical change in the world of securities 

 12 exchanges, the markets themselves. The concept of the New 

 14 very far from most people minds back when I was chairman. I 

 15 actually was on the Board of Archipelago Holdings when New 

 17 subsequent transatlantic merger with Euronext. 

 18 And when you look at what's going on, you have 

us 

 20 consolidation going on in the exchange world. I don't see 

 21 anything inherently threatening about that. And maybe it 

of 

 23 access to capital. 

the

 1 Anyway, okay. 

 

 

 4 It goes silent up here. It would be a good 

 

 

 7 growth and governance and transparency and regulation of 

 

 

 10 I've also been struck, since I was Chairman at the 

 

 

 13 York Stock Exchange being a public company would have been 

 

 

 16 York merged into us to accomplish their IPO prior to the 

 

 

 19 first a movement into public companies, and then tremendo

 

 

 22 will produce beneficial results for the long run in terms 

 

 24 But I think the one corollary that I would 

 25 certainly be focused on if I was still here would be 
 16 

 2 markets consolidate; and particularly when you look at what's 

 3 going on on the derivative side rather than the cash market. 

 5 year -- when I was here I had the dutiful pleasure of closing 

 6 and liquidating and putting into bankruptcy Drexel Burnham, 

 8 thought, in U.S. markets. And that was a traumatic event; it 

 9 was handled very differently from how Bear Stearns was 

 11 certainly were discussions of it. 

 12 But in fairness, we were looking at it not at a 

e 

 14 looking at a failure that was being driven principally by the 

 15 consequences of criminality in one firm, and it was a problem 

 17 But I think the last 12 months should have shown 

 18 all of us that I think the regulators have been too 

n perhaps 

 20 too scientific in allowing people to stand closer and closer 

 21 to the edge of the cliff in terms of leverage, and that makes 

 23 more brittle system than if some of the major players had to 

e years, in the wake

 1 consequent concentration of clearing risk as the trading 

 

 

 4 I think we've all witnessed in the last 

 

 

 7 then the largest failure of a financial institution, we 

 

 

 10 handled. We didn't bail out anybody, though there were 

 

 

 13 time of unprecedented global stress in the markets; we wer

 

 

 16 limited to one firm. 

 

 

 19 complacent about complex capital rules. We've gotte

 

 

 22 the overall systemic risk much greater and it makes for a 

 

 24 hold real substantial levels of capital. 

 25 And I suspect over the next fiv
 17 

 2 there's a lot of thinking that needs to go into how we ended 

 3 up with the mortgage crisis of the magnitude it was, and what 

 5 And disclosure I would flag as a major issue there. 

 6 It's quite clear that people ranging from towns people in 

 8 invested in instruments that were pools of things; and they 

 9 really didn't look beyond that label that said "AAA," and to 

 11 buying. And that's going to be an issue I think for the 

 12 Commission and others. 

up. I think I agree with, if was 

 14 David, who said that the UK system and principles-based, we 

 15 shouldn't all fall over with envy. I would just remind 

 17 regulation was created. A little agency called the SEC's 

 18 Rule 10(b)(5), it's don't lie, cheat, or steal. 

nfirmation 

 20 hearing I had to put up courtesy of Harvey with 800 questions 

 21 about why the SEC wouldn't codify what insider trading was. 

 23 did we have a principles' based standard that said you can't 

 1 of once the current market crisis finally settles down, 

 

 

 4 the lessons are for world markets from that. 

 

 

 7 little towns in Norway to large institutions found themselves 

 

 

 10 the underlying quality of things in the boxes that they were 

 

 

 13 So I'll wind 

 

 

 16 people that the original principles-based securities 

 

 

 19 In fact, when I was Chairman, in my co

 

 

 22 And this was the big issue at the bar at the time was: Why 

 

 24 engage insider trading, and we'll know it when we see it, as 

 25 opposed to drawing everybody a map of exactly what the
 18 

 2 So there's an ebb and flow of these principles 

 3 versus rule-based discussion. 

 5 that no matter what changes in the markets, domestically or 

 6 globally, in my opinion -- and it's gotten stronger and 

 8 role for a strong, capable, touch SEC. And the people who 

 9 put forward proposed regulatory reorganizations that don't 

 11 people who I simply wouldn't follow very far. 

 12 It is amazing to me, sitting on the market side of 

 14 regarding transparency are not resented around the world; how 

 15 much investors in our fund and in others from around the 

orld 

 17 try to emulate a system that they know is good, and the 

 18 transparency, the values, the enforcement tradition we have 

 20 anybody try and convince you that things like enforcing the 

 21 law are now old-fashioned. 

 can't value these exotic 

 23 securities, then what do you do? 

ecause

 1 contours of insider trading was. 

 

 

 4 My last observation for this part would only be 

 

 

 7 stronger over the last 20 years -- there will always be a 

 

 

 10 see a need for the SEC and the markets of the future are 

 

 

 13 the fence how much the existence of the SEC and the rules 

 

 

 16 world, as well as funds operating in other parts of the w

 

 

 19 here are very, very good. And hang to them. Don't let 

 

 

 22 MR. COOK: If you

 

 24 MR. BREEDEN: If you can't value what? 

 25 MR. COOK: If you can't value them -- b
 19 

 2 you just eliminate them?, or do you -- 

 3 MR. BREEDEN: Well, I think if you have securities, 

 5 MR. COOK: It's after-the-fact kind of a situation. 

 6 MR. BREEDEN: Right. Well, I would be curious. As 

 8 didn't understand. I have a fiduciary duty to my investors, 

 9 and if the thing is so complex that you can't understand it, 

 11 MR. PITT: Well, there's a different element to the 

 12 problem, putting aside for the second fiduciary duties. And 

 14 no organized markets, so that you can open your Wall Street 

 15 Journal and see what the price is, the problem we have is 

 17 counter-parties putting very different values on exactly the 

 18 same instruments. 

sn't necessarily have to be wrong; but 

 20 there were some firms, I believe, that had multiple marks for 

 21 the same securities. And so fiduciary duties are fine, but 

 23 these securities are not regularly traded; therefore, I have 

 1 they're so exotic or so synthetic is Harvey's term -- then do 

 

 

 4 that I'm very curious -- 

 

 

 7 a fiduciary myself I can't imagine investing in something I 

 

 

 10 you shouldn't be buying it. 

 

 

 13 that is if you've got complex securities for which there are 

 

 

 16 that particularly in the subprime fiasco you had 

 

 

 19 That doe

 

 

 22 if people take the easy way out by saying in effect, "Well, 

 

 24 to apply my judgment, and applying my judgment I think that 

 25 they should be worth X or Y or Z. We now has FAS 157 and
 20 

 2 whole host of assets that will have an impact on securities 

 3 valuations as well. 

 5 following some kind of regimen, some kind of approach that 

 6 provides a certain amount of credibility. The difficulty you 

 8 Richard, you spoke about the, in effect, inadequacy 

 9 of a AAA rating, and I think that's absolutely true. It did 

 11 models to price their securities and then they never went 

 12 back and checked the underlying assumptions to see whether 

r 

 14 the market had moved away from them. 

 15 The same thing, I think in response to Brad's 

 17 independent assessment of their methodology. I'm not talking 

 18 about the value, but some independent assessment of the 

 20 valuations, so the people have the ability to rely on values, 

 21 understanding, of course, that with many of these securities, 

 23 moment to moment. 

 1 Fair Value Accounting, and that may extend this process to a 

 

 

 4 But if people are free to do that without at least 

 

 

 7 have is that valuations will be meaningless. 

 

 

 10 become inadequate because basically people came up with 

 

 

 13 the original assumptions were still making sense, or whethe

 

 

 16 question is that portfolio managers ought to have some 

 

 

 19 methodology they're using to come up with securities 

 

 

 22 valuations are going to be highly speculative and change from 

 

 24 MR. HILLS: I think you have two issues, Brad, when 

 25 you talk about valuation. The subprime was I suppose largely
 21 

 2 without having to collect it. And then people bought those 

 3 assets, accumulated them, so the great risk. I don't think 

 5 bought a subprime loan couldn't value it; but there is a 

 6 system problem if that gets too large. 

 8 problem was that there was no way to understand how many 

 9 loans existed, created by people, as I say, who didn't have 

 11 a commission for loaning money, and you don't have to worry 

 12 about collecting it. 

ation in the first instance I don't 

 14 think is a problem for the regulatory agency; but when it 

 15 accumulates as it did, and we don't have transparency to 

 17 MR. DONALDSON: You had the separation of the 

 18 origination of loans, banks, mortgage brokers, who originated 

 20 responsible, if you will, for what was thrown out there. And 

 21 I think that's a problem that's really got to be solved. 

e 

 23 haven't touched on, which is the organized markets, which 

,

 1 caused by the fact that a whole of people loaned money 

 

 

 4 there's much problem with the fact that the person that 

 

 

 7 And for the system you need disclosure. And the 

 

 

 10 to collect them. Those were terribly risky things. You get 

 

 

 13 So the valu

 

 

 16 understand it, that's the problem. 

 

 

 19 loans to be sold and packaged, and had no residual 

 

 

 22 I'd like to talk about another problem, which w

 

 24 used to be organized. We now have a glomeration of stock 

 25 exchanges, if you will. At the same time that's happening
 22 

 2 words, we're going in exactly the opposite direction, where 

 3 it's getting tougher and tougher to figure out what's going 

 5 wish to keep it secret, what they're doing. 

 6 And so you have a tremendous amount of security 

 8 glomeration of transactions that we used to have. And I see 

 9 that as a huge, huge problem. 

 11 are a difficult problem. I'm Chairman of the Mutual Fund 

 12 Directors' Forum, and we talked about valuation just today 

 14 about how the dark pools are influencing that execution; 

 15 fragmented markets, ECNs, electronic markets, and other 

ties 

 17 are treated. 

 18 And I agree with you as well that we need to look 

 20 find a way to value them. And I agree with Harvey that we 

 21 need to have some third party process to do that. In the 

 23 using third parties to see whether the valuations of their 

 1 we have the arrival of so-called "dark markets". In other 

 

 

 4 on in the marketplace, and that's being driven by people who 

 

 

 7 transactions going on all over the world without any of the 

 

 

 10 MR. RUDER: I agree with you, Bill. The dark pools 

 

 

 13 and the question of -- and best execution -- and we talked 

 

 

 16 things that are changing the environment in which securi

 

 

 19 at what you call "synthetic securities," Brad. We need to 

 

 

 22 corporate world, as I understand it, many corporations are

 

 24 derivative instruments are right. In the mutual fund world 

 25 the mutual funds are using third parties to value their
 23 

 2 And we need, I think, to ask whether the Commission 

 3 itself has the ability to understand these synthetic 

 5 entity program in which it is supposed to be looking at risk 

 6 assessments. And I think it's a big burden on the Commission 

 8 understand everything that's going on in these markets. 

 9 Even the fed didn't understand it, as I understand 

 11 understand it. 

 12 So I think in a sense the Commission has to ask 

 it 

 14 can have the really kind of sophisticated help that it needs, 

 15 either in us or as a third-party basis, to do the analysis 

 17 And I don't believe frankly that it ought to be 

 18 relying upon the Federal Reserve Board; it ought to have its 

 20 markets and engage in a regulatory process, which is to 

 21 protect investors. And that carries with it a lot of 

ve. 

 23 MR. PITT: If I can, I just want to pick up on 

 1 instruments. 

 

 

 4 instruments. It has undertaken its consolidated supervised 

 

 

 7 to find the kind of high-priced talent that will allow it to 

 

 

 10 it. Even the Wall Street bankers themselves didn't 

 

 

 13 itself whether it need to find funding mechanisms, so that

 

 

 16 and risk assessment. 

 

 

 19 own capability, because it needs to regulate the securities 

 

 

 22 different attitudes than the banking regulators may ha

 

 24 something that both David and Rod touched upon, and I think 

 25 that is you did have a problem; what makes capital markets
 24 

 2 basic principle. It needs to be a free flow of information. 

 3 There wasn't with respect to these subprime mortgages and the 

 5 And the one thing that would be very cost-effective 

 6 and not involve a great deal of regulation is requiring 

 8 what their positions are and exposure are, and the like. And 

 9 I think without transparency, it's going to be very 

 11 As far as the Commission is concerned, I happen to 

 12 agree with David that it's very hard for the Commission to do 

 14 wants to look around for blame, you can always find many, 

 15 many candidates to point a finger at. I don't think that's 

 17 that understanding of the markets is very difficult. 

 18 But if you look at what happened in terms of 

nking 

 20 firms, standing up and saying publicly as well as to the 

 21 Commission, on day 1 they thought their losses were going to 

 23 billion." And on day 23, they said, "No, it's actually $11 

Now, the one thing you could tell from that

 1 work is transparency. Everybody will agree with that as a 

 

 

 4 securitization elements that went on. 

 

 

 7 transparency, requiring firms to assess their risk, indicate 

 

 

 10 difficult. 

 

 

 13 this kind of review. I also agree with David that if one 

 

 

 16 ultimately going to be terribly constructive; but I agree 

 

 

 19 transparency, you have the heads of major investment ba

 

 

 22 be $4 billion. On day 8 they said, "Gee, maybe it's $7 

 

 24 billion." 

 25 
 25 

 2 didn't have a clue. And I don't say that pejoratively; I 

 3 just say it as a factual matter. So if they didn't have a 

 5 SEC is going to have a clue. But there is a way to do it; I 

 6 think that the Commission should develop standards, as I 

 8 disclosure. And then require all portfolio managers to 

 9 retain somebody truly independent and competent to do an 

 11 inspection pursuant to standards, and report both to the fund 

 12 management and board, as well as to the SEC's Office of 

 14 And if you have that kind of effort, number one, 

 15 the regulation would be paid for by the firms who are using 

 17 expertise they need as opposed to the Commission trying to 

 18 replicate that at government salaries, which are not going to 

 20 Commission to focus its efforts on where it wants to go, once 

 21 it gets these reports, and provide broader coverage for the 

 23 MR. BREEDEN: It sounds like a great 

 1 progression -- and this all happened publicly -- is that they 

 

 

 4 clue -- picking up on David's point -- I don't know how the 

 

 

 7 think under Chairman Cox you have been for liquidity and 

 

 

 10 annual -- or a bi-annual, if they're smaller -- compliance 

 

 

 13 Compliance, Inspection, and Examination. 

 

 

 16 the markets; second, the firms would have to get the kind of

 

 

 19 be adequate for the job; and third, it will enable the 

 

 

 22 industry than it the Commission is capable of doing itself. 

 

 24 full-employment act for consultants. I wish I hadn't left 

 25 the consulting world behind.
 26 

 2 to like to be, I sometimes think we get over-mesmerized by 

 3 experts and people who run lots of fancy models. I spent 

 5 Coopers & Lybrand, and we had to audit people like AIG and 

 6 Goldman Sachs, and they had all big derivative books. And I 

 8 experts. They all trot in with statistical models, and 

 9 they'll sit and say whether it's in the hedge fund world, the 

 11 valuation experts, everybody's carrying around ever-more 

 12 complex statistical models, relying on what has and hasn't 

 14 want to say that you're going to control risk to. 

 15 I remember it used to be popular saying, you know, 

 17 what it was, two standard deviations or something -- which 

 18 meant the Titanic sank every 40 years, and if you're the 

s, 

 20 maybe that isn't an adequate standard. Maybe "We don't ever 

 21 go bankrupt" might be a better standard than "We'll do it 

 23 Anyway, I'm not sure that more complexity is the 

 1 You know, I, just to be contrarian, which I'm known 

 

 

 4 three years running the financial services practice at 

 

 

 7 can tell you, fine, you can go hire the best of the best 

 

 

 10 long-term credit guys, or the mortgage world, or the 

 

 

 13 happened in history. Pick how many standard deviations you

 

 

 16 you would measure your risk models for, you know -- I forget 

 

 

 19 stewards of Merrill Lynch or Goldman Sachs on their board

 

 

 22 every 40 years." 

 

 24 answer. I hope after the subprime crisis, there will be a 

 25 period of reflection. I think we have been on a 25-year
 27 

 2 away from traditional equity securities and debt instruments 

 3 issued by companies. And there's nothing wrong with 

 5 some of the limits, and in a very powerful way the stability 

 6 of world markets called into question by the level the which 

 8 people who are originating these things, and who's supposed 

 9 to collect them. 

 11 thought we learned at Enron that putting assets off balance 

 12 sheet and huge amounts of debt off balance sheet in the 

 many 

 14 of the major banks, not just in the U.S., but 

 15 internationally, who have had serious write-offs, and a lot 

 17 similarly taking assets and structured finance off the 

 18 balance sheet, where the markets can't see it. 

s we will look 

 20 hard at improving transparency, so that people in the markets 

 21 can valuate how much risk fiduciaries are taking. If I was 

 23 fiduciaries who have now admitted that they invested 

 1 binge of moving in the direction of asset-backed securities, 

 

 

 4 asset-backed finance; but, you know, we have seen perhaps 

 

 

 7 the disconnect between, as I think Bill was saying, the 

 

 

 10 So understanding how far should asset-backed go, I 

 

 

 13 Raptors wasn't a very good idea. And yet you look at so

 

 

 16 of them with these special investment vehicles that are 

 

 

 19 So I hope that in the wake of all thi

 

 

 22 in the Enforcement Division, I'd be looking for a few 

 

 24 trillions of other people's money in instruments they didn't 

 25 understand, and I'd sue them. And that might induce some
 28 

 2 investors' money down the drain, without knowing what they're 

 3 doing. 

 5 transparency, rather than things off in whatever corner, 

 6 where they can't be evaluated. And lastly that we have real 

 8 we're going to protect, the ones that the public policy says 

 9 are essential to systemic stability, then they ought to have 

 11 engineering, and how far their risk-taking can go, so that 

 12 they will be sources of stability in a storm. 

rtain is that 

 14 the subprime crisis will not be the last global financial 

 15 instability that any of us will ever see. These things 

not 

 17 just to deal with a nice, sunny day, but it has to be 

 18 organized to deal with storms and hurricanes too. 

on this I 

 20 think very productive discussion was the contemplation of 

 21 where the markets are going structurally, where the market 

 23 change over the next several years, and what it means for 

 1 healthy caution among people who are flinging other 

 

 

 4 And I hope that we will continue to push for 

 

 

 7 leverage limits, that there be some institutions. The ones 

 

 

 10 real limits on how far they can carry their financial 

 

 

 13 Because the one thing we know for ce

 

 

 16 happen periodically, and the system has to be organized 

 

 

 19 CHAIRMAN COX: What got us to start off 

 

 

 22 participants are going structurally and how that's going to

 

 24 regulation. I think we teased out some good issues on that 

 25 topic.
 29 

 2 touchstone, that it's very important; it's vital, central to 

 3 what the SEC does. And I think baked into that is a notion 

 5 transparency, you get the best price discovery. It's made on 

 6 the basis of the best information, and so on. 

 8 pools as an alternative to transparency. To the extent that 

 9 increasingly the market structures themselves -- demutualized 

 11 great source of revenue; hedge funds and other market 

 12 wanting to utilize dark pools and other aspects of prime 

 13 brokerage to conduct, you know, their business to the extent 

 15 of these things going on simultaneously -- sovereign wealth 

 16 funds, which, you know, don't need to (except for perhaps best 

 18 add it all up, do you get something systemic? 

 19 Do you get something that challenges the 

lation is 

 21 premised? And what does that mean for the future? 

 22 MR. DONALDSON: I think we know far too little 

 24 employed in the marketplace on a global basis. To bring up 

 25 an old sawhorse here that we used to talk about when I was

 1 All around, everyone agreed that transparency is a 

 

 

 4 that, for example, when you have full disclosure and 

 

 

 7 But Bill and David mentioned, for example, dark 

 

 

 10 for profit exchanges that are now looking to market data as a 

 

participants 

 

 

 14 possible on a proprietary basis; to the extent there are all 

 

 

 17 practices) subscribe to any regime of regulation -- when you 

 

 

 20 fundamental basis on which the SEC's system of regu

 

 

 23 about the trading techniques, if you will, that are being

 

 
 30 

 1 here, the hedge fund industry, I mean here you have this 

 2 gigantic industry growing like topsy, with essentially no 

 3 regulation, very little regulation. And people say that the 

 4 sophisticated investors don't need regulation inside these 

 5 pools. I mean the name "hedge fund" of course means nothing. 

 6 I mean most of these funds are no longer hedge. 

 7 But I guess my question is: How are we going to 

 8 get on top of, not so much what goes on inside the hedge fund 

 9 itself, the regulatory needs inside there for prevention of 

 10 insider trading and for pricing of securities and so forth 

 11 and so on; but how do we get on top of the techniques being 

 12 used by these funds when they deal with the outside world? 

 13 Every time a hedge fund buys or sells something, 

 14 it's selling it to a public market; it's selling it to 

 15 investments investors, or institutional, or endowments, and 

 16 so forth. And I think we know far too little about what's 

 17 going on. And that multiplies or compounds itself as you get 

 18 going on a global basis. I don't have any solutions to this, 

 19 but I think it sure is an area that we need to be looking at. 

 20 MR. RUDER: Well, Bill, after long-term capital 

 21 markets, I told Congress, I testified that what they needed 

 22 to do was to create a regime in the United States in which 

 23 all of the counter-parties were required to reveal to some 

 24 regulators someplace their risk position, so that somebody 

 25 could look at the systemic problems that were involved in
 31 

 2 And I don't know how to get from my grandiose 

 3 theory to practical realities about how to get this 

 5 would do with it. But I do think that there needs to be some 

 6 really broad thinking about how to coordinate this 

s 

 8 to be a global phenomenon as well as a U.S. phenomenon, that 

 9 we have to look at the foreign regulators and see what 

 11 The Chairman is currently head of the IASCO 

 12 Technical Committee, and you probably have some ways of 

 14 So it is an extraordinary complicated question, but 

 15 one that I do not think can be left alone. 

 17 wanted to use experts as much to identify the question of 

 18 whether the risk was properly disclosed as much as trying to 

 20 some sense to make sure that people who have these strange 

 21 items in their portfolio have disclosed the risk. 

 23 have; but the issue really is: Have companies that are 

 1 these opaque markets. 

 

 

 4 information into the regulators, and even then what they 

 

 

 7 information gathering. And I would really add that this ha

 

 

 10 they're doing. 

 

 

 13 getting at that problem through that as well. 

 

 

 16 MR. HILLS: I understood Harvey as saying that he 

 

 

 19 decide what the value of it was. And I do think it makes 

 

 

 22 Now the risk may be -- I can't tell you what we 

 

 24 regulated by the SEC properly disclose to the public the 

 25 kinds of risks they're exposing themselves to.
 32 

hey are required to do that now. 

 2 MR. HILLS: I don't think most of them know how to 

 3 do it. 

 5 MR. HILLS: I think that's the point, that if you 

 6 hold these synthetic investments, if you want to call 

 8 really know how to deal with options -- the issue is: Has 

 9 someone been able to make sure that J. P. Morgan Chase has 

 investing in that bank understand the real 

 11 risks? And if you do that correctly, you'll probably create 

 12 less risk-taking. 

re is 

 14 a regulator for many of these institutions; it's called the 

 15 board of directors of their company. And if they don't do 

ourt or jail, and 

 17 take care of them; and put the fear of you-know-who into the 

 18 boards, and they'll do a little better job doing their job. 

 20 was Chairman, actually did enacted, some data collection 

 21 powers for the Commission. But I think it's an illusory goal 

othesize 

 23 that no matter how generous Congress ever chooses to be with 

at 

 1 MR. COOK: T

 

 

 4 MR. COOK: Right -- 

 

 

 7 it -- we used them options way back then -- people didn't 

 

 

 10 made the people

 

 

 13 MR. BREEDEN: I mean the good news is that the

 

 

 16 their job, somebody should haul them into c

 

 

 19 I mean I know after David's proposals, and when I 

 

 

 22 as well as an impossible assignment to try and hyp

 

 24 the budget of this agency or any other federal agency, th

 25 you're really going to understand every risk in the
 33 

y do 

 2 it. I wouldn't try. 

 3 I would understand what the duties are of the 

rds of other people's money. 

 5 None of us cares if Paul Tudor Jones goes out and loses his 

 6 own money. Right? Or anybody's. Not to pick on Paul. But 

 8 through fraud and abuse -- then we care. But we care about 

 9 stewards of other people's money and how they behave. We 

 11 And I think without knowing the answer to every 

 12 possible risk and where every trade has been made, and whose 

e world, which if you go too far, (a) it 

 14 probably won't work, it will be very costly, and I do think 

 15 there's a big risk of driving investors offshore when you do 

 17 But what we can do is try and do what the SEC has 

 18 always been very good at, which is holding people accountable 

 20 don't have to understand how to value every single instrument 

 21 in somebody's portfolio; but if they had the legal obligation 

 23 with that disclosure, or not buy it in the first place. And 

 1 marketplace. That's too big a task. You can't possibl

 

 

 4 different people who are stewa

 

 

 7 somebody who goes out and loses their own money -- unless 

 

 

 10 care principally. 

 

 

 13 holding what in th

 

 

 16 that. 

 

 

 19 for how they comply with certain standards. Disclosure. I 

 

 

 22 to disclose it properly, then they either had better comply 

 

 24 it's their duty, and you can hold them to it. 

 25 And similarly, I think -- and David has a lot more
 34 

 2 fiduciary duties of mutual fund directors are tools that we 

 3 have traditionally used to make sure that 

 5 private market of the risk-taking that their institutions 

 6 have been engaged in. And I think what we've seen in the 

s 

 8 of many large financial institutions. 

 9 And I actually think some of that comes from people 

nfidence in all the experts and all the 

 11 models. And the problem is the models don't always work. 

 12 MR. RUDER: I wonder whether we would have been 

 14 Street firms that we have had in the mutual fund, where we 

 15 had requirements that there be sound valuation procedures. 

 17 we're leading into another major subject, which is 

 18 governance. In the broadest sense, how do these fiduciaries 

 20 areas in this country that needs immediate attention is 

 21 so-called proxy access. How do we maintain independence of 

 23 different sort of investors get representation? It's a door 

ehind the rest 

s an area that

 1 experience than I do in this area, but the issues of the 

 

 

 4 risk-taking -- there are people who are overseers in the 

 

 

 7 last year is pretty massive failures in the control system

 

 

 10 having too much co

 

 

 13 better off to have the same kind of discipline in the Wall 

 

 

 16 MR. DONALDSON: When year open that door, and then 

 

 

 19 get in the position that they're in? I think one of the 

 

 

 22 governance? How do people become directors? How do 

 

 24 that is open now. I think we're pretty much b

 25 of the world in some of our processes; but it'
 35 

 2 MR. BREEDEN: And I have the biggest -- since we're 

 3 an activist investment fund -- we're not a hedge fund, we 

uy 

 5 equity securities -- I don't buy anything -- and I try and 

 6 understand those -- but the hedging world we leave to others. 

 8 there is a tie-in to safety and soundness, and systemic 

 9 stability, because when you have self-perpetuating boards and 

isk 

 11 management, for example, and if the system makes it too 

 12 difficult for the shareholders who are losing the money to 

 14 who are not doing their job, then you build up risk-taking 

 15 and you build up dangers to the system. 

 17 system doesn't provide alternatives for 

 18 shareholders -- having won several proxy contests, you know, 

 20 it's awfully difficult, and there are far too many companies 

 21 where you have boards that have members who have been in 

 23 enough. And more risk of accountability to directors 

 1 needs attention, I believe. 

 

 

 4 don't hedge any; we're very dull, very boring. We just b

 

 

 7 But I think Bill raises a great point. And I actually think

 

 

 10 governance that is not responsive to failures to oversee r

 

 

 13 replace people who are supposed to be protecting them, and

 

 

 16 So having a system -- it's not to say the current

 

 

 19 you can go out and run against a board and you can win. But 

 

 

 22 power too long, have not been taking their job seriously 

 

 24 would -- and I'm not saying people suing them, I'm talking 

 25 about replacement via action of the shareholders might be a
 36 

 help control risk-taking. 

 2 MR. HILLS: The question really is: How do you 

 3 want to construct a board? And I would suggest a bill that 

a 

 5 board. The possibility of a proxy fight is a good way to 

 6 cure a bad problem; but what we're lacking through the 

 8 become more and more common to say that only the independent 

 9 directors can choose the director. And more and common is 

 11 other words, do not let the CEO control the candidates for 

 12 are being new directors. 

 14 have the kinds of directors we want. And I guess I think 

 15 that it's not that hard to have a proxy fight today. There's 

t don't have six or 

 17 seven organizations that own 5 percent of their shares. 

 18 Given the electronic data we have now, it's not 

 20 bad a shape. I just don't like the idea of constructing a 

 21 board through a series of proxy fights. 

s 

 23 simply suggesting the general area of governance; although it 

e

 1 very healthy thing and might

 

 

 4 -- a series of proxy fights isn't the best way to construct 

 

 

 7 country is a traditional way of selecting a board. It has 

 

 

 10 they keep the management out of the director process. In 

 

 

 13 And I think if we emphasize that, over time we'll

 

 

 16 very few companies today of any size tha

 

 

 19 that hard to start a proxy fight, if the company is in that 

 

 

 22 MR. DONALDSON: I wasn't suggesting that. I wa

 

 24 has, in my view, really improved with Sarbanes-Oxley. I 

 25 think boards are running better; people take their jobs mor
 37 

in 

 2 terms of the obligations they've taken on. I think boards 

 3 are doing a lot better job than they've ever done. 

 5 get new dimensions into those boards. Certainly independent 

 6 nominating committee is a step in the right direction. But I 

 8 classes of shareholders who want to have more of a say in the 

 9 way the company is run. 

 11 wanting to pay the money for the proxy fight. They want to 

 12 use a management mechanism to put their candidates forward. 

mission was right when it said in 

 14 its proxy access proposal that its approach was that if a 

 15 person was to be put up for directorship, there had to be the 

 17 backers that there would be if there were a proxy fight. 

 18 I think that's a sound principle, and maybe it can 

es 

 20 funds to be used to support directors. But as you know, when 

 21 you propose that kind of rule, it's very, very complicated. 

 say I think there's 

 23 not a real problem that I think we're grappling with. We're 

rate 

th

 1 seriously; directors are self-regulating, if you will, 

 

 

 4 I was questioning how you change boards, how you 

 

 

 7 think there still is frustration out there, amongst certain

 

 

 10 MR. RUDER: The frustration comes from them not 

 

 

 13 I happen to think the Com

 

 

 16 same kind of full disclosure for that candidate and its 

 

 

 19 be incorporated in a system in which you allow the compani

 

 

 22 MR. PITT: I believe I have to

 

 24 almost talking more about an ideal than a problem. Corpo

 25 governance is very, very important. I happen to agree wi
 38 

 2 Sarbanes-Oxley. And I spent a lot of my time with people on 

 3 these committees, and on boards, and so on. And we're seeing 

 5 Trying to open up access to the proxy process I 

 6 think leads to enormous communications; and I think that we 

 8 People get to vote in primaries and for candidates that they 

 9 don't often get to select, and they don't have a process. 

 11 I think when you have funds like Richard's funds 

 12 and others that are activist and seek to hold management and 

 14 which the process works. But if we were to now change the 

 15 system to allow directors to be nominated; and in particular 

 17 was the effective equivalent of labeling a company as being 

 18 troubled, which I don't think the government is really 

 20 sector firms, like Richard's and others, make those 

 21 assessments and go after them, with the profit potential that 

 23 The one thing I was curious about was when the 

 1 Bill that people are doing a much better job in light of 

 

 

 4 a real change in the attitudes and commitments. 

 

 

 7 don't have that situation even with our elected leaders. 

 

 

 10 And we have representative government. 

 

 

 13 boards to a higher standard, that is a traditional way in 

 

 

 16 I thought one of the problems with the Commission's proposal 

 

 

 19 capable of doing, or should do. I'd much rather see private 

 

 

 22 they see, as well as the desire to improve the governance. 

 

 24 Commission put out its policy statement in light of the 

 25 Second Circuit's decision in the AFSCME against AIG case. I
 39 

 2 between the federal and state governments somewhat on its 

 3 head. The rule of law is supposed to be that the states 

lders are, 

 5 and the SEC deals with the mechanics and full disclosure. 

 6 But if under state law, shareholders have the right 

, 

 8 and that is assuming that that is a valid issue for the 

 9 shareholders to vote on, having the Commission then 

 to allow the 

 11 mechanics to be used to achieve that result," causes for me 

 12 at least a concern that the Commission is then really, even 

 14 And to me the Commission had an easy way out of the 

 15 problem. Of course, it's always easier when you're not 

 17 I know. But the easy way is simply to say, "State law tells 

 18 shareholder whether they have the right to amend their bylaws 

 the 

 20 bylaw to have a different process for nominating directors, 

 21 that's great. And then those investors who don't like it 

 23 And it obviates the need for the Commission to make 

ing 

 1 thought you had the potential of turning the bifurcation 

 

 

 4 determine what the substantive rights of shareho

 

 

 7 to change their bylaws, as was proposed in the AFSCME case

 

 

 10 effectively say, "Well, we're not going

 

 

 13 though it's talking about mechanics, is effecting substance. 

 

 

 16 sitting there with people shooting at you from all sides, as 

 

 

 19 or not, and if a majority of shareholders want to amend

 

 

 22 will leave that company, using the Wall Street walk theory. 

 

 24 any substantive judgment about whether the company is be

 25 well run or badly run, how investors get access. But it
 40 

 2 believe that the bylaws need amending. 

 3 CHAIRMAN COX: Since there is actual free 

 5 the Commission, I want to try and interpolate here. Are you 

 6 in tune with David's suggestion that your approach be tied 

 8 be required in connection with the proposal to amend the 

 9 bylaws would be the same as if there were a proxy fight? 

gree 

 11 with David that when you're talking about specific candidates 

 12 who are running, it doesn't really matter who nominates them; 

 14 couldn't agree more with David. 

 15 What I'm saying is I don't know that the 

he 

 17 proxies, et cetera, then it seems to me -- I don't know that 

 18 the Commission has to even go that far. I'm saying I think 

 20 And if the law in your state permits shareholders to change a 

 21 bylaw to let the shareholders nominate directors, so be it. 

y 

 23 -- 

 1 would provide shareholder access if enough shareholders 

 

 

 4 consultation going on here on issues of current interest to

 

 

 7 with disclosure? That is to say, the disclosure that would 

 

 

 10 MR. PITT: It could. I guess I certainly a

 

 

 13 those candidates should be subject to full disclosure. I 

 

 

 16 Commission -- if the Commission's concern is access to t

 

 

 19 there's an immediate solution which simply says, "State law." 

 

 

 22 And we're not making that rule; we're just simpl

 

 24 CHAIRMAN COX: Could the bylaw state that you can 

 25 side-step the disclosure that David's talking about?
 41 

o put 

 2 a finer point on it, I actually thought that the 

 3 outcome -- and it's not that I'm somebody who believes that 

 5 there are ways -- but I thought the outcome by the Second 

 6 Circuit putting aside that it rejected the Commission's 

 8 the outcome in that case was actually quite good. The court 

 9 said they can put in a bylaw proposal if State law permits 

 11 MR. RUDER: Harvey, certainly in your federal-state 

 12 dichotomy, you would not suggest that the states should be in 

 14 solicitation? 

 15 MR. PITT: No. That was clearly allocated to the 

 17 MR. RUDER: Well, then -- 

 18 MR. PITT: The SEC decides disclosure and 

a 

 20 right under state law, the SEC can prescribe what disclosure 

 21 is appropriate for the exercise of that right. Absolutely. 

 23 MR. PITT: I'm glad you agree with me on that. And 

s 

 1 MR. PITT: It certainly could. And I guess, t

 

 

 4 we need necessarily more shareholder access, because I think

 

 

 7 interpretation, which I always hate to see -- but I thought 

 

 

 10 it. And that would have solved the entire problem. 

 

 

 13 charge of what kind of disclosure is required in a proxy 

 

 

 16 SEC -- 

 

 

 19 mechanics. And so if the SEC thinks that shareholders have 

 

 

 22 MR. RUDER: I don't have any disagreement on that.

 

 24 then the next question is: Who decides who pays the expense

 25 of that solicitation? Is that a state law question or a
 42 

 2 MR. RUDER: Well, the bearing of the expenses, I 

 3 think is going to become less and less of an issue. I 

 5 e-proxy rules, and so on. It seems to me that as we become 

 6 more technologically oriented, the question of expense is 

 8 I can see that. 

 9 The problem is unless you know that someone has the 

d alluded 

 11 to earlier, has a fiduciary obligation to protect 

 12 shareholders, allowing anyone who wants to wage a contest to 

 14 potentially of the minority over the majority, and I would be 

 15 opposed to that. 

 17 minorities are self-perpetuating board of directors who spend 

 18 endless amounts of shareholder money on their own 

y and 

 20 those, we're going" -- David's all worried about all the 

 21 disclosures about the insurgents. And with all due respect, 

 23 The problem is we got boards that sit in American 

 1 federal law question? 

 

 

 4 commend Chairman Cox and the Commission on going to its 

 

 

 7 going to become easier. But that's down the road a bit, and

 

 

 10 support of a majority of shareholders, or, as Richar

 

 

 13 impose the costs on the company strikes me as a tyranny 

 

 

 16 MR. PITT: Well, the worst tyranny of the worst 

 

 

 19 self-perpetuation and claim, "Well, we're the compan

 

 

 22 that ain't the problem. 

 

 24 board rooms and do nothing. When companies have declining 

 25 performance, when they're taking risks that they don't
 43 

re putting the shareholder interests at 

 2 risk -- not at every company, but all too often. It isn't 

 3 just Enron or Exxon. There are too many companies where the 

 it 

 5 to too difficult -- and I kind of agree with Rod; you don't 

 6 want boards that you have to have a proxy fight in every 

 8 at the same time, the system has to have enough 

 9 accountability built in. 

 11 striking that -- take off all the major financial 

 12 institutions: Merrill Lynch, CitiCorp, UBS, and so on, where 

 14 losses to shareholders, in the subprime situations. How many 

 15 announcements of board members stepping down and being 

 seen? Very few. 

 17 And so great, some people may argue that while they 

 18 did their job, they replaced the CEO. But I do think we have 

o much 

 20 insulation of a self-perpetuating group called the board of 

 21 directors. And you want some insulation so people are 

 23 directors in this country. 

 1 understand, when they'

 

 

 4 boards aren't doing a good job. And if the system makes

 

 

 7 single company; I mean nobody would want to see that -- but 

 

 

 10 I've been quite interested; I find it a little 

 

 

 13 CEO's have been fired in the wake of the losses, horrendous 

 

 

 16 replaced have you

 

 

 19 a problem in the country -- in the system -- of to

 

 

 22 willing to do it. It's a hard job. We have a lot of good 

 

 24 And you know, I'm very sensitive to those issues;

 25 but at the same time, if you put up too many walls and it's
 44 

 2 level of accountability that should exist of the people who 

 3 are in the end fiduciaries for the shareholders. And it gets 

 5 much time worrying about how to protect companies from 

 6 shareholders rather than to figure out how to protect the 

 8 MR. PITT: Yeah. I just have to say one thing 

 9 about that, Richard. You don't want the process to get too 

 11 profits. So we want to be careful about that. But obviously 

 12 the system isn't sufficiently hard that you can't manage it, 

 14 What we're really talking about is the impression 

 15 of any majority by minority; and in some cases that can 

 major 

 17 financial institutions is a great one. Anybody who thinks 

 18 that it was an individual CEO at any of these companies and 

 20 were they doing?, what were they looking at?" I think is 

 21 being very, very short-sighted. 

issue 

 23 that we have is, is it the function of a federal regulatory 

y

 1 too expensive to challenge, you will end up with not the 

 

 

 4 turned, the system gets turned on its head when we spend so 

 

 

 7 shareholders. 

 

 

 10 easy, because that's going to diminish your potential 

 

 

 13 and that others can't. 

 

 

 16 include boards. I think your point, for example, about

 

 

 19 doesn't ask the question, "Where were the directors?, what 

 

 

 22 So I couldn't agree with you more. The only 

 

 24 agency to decide what companies can be the subject of 

 25 potential contests for control, by giving access to the prox
 45 

 2 shareholders or not in other cases? 

 3 And in my view I don't think it's necessary to go 

 5 the existence of already in-place laws in virtually every 

 6 state in the union. And that keeps the federal government 

iness of having to dictate which companies can 

 8 be subject to attack and which ones can't. 

 9 MR. BREEDEN: And I was sort of agreeing with you 

ut, 

 11 against my self-interest, that the system works best to the 

 12 extent we let shareholders vote. The franchise works; it 

 14 in our corporate society. And the more we go to a system in 

 15 which shareholders ultimately -- we have the system through 

et 

 17 shareholders vote and have major issues be decided by the 

 18 will of the majority, not by either self-perpetuating small 

 20 CHAIRMAN COX: You know, we've been now through a 

 21 couple themes. Within the first portion of this discussion 

o the existing regulatory 

 23 structure from changes in the marketplace, and what lies 

 second 

es

 1 for some shareholders in some cases, but not for other 

 

 

 4 there. I think you can have a more relaxed system, based on

 

 

 7 out of the bus

 

 

 10 in saying that even though I'm arguing, as you point o

 

 

 13 works in our political society; it should work, it will work 

 

 

 16 e-proxy and other things to make it flexible enough to l

 

 

 19 groups, or through federal regulatory agencies. 

 

 

 22 we talked about the challenges t

 

 24 presently outside the realm of SEC regulation. In the

 25 part we talked about governance of the portion that li
 46 

can 

 2 better constitute the governance of corporations in America. 

 3 One of the things that Richard mentioned leads me, 

 5 discussion -- because we'll come to a natural close in about 

 6 20 minutes -- and that is: If you have properly constituted 

 8 how do you hold them to account? What's the best way, as 

 9 Richard says, to haul them before court or whatever, or throw 

t 

 11 the performance is there? 

 12 Our system in the United States works pretty well 

 14 world when it comes to the enforcement tools that both the 

 15 government and private actors possess. In this international 

 17 increasingly we can't do enforcement without cooperation from 

 18 other countries. Bread-and-butter enforcement cases of old, 

o 

 20 on, that might have been contained within the borders of the 

 21 United States of America might just as well today be 

 23 and the players all in different countries -- in part 

 1 clearly within the realm of SEC governance, and how we 

 

 

 4 I think, to what will be the third and final theme of this 

 

 

 7 the governance structure of a corporation in our system, then

 

 

 10 them in a jail or what have you, in order to make sure tha

 

 

 13 that way. Certainly, it's superior to any system in the 

 

 

 16 environment, global capital markets' convergence, 

 

 

 19 the pump-and-dump schemes, the boiler-room operations, and s

 

 

 22 multi-jurisdictional with the computers and the telephones 

 

 24 intentionally so that regulators and law enforcement have 

 25 diminishing interest in pursuing the wrongdoers because their
 47 

s 

 2 and nobody really owns the problem. 

 3 So we find ourselves in a position now where we've 

s 

 5 a year. Over 500 times this last year we've made demands on 

 6 foreign regulators, and over 500 additional times they've 

 8 when you look at the numbers just a few years ago, that's a 

 9 sharp, steep increase. 

 11 where we are today. I mean it's pretty easy to see where 

 12 we'll be in two or three years. 

 14 arms and that we can't do law enforcement any longer by 

 15 ourselves, what's the best way for the United States to true 

 17 world, so that we can be comfortable that we no longer need go 

 18 it alone? 

 20 think the question is bilateral or multilateral relationships 

 21 and if we need multilateral relationships, do we have the 

 teeth, 

 23 more power? Or is there some other organization that needs 

 1 activities are spread across so many different jurisdiction

 

 

 4 got to ask these other regulators for help hundreds of time

 

 

 7 made demands on us. So it's becoming the norm, and indeed, 

 

 

 10 And the trajectory is even more interesting than 

 

 

 13 Given that we've been thrust into one another's 

 

 

 16 up enforcement and the calibre of it around the rest of the 

 

 

 19 MR. DONALDSON: Can I throw that back at you? I 

 

 

 22 right entity out there, IASCO? Should that have more

 

 24 to be put together that will open up the cooperation -- 

 25 CHAIRMAN COX: But I'll accept your invitation
 48 

 2 former chairmen. And I'll be exceptionally brief. IOSCO is 

 3 an outstanding organization to bring different national 

 5 not either now or in my view in the foreseeable future going 

 6 to be any good as a global regulator. 

 8 actually do regulation, you're going to have to reduce it to 

 9 the level of the lowest common denominator and it will 

 11 important decisions by consensus, which I think is 

 12 appropriate in international forums such as that. And it can 

 together and share 

 14 information and even to have us all subscribe to the same 

 15 principles, as we're implementing our national regimes. But 

 17 regimes to get the real work done. 

 18 I would just throw into the mix here that our 

International Affairs and the SEC as a whole are 

 20 engaging in ways that you all started, and have really 

 21 blossomed. With our counterparts overseas we've trained this 

00 

 23 countries, who come here. We do it in their countries. It's 

big 

 1 purely for purposes of stimulating discussion among the 

 

 

 4 approaches together and potentially to converge them. It's 

 

 

 7 I think in a group of that size, if you attempt to

 

 

 10 account for very little. The group reaches most of its 

 

 

 13 do a lot of good to bring people

 

 

 16 it will fall to bilateral and possibly modest multilateral 

 

 

 19 Office of 

 

 

 22 year along over 1,000 people, 1,000 regulators from over 1

 

 24 really quite a deep engagement. So we're after it in a 

 25 way, regulator to regulator.
 49 

n 

 2 come by from you, who are the architects of a lot of these 

 3 programs, and who thought them up before they even existed. 

 5 MR. RUDER: Well, I'd just like to throw out the 

 6 word, "regulatory arbitrage," which is a buzz word for the 

 8 markets are regulated, and the problem that the capital will 

 9 flow to those markets that are less regulated. 

hink 

 11 that the capital will flow or should flow to the best 

 12 regulated market. But I've been very pleased in the past few 

 14 to persuade other governments to follow our path in some of 

 15 the regulation. I see that in the development of the audit 

 17 see it in the creation of the Caesar Group in the European 

 18 Union. And I know that you've been meeting with the Japanese 

 20 And I think that to try to persuade those 

 21 regulators that they need to have an optimum regulatory 

 23 right way to go. So it's your problem, Chris. 

y

 1 But we're looking for all the ideas that we ca

 

 

 4 So, over to you. 

 

 

 7 question of some markets being regulated less well than our 

 

 

 10 I happen to think that's wrong. I happen to t

 

 

 13 years to know that the Commission has been a leader in trying 

 

 

 16 regulation and similar to the PCAOB, in foreign markets; I 

 

 

 19 regulators and others. 

 

 

 22 system rather than a bottom-feeding regulatory system is the 

 

 24 MR. HILLS: I see it as working, Chris. 

 25 Thirty-three years ago the SEC -- we were complained about b
 50 

he 

 2 time people said it was none of our damn business, and worse 

 3 words. Today you find through all parts of the world a 

in the bribery issue. 

 5 As you know, we have centers, a foundation we work 

 6 with around he world, and each one of them at these 

 8 trying to find a way to replicate the effectiveness of the 

 9 SEC. One of the problems, of course, is they don't have a 

 11 enforce transparency. 

 12 One of the things this Commission can do is 

 14 The accounting profession is uneven around the world. The 

 15 ability -- I think it was Ernst & Young that decided to have 

 17 partnerships -- I think that's a step forward. I think the 

 18 Commission can encourage that. 

 20 world that is trying to find a way to have a system of 

 21 securities trading that's as honest and as transparent as we 

ing 

 23 is great. But my suggestion is that you can lean more on the 

ying to 

 1 a lot because we attacked the foreign bribery cases. At t

 

 

 4 genuine interest 

 

 

 7 universities in China, Korea, Indonesia, even Nairobi, are 

 

 

 10 plaintiff's bar, and they don't have a legal system that can 

 

 

 13 concentrate on the capacity of the accounting profession. 

 

 

 16 a single partnership rather than independent 

 

 

 19 In other words, I think there's a large part of the 

 

 

 22 are. And we are setting the example, and what you're do

 

 24 accounting profession to do what I think they're tr

 25 do.
 51 

 2 Chris, I was delighted to see you taking on the leadership of 

 3 the technical committee. I think I was actually the first 

was a dubious reward 

 5 doing that. But I thought at the time it was terribly 

 6 important for the Commission, as the by-far the largest and 

to 

 8 play a leadership role in the world. 

 9 We can't dictate that the rules in other countries 

 11 experience, and we can explain to people why our system, why 

 12 we care about bribery, why we care about insider trading, why 

 14 reasons, and they're born our of our experience in building 

 15 successful and competitive markets. 

 17 constant engagement by the Commission and its staff with 

 18 their colleagues overseas. You know, if you think about law 

ng to be a need presumably for 

 20 the FBI; well, there's also a need for Interpol. 

 21 And in law enforcement and in the securities 

 23 There will be cases that are simply between the U.K. and the 

 1 MR. BREEDEN: I think it's a fascinating issue, and

 

 

 4 technical committee chairman then. It 

 

 

 7 the oldest of the securities commissions around the world, 

 

 

 10 look like ours, but we can share our knowledge and our 

 

 

 13 our rules -- our rules exist for reasons, and they're good 

 

 

 16 And I really think there is not a substitute for 

 

 

 19 enforcement, there's always goi

 

 

 22 enforcement arena, I think you need bilateral arrangements. 

 

 24 U.S. or France and the U.S. or Japan and the U.S. And it's

 25 important to have a direct tie and a direct relationship.
 52 

 2 International Affairs when I set up the division, and he had 

 3 been in -- essentially the same effort under David in the 

d 

 5 signing memoranda of understanding on enforcement sharing. 

 6 And maybe we did too good a job, if you've got 500 cases a 

 8 something like that in the years I was there. 

 9 And I can remember quite vividly a meeting where we 

ficers 

 11 of Switzerland. Obviously a banking haven. And at the time 

 12 there had been the first entry of cooperation agreement 

 14 about the formal arrangements, and before we were 30 minutes 

 15 into the dinner, my people from enforcement and this 

tually had two cases that 

 17 were -- you know, one that the Swiss had we're very concerned 

 18 about in our direction, and the other way around. 

 20 you have bilateral relationships and the enforcement people 

 21 in both countries know each other and feel comfortable 

 23 At the same time I don't think that there is a 

 1 We signed -- Mike Mann was the first director of 

 

 

 4 enforcement division. And we made a huge effort to go aroun

 

 

 7 year coming in. But I think we signed 14, 18, 20 of them, 

 

 

 10 had in Zurich with one of the senior law enforcement of

 

 

 13 between Switzerland and the U.S. And we started out to talk 

 

 

 16 gentleman launched into it. They ac

 

 

 19 And so there's a tremendous, I think, benefit when 

 

 

 22 sharing information. 

 

 24 substitute for having a multilateral effort as well, and 

 25 Iasco is the only organization we have. I wish it had
 53 

 2 Banking Committee. I mean maybe more in the way of a small 

 3 secretariat or something. But I think as complicated as it 

 5 relationships and the multilateral, and keep working 

 6 together, because in the end there is a community of 

 8 world. 

 9 There will always be people who don't do it, and 

 11 think you and Roel Campos, and a number of the Commissioners 

 12 here over the last years, have worked very hard to continue 

ity 

 14 arrangements and others that you have pushed through to show 

 15 it's a two-way street, America is willing to cooperate, and 

 job. 

 17 MR. COOK: But is the concern with commercially 

 18 recognized countries or rogue countries, or both? Rogue I 

 20 CHAIRMAN COX: That's a good question. 

 21 MR. COOK: Like offshore gambling. 

ink 

 23 our approach, at least thus far, has been centered on the 

 of 

ther

 1 perhaps more institutional strength, similar to the Bosel 

 

 

 4 looks, I think you got to keep after the bilateral 

 

 

 7 regulators and there should be a common interest around the

 

 

 10 whose heart isn't in it. But if you can keep working, as I 

 

 

 13 to build through both the contacts and also the reciproc

 

 

 16 the SEC is a good partner. And that's a never-ending

 

 

 19 mean by some Caribbean island. 

 

 

 22 CHAIRMAN COX: It's a good question, and I th

 

 24 major markets, with a view to trying to build a coalition

 25 high standards countries. Hopefully the outliers will ei
 54 

t 

 2 way, or alternatively over time we'll get them too. 

 3 But I think from my own standpoint, starting with 

 5 investment is, is the best way forward. 

 6 MR. PITT: I'd just like to make a few observations 

 8 years done a terrific job of its outreach, and I really 

 9 congratulate both you and Ethiopus Tofar. I think there have 

s 

 11 one way to do this; although that's going to take a long 

 12 time. 

 14 IASCO is not going to be the vehicle, and for a number of 

 15 reasons, including political with a small "p" reasons. I 

 17 entity that does this. I think it can do a lot of good in 

 18 the areas it's working in. 

 20 proceeding with unilateral-bilateral agreements, as has been 

 21 discussed already. I think that's going to solve some of the 

ing a terrific 

 23 job on negotiating those agreements. k 

 1 remain outliers and modest size and be marginalized in tha

 

 

 4 major market centers where most of the throwaway of

 

 

 7 on this. I think the Commission has over the last several 

 

 

 10 been a lot of very impressive initiatives, and I think that'

 

 

 13 I also happen to agree with your assessment that 

 

 

 16 think there are risks associated with IASCO becoming the 

 

 

 19 But I think that what's really required are one, 

 

 

 22 problem, and it has, and the Commission is do

 

 24 But I think the other thing is coming up with some 

 25 form of regulatory/enforcement body that represents global
 55 

 2 specific authority -- and it may be impossible to get that in 

 3 the short term, anyway. 

h 

 5 everyone can discuss how we bring regulatory convergence as 

 6 well as enforcement convergence to the world really ought to 

 8 that, particularly if the SEC were willing to participate in 

 9 performing that, I think, would go a long way to say "We're 

 11 Obviously, we're always going to protect investors. We're 

 12 not necessarily going to give up authority, but want to find 

on way of handling global issues, both on a regulatory 

 14 and an enforcement basis. 

 15 And I think an organization that's really designed 

ok 

 17 at the success that the IASB has had, and the Commission's 

 18 incredible support of what the IASB has done, I think that 

nt to the rest of the world that 

 20 American geocentrism may be waning, and that the SEC is a 

 21 participant, not necessarily dictating how things come out. 

 23 variety of regulatory areas, exchange regulation in 

 1 viewpoints,. I'm not sure that it would need to have 

 

 

 4 But I think having an organization in whic

 

 

 7 be useful, and the U.S. by being willing to participate in 

 

 

 10 part of the world community, we want to work with you." 

 

 

 13 a comm

 

 

 16 to come up with new ideas would be very useful. If you lo

 

 

 19 has made a dramatic stateme

 

 

 22 I think trying to get to those points in a whole 

 

 24 particular, now that you have global mergers of stock 

 25 exchanges, and so on, is absolutely critical to the
 56 

 2 leadership role to play. 

 3 So I would think working toward that kind of result 

ink can 

 5 do a lot of good. And while it may not be, you know, a 

 6 complete answer to all this, I think the Commission should be 

 8 continue doing it. You are clearly headed, in my view, in 

 9 this area on the right path. And I think there will be 

is 

 11 year. And I think it may take longer. But I think you're 

 12 moving in the right direction, and you should keep up with 

 14 CHAIRMAN COX: Well, we are now at the point in the 

 15 program where I'm going to invite you to say whatever you want, 

 17 encourage you to think of this as an opportunity to be 

 18 provocative, controversial, headline-grabbing, sensational, 

 20 (Laughter.) 

 21 INVITATION TO OPEN DISCUSSION 

 23 MR. DONALDSON: I started it all -- 

 1 Commission, and the Commission has a very important 

 

 

 4 in a way that's seen as collegial and cooperative I th

 

 

 7 commended for what it's doing, and I think you should 

 

 

 10 success from it. It's just probably not going to come th

 

 

 13 it. 

 

 

 16 just in closing here, to help us wrap up. And I would 

 

 

 19 or shamelessly complimentary to the current Commission. 

 

 

 22 CHAIRMAN COX: Bill, do you want to start? 

 

 24 CHAIRMAN COX: All right. We'll start with 

 25 Richard, if you want?
 57 

 2 complimentary. I've been very proud to see many of the 

 3 initiatives the Commission is doing. I think we have all 

 5 difficult 12 months. I sit on the board of a major European 

 6 bank, and the problems are certainly not just American, and 

of 

 8 stability of capital markets that we've seen in the last 20, 

 9 30 years. 

 11 The subprime market mess has cost a lot of people an enormous 

 12 amount. I think we have found out that regulatory systems, 

 14 internationally, don't work as well as would like them to 

 15 work. In spotting risks and figuring out methods to 

 17 and the other central banks do not have a handle on risk 

 18 that's any better than that of the SEC, or any other 

 20 I think all the regulators, all the rating 

 21 agencies, most big investors, the whole market was evidently 

 the depth of 

 23 the risks and how far these instruments had permeated around 

wnturn 

 1 MR. BREEDEN: Well, I'll be shamelessly 

 

 

 4 gone in the market through the last months, perhaps the most 

 

 

 7 we've gone through probably the most difficult issues 

 

 

 10 So it's been a dangerous time in regulatory terms.

 

 

 13 both securities and banking, both the U.S. and 

 

 

 16 controlling them, it's perfectly crystal clear that the Fed 

 

 

 19 regulators around the world. 

 

 

 22 a little bit asleep at the switch in realizing

 

 24 the world and the risk that could -- if there was a do

 25 that lasted any period of time -- could be imposed
 58 

 2 And I think there's a real challenge there over the 

 3 next year or two or three for regulators to put their heads 

 5 the securities regulators, U.S. and around the world, to 

 6 think through what would be better ways of disclosure, better 

r 

 8 risk-taking, to build a stronger system. 

 9 I was disheartened would be the mildest term I can 

 11 appeared to contemplate the SEC's ceasing to exist, and that 

 12 because someone decided to intervene in a major securities 

 14 needed. Maybe I read the plan wrong. 

 15 But I think the SEC is still very much needed. I 

and 

 17 balance and values, and protects investors not just here but 

 18 helps make the world markets what they are. And I hope that 

the 

 20 future will ensure agencies have responsibilities that change 

 21 at the margins. But this is an agency that remains intensely 

 23 today's markets. And so hang in there. 

 1 systemically. 

 

 

 4 together across industry lines, both the central banks and 

 

 

 7 transparency in the marketplace, better accountability fo

 

 

 10 think of to read of a plan emanating from the treasury that 

 

 

 13 firm, Bear Stearns, that suddenly the SEC is no longer 

 

 

 16 think this is an institution that provides stability 

 

 

 19 Mr. Chairman, yourself and your successors long into 

 

 

 22 relevant, perhaps more relevant than it's ever been, to 

 

 24 MR. HILLS: Maybe I could express on behalf of Brad

 25 and myself the appreciation for how the rest of your have
 59 

 increased the reputation in the 31 years since 

 2 I left. If I go to Nairobi or I go to Jakarta, and I say I 

 3 was once the Chairman of the SEC, I get a lot of respect, 

 5 MR. PITT: I'm not prone to giving provocative or 

 6 controversial comments -- 

 8 MR. PITT: I apologize. But, I think that there is 

 9 a real issue with respect and in a sense your last question, 

 11 is fundamental changes in the regulatory system. My concern 

 12 is I think there is a real need for the SEC. I think there 

 14 But I think that the problem for the Commission is 

 15 maintaining its relevance in a world that is light years away 

 17 myself, but I think it's probably true for Bill as 

 18 well -- even for the two most recent SEC chairmen -- this 

 20 the world I think any of us had to confront. I think these 

 21 issues are very complicated, and although I am never in 

 23 easy solutions to any of this. 

 1 maintained and

 

 

 4 thanks to all of you. 

 

 

 7 (Laughter.) 

 

 

 10 Chairman Cox, is very similar to your first question, which 

 

 

 13 are many things that the SEC can bring to bear. 

 

 

 16 from the world any of us -- even -- I'll certainly speak for

 

 

 19 world today that you are confronting is very different from 

 

 

 22 doubt, even though I'm seldom right, I don't think there are 

 

 24 But I do think that the Commission has an 

 25 opportunity here to lead the discussion instead of, shall we
 60 

 2 as a thoughtful effort to get issues on the table. The irony 

 3 I think is that in the early '90s when the democrats 

d the Senate, there were similar 

 5 proposals that were rejected then by the republicans, who 

 6 were opposed to that. 

 have come up ever since the SEC was 

 8 created. I think they'll continue to come up. But I don't 

 9 think the answer is to sort of beat our chests and say the 

 11 great agency. I think it has an illustrious history. But I 

 12 think it's also a wake-up call to sort of say: How to we 

 14 anyone's expectations?, beyond anything any of us could have 

 15 imagined, including -- and I don't mean to sound 

 17 who ought to be as taken by surprise by the developments of 

 18 the last month, as all the rest of us were. 

 20 changes. But having had them, my strong recommendation is 

 21 that rather than run from the issue, or rather than hide 

e 

 23 best way. And there's truth in that point. It's just a 

ading the

 1 say, being led in the discussion. I view the treasury report 

 

 

 4 controlled Congress an

 

 

 7 These issues

 

 

 10 SEC is the world's greatest agency. I think the SEC is a 

 

 

 13 become even more relevant in a world that's changed beyond 

 

 

 16 startled -- including the current members of the Commission, 

 

 

 19 Because nobody necessarily saw a lot of these 

 

 

 22 behind the issue, the way we've always done is always th

 

 24 question of how much truth. 

 25 I really think the Commission should be le
 61 

 2 administered, not just in this country, but throughout the 

 3 world. There's a real need for thoughtful and careful 

 5 And I will throw out one sort of observation. If 

 6 you look at what happened with Bear Stearns, okay? -- and 

 8 the things that the Commission has unique perspectives on is 

 9 what lessons can we take -- not who's to blame, because there 

to 

 11 be broad, or there may not -- but what lessons do we learn 

 12 about our regulatory system? What ways can we improve its 

 14 And I really think that the Commission should be at 

 15 the forefront of that discussion, rather than having other 

t, or if it 

 17 does exist how it should exist. I think it's always better 

 18 to try and be in a leadership role on what is clearly a very, 

 20 MR. COOK: Well, this agency has always been very 

 21 nimble. It's got the best talent that you can find in any 

ould 

 23 be leader in any kind of regulatory process that evolves out 

so to you employees who are here 

. So good luck.

 1 discussion of how financial services should be regulated and 

 

 

 4 consideration. 

 

 

 7 we've all read and seen various different things -- one of 

 

 

 10 may be people to blame, there may be cases that are going 

 

 

 13 effectiveness? 

 

 

 16 people tell it whether I should exist or not exis

 

 

 19 very important issue, going forward. 

 

 

 22 government. And I feel that under any circumstances it w

 

 24 of the recent debacle. And 

 25 in the room, you're the best
 62 

 2 MR. RUDER: I'd just like to emphasize the concept 

 3 of the SEC as an independent agency. I agree that the 

l seemed to be pushing towards the lowering of 

 5 the Commission's independence. And I think it is extremely 

 6 important that the agency retain its independence, its 

 8 own financial system and within its role in the world. 

 9 At the same time, it must play a leadership role 

 11 important, Chris, that the Commission continue in its role, 

 12 not only now but in the future. And whatever legacy you can 

 14 MR. DONALDSON: I think from what everybody said, 

 15 we all share a great respect for the SEC. I think that comes 

 17 One of the things I worry about in terms of the SEC 

 18 providing too much of a leadership position here is that we 

 20 great and we think we should be leaders. What goes through 

 21 my mind is trying to really understand what's going on here. 

 23 And I fear that this solution may be thrown to the 

 1 Thank you 

 

 

 4 Paulson proposa

 

 

 7 regulatory posture within any possible restructuring of our

 

 

 10 and be cooperative in whatever it's doing, and I think it is 

 

 

 13 leave for your successor I think you should. 

 

 

 16 from everybody sitting on this side of the table. 

 

 

 19 do have our own biases. I mean we think the SEC is pretty 

 

 

 22 What's brought us to this stage we're at? 

 

 24 politicians. It may be thrown in a biased way. Again, I 

 25 guess what I'm sort of calling for is some kind of an
 63 

ation, a Commission, or whatever you want 

 2 to call it, to take a look at the circumstances we find 

 3 ourselves in. Maybe can lead in putting that together, but 

 5 regulatory agencies in the country. 

 6 I don't know we really understand yet what happened 

 8 some agency -- but I don't really know whether we should have 

 9 been on top of the subprime thing long before it happened, 

 11 But I do believe that we need to, before we get 

 12 into the next political environment that we're going to be at 

 14 together some independent thought and be willing to not 

 15 dominate it ourselves, but be willing to be partners with 

 17 community. 

 18 CLOSING REMARKS 

 20 This has been absolutely fascinating and enjoyable, and I 

 21 hope that this discussion was as enjoyable and illuminating 

 23 watching electronically as it has been for me to chair it. 

is

 1 independent investig

 

 

 4 it seems to me it has to have strong voices from the other 

 

 

 7 here. I don't know -- not because I want to find fault with

 

 

 10 whether we the SEC or the whomever. 

 

 

 13 the end of this election year, I really think we need to get 

 

 

 16 some thinkers from other parts of the financial regulatory 

 

 

 19 CHAIRMAN COX: Well, thank you, each one of you. 

 

 

 22 to all the people here in the auditorium and all the people 

 

 24 I'd like again to thank six of the past chairmen

 25 from this agency, six of the eight living chairmen. So th
 64 

 2 to each of you, and since you were so generous in thanking 

 3 the current professional staff and Commission, I want to, in 

 5 This is a remarkable American institution. It will 

 6 undoubtedly prosper and continue to play a leading role, not 

 8 markets, but in cooperation with our regulatory counterparts 

 9 around the world, the world's capital markets. And it is, as 

, in large measure thanks 

 11 to what you have been the architects of and what you've built 

 12 here. 

 14 at the SEC celebrating with you the SEC's 75th anniversary 

 15 starting in a just a few months, and celebrating even this 

you 

 17 and ask everyone present to give a rousing show of 

 18 appreciation to the former Chairmen of the Securities and 

 20 (Applause.) 

 21 CHAIRMAN COX: Thank you and good evening. 

 23 adjourned.) 

 1 is really quite a spectacular event for us. We are indebted 

 

 

 4 turn, thank each of you for what you've helped build here. 

 

 

 7 only in regulating and undergirding America's capital 

 

 

 10 I've said throughout this discussion

 

 

 13 For all of us here in the auditorium, for all of us 

 

 

 16 year the 75th anniversary of the '33 Act, I want to thank 

 

 

 19 Exchange Commission. 

 

 

 22 (Whereupon, at 4:45 p.m., the meeting was 

 

 24 

 25