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Glassman Explains Regulatory Viewpoint

Commissioner Cynthia Glassman clarified her views on a number of recent actions taken by the SEC and discussed some of its upcoming initiatives in a June 15 speech at the Exchequer Club in Washington, D.C. Glassman said the recent split votes on SEC rulemakings reflected philosophical differences on how much to permit the markets to work freely and how much to regulate them. The regulation that was the subject of the split votes increases the possibility of unintended consequences, in her view, which then can require additional regulations to remedy. Glassman's remarks were posted on the SEC's Web site.

Glassman said she is not opposed to regulation in general, just to regulation that lets the SEC micromanage how markets or regulated entities operate. For instance, she does not believe it is appropriate to tell mutual fund boards how they should be structured, as the majority did with the independent chair rule. She also described her views on corporate penalties. While Glassman said she has at times sought higher penalties and other sanctions on individuals, she cannot justify imposing penalties indirectly on shareholders when they have already lost investment value due to fraud. The Fair Funds provisions of the Sarbanes-Oxley Act result in shareholders paying corporate penalties which are then returned to them, minus the distribution expenses, she explained, which makes no sense to her.

Glassman said that a consistent theme in the SEC's enforcement and rulemaking activities is the need for clear and accurate disclosure. She said the whole disclosure program may have to be reexamined, including the mutual fund disclosure regime. The SEC is considering rulemaking to reduce investor confusion about the differences in broker-dealer and investment advisory regimes and may conduct a longer-term study on the need to rationalize their regulation, she advised.

Glassman addressed the first year's experience with section 404 reporting on internal controls and said there is no doubt in her mind that the implementation was misdirected. The SEC and the PCAOB must ensure that their guidance and statements to the industry are being heard or she will strongly urge that additional steps be taken, including a reconsideration of the elements of the PCAOB's Auditing Standard No. 2, if necessary.

Glassman expressed hope that the SEC will take action on soft dollars in the coming months and said she wants proprietary and third party research to receive equivalent treatment. She reported progress on Regulation B, but said whether it will be extended past September depends on the timing of the new SEC chairman's arrival and how much progress has been made on an acceptable solution.

Going forward, Glassman hopes the Commission will do a better job of tailoring its regulations to the problems they are intended to address. She repeated that she is not against regulation, but does not support regulation that is overly broad, misdirected or that imposes costs and burdens that far exceed the intended benefits. She noted that upon her arrival at the SEC, then Chairman Harvey Pitt asked her to review the SEC's rules and regulations to ensure that they are accomplishing their intended objectives in an effective manner. The project was derailed by intervening circumstances, she said, but she hopes to return to it soon.