Mr. Chairman, thank you for scheduling this very important hearing on the Global Settlement in such a timely manner. In many ways, this is one of the most significant securities settlements in history. It address issues at the heart of our markets and the structure of our financial system. It responds directly to the exploitation and manipulation of investor clients by stock analysts and their firms. It reveals a pattern of conduct that violates fundamental principles of a securities firm's responsibilities to its clients and systemic conflicts of interest within the industry.
This was not a matter of a few "bad actors;" rather, it involved major firms and was a fundamental breakdown in the system. The magnitude of the abuses disclosed in the global settlement cannot be overstated. As the press release announcing the settlement reads, "The regulators found supervisory deficiencies at every firm" - every firm.
The documents released by the Commission present a stark picture of the ways in which individual investors were given short shrift or, worse, held in contempt by the analysts and firms on whom they relied for guidance and advice in making investments. They include references of breathtaking cynicism about the "little guy" who did not understand the "nuances" of Wall Street, and "John and Mary Smith who are losing their retirement." As the Financial Times wrote in an editorial on April 29, "It is difficult to imagine anything worse in business than trusted professionals pushing toxic products at gullible consumers. That is the shameful picture that emerges from the evidence published [yesterday] behind the . . . global settlement." And Gretchen Morgenson, writing in The New York Times on the same day said that, "Wall Street firms, in pursuit of investment banking fees, put the interests of their individual clients dead last."
These are harsh assessments of our capital markets, whose high standards of market integrity and investor protection have traditionally made them the envy of the world. We enacted reform legislation last year to ensure that our markets would again adhere to high standards, and deserve the confidence of investors, and I hope very much the global settlement will take us further in that direction. I commend the regulators, especially New York State Attorney General Eliot Spitzer and SEC Enforcement Director Stephen Cutler, for their perseverance and determination in carrying out their investigations. They both have made a singular contribution to the public interest.
At the same time, however, it is clear that much remains to be done. The issue is not closed. An editorial in The Baltimore Sun on April 30 observed, "Wall Street doubtless hopes this deal marks the last chapter in this debacle. Like many stock ratings that's far from the truth."
Today's hearing gives us an opportunity to focus specifically on some of the many issues raised by the settlement. I look forward to exploring with our witnesses address the following questions:
How is it possible that the regulators could have missed for so long the supervisory problems at all 10 of the nation's top investment firms? What steps are the SEC and the self-regulatory organizations taking to prevent a re-occurrence?
Given that supervisory deficiencies were found at every firm, why have none of the supervisors in any of these firms been held accountable in the settlement? Where were the supervisors within the firms themselves?
Can we be confident that this global settlement will result in lasting change?
Does Wall Street, in fact, care about the interests of the individual investor any more?
Where were the self-regulatory organizations? How adequate are the self-regulatory mechanisms on which our securities markets rely? The Director of Investor Protection at the Consumer Federation of America pointed out that, "We have a whole system in place that's designed to prevent these sort of abuses, and it's not as though there wasn't evidence of a problem." Yet, she argues, the self regulatory organizations took no action until pushed by this investigation.
How can the relationships between State and Federal securities regulators be strengthened so that the States are given adequate credit for and encouraged to pursue investigations wherever they may lead?
Given the magnitude of the conflicts of interest that were exposed, is further independent fact-finding needed to assess exactly what went wrong and what further needs to be done?
A number of eminent securities lawyers, including Judge Stanley Sporkin, former SEC Director of Enforcement, Irv Pollack, former SEC Commissioner and head of the Division of Enforcement and Market Regulation and Dean Joel Seligman of the Washington University School of Law in Saint Louis, have suggested a broad review of our securities markets, on the model of the SEC special study of the markets initiated in 1961. And I urge the SEC to seriously consider this suggestion.
As a number of people have said, this global settlement marks the beginning and a first step towards restoring investor confidence to our markets.
Finally, while Chairman Donaldson was confirmed after most of the global settlement had already been negotiated I want to commend him on his leadership at the Commission to date. For those who believe that certain CEOs on Wall Street "just don't get it" I believe that Mr. Donaldson does.