Remarks of SEC Commissioner Roel C. Campos

Case Western Reserve Law Review Volume 55 | Issue 3 2005 Remarks of SEC Commissioner Roel C. Campos Roel C. Campos Follow this and additional works at: https://scholarlycommons.law.case.edu/caselrev Part of the Law Commons Recommended Citation Roel C. Campos, Remarks of SEC Commissioner Roel C. Campos, 55 Case W. Res. L. Rev. 527 (2005) Available at: https://scholarlycommons.law.case.edu/caselrev/vol55/iss3/5 This Symposium is brought to you for free and open access by the Student Journals at Case Western Reserve University School of Law Scholarly Commons. It has been accepted for inclusion in Case Western Reserve Law Review by an authorized administrator of Case Western Reserve University School of Law Scholarly Commons. REMARKS OF SEC COMMISSIONER ROEL C. CAMPOSt INTRODUCTION I would like to thank Dean Gerald Korngold and George Dent for inviting me to this symposium. As an SEC Commissioner, appointed by the President in 2002, I came to the table with experiences that would allow me to have a balanced approach to regulation and enforcement. During my career, I have been a federal prosecutor, a corporate transactional attorney, an in-house general counsel, and an entrepreneur and business owner. In other words, I have lived on both sides of the regulatory table. In this paper, I will give you my views on some of the more important corporate governance reforms resulting from Sarbanes-Oxley and changes in self-regulating organization (SRO) listing standards, with a focus on the need for independent boards and highly independent audit committees. I will also speak frankly about director liability and responsibility in today's corporate and regulatory environment. Finally, I will give you my view on shareholder access and end with a note on business and legal ethics. I. SARBANES-OXLEY As you know, the Commission has been extremely busy, as we have recently wrapped up implementing a number of the mandates of the Sarbanes-Oxley Act of 2002.' The Act was passed on the heels of the series of recent corporate failures including Enron, Andersen, WorldCom, and Tyco, just to mention a few, but also evident in the older cases of Waste Management, Sunbeam, and others. SarbanesOxley is a landmark piece of legislation that was the first comprehent Commissioner, United States Security and Exchange Comission (2002-present). J.D. Harvard Law School; M.B.A., University of California, Los Angeles; B.S., United States Air Force Academy. These remarks constitute the views of the author and are not necessarily the views of other S.E.C. Commissioners, the S.E.C., or its staff. Pub. L. No. 107-204, 116 Stat. 745 (2002). 527 CASE WESTERN RESERVE LA W REVIEW [Vol. 55:3 sive overhaul of the U.S. federal securities laws since the laws were first adopted in 1933 and 1934. The legislation is particularly remarkable because it addresses virtually every participant in the capital markets, including independent auditors, public companies' officers, and boards of directors, audit committees, attorneys, broker-dealers, credit rating agencies, and investment advisers. It creates a new era of accountability in that the law is designed to ensure that all participants in the capital markets are held accountable and ultimately act in the best interests of shareholders. II. TODAY'S Focus My focus today will be on issues for the corporate board and management, with a particular focus on issues the audit committee should be thinking about. I would like to start by discussing a few issues relating to Sarbanes-Oxley as well as the somewhat recent listing requirements that are now in place at the NYSE and NASDAQ. I do not need to tell this audience how the environment has dramatically changed since the bursting of the bubble of early 2000 and the corporate scandals that ultimately emerged. Certainly, from my perspective as an SEC Commissioner, it seems like there has been no letting up with respect to the amount of wrongdoing in our securities markets. Yet, I am an optimist, and I believe that recent legislative, regulatory, and SRO reforms have helped, and will continue to help, our securities markets maintain investor confidence. I know that you appreciate the importance of investor confidence in the securities markets, which, of course, includes trust in financial statements of public issuers. In my view, financial statements and other financial information are among the key sources of marketmoving information. Stock prices may go up or down the instant that a press release containing quarterly or annual earnings information is issued. It is the importance and integrity of this financial information that Sarbanes-Oxley seeks to address through different means, among other things, through: " strengthening board and, specifically, audit committee independence; " auditor independence; * stiffer penalties for fraudulent disclosure; * more disclosure with respect to non-GAAP financial measures and off-balance sheet transactions; and, 2005] * REMARKS OF SEC COMMISSIONER ROEL C. CAMPOS 529 of course, the establishment of the Public Company Accounting Oversight Board (PCAOB). In addition to Sarbanes-Oxley, there have been significant developments at the NYSE and NASDAQ where listing standards have been strengthened through additional corporate governance requirements. These requirements, which I will discuss in more detail later, nicely complement those of Sarbanes-Oxley. A. Audit Committees In speaking about independence, I want to focus first on audit committees. It goes without saying that there is an increased focus on audit committees and their roles in overseeing financial statements. Dating back as far as the early 1940s, the Commission has recognized the importance of audit committees and has sought to encourage effective and independent audit committees. In this regard, Section 301 of Sarbanes-Oxley required the Commission to engage in rulemaking with respect to the independence of audit committees. In response, the Commission promulgated Rule 10A-3, which imposes, among other things, requirements on audit committee members that are in addition to the NYSE and NASDAQ listing requirements. Specifically, audit committee members: (1) cannot directly or indirectly accept any consulting, advisory, or other compensatory fees from the company or any subsidiary except for directors' fees and fixed compensation under a retirement plan (for prior service) and (2) cannot be "affiliated persons" of the company or any of its subsidiaries. In my opinion, these stringent independence requirements were much needed. While there are certainly other problems that independence cannot fix, having strong and independent oversight by the board to keep management "in check" is a necessary framework. In fact, the 1998 Blue Ribbon Committee report, which was issued by a committee that was sponsored by the NYSE and NASDAQ, pointed to "recent studies" that showed a correlation between audit committee independence (...truncated)