AFTER THE STORM:
RECOVERING, REBUILDING, REVITALIZING
Remarks of Marc E. Lackritz
President, Securities Industry Association
SIA Southern District Meeting
May 16, 2003
For Dickens readers, it has been the best of times, and the worst of times.
For James Taylor fans, "We've seen fire and we've seen rain. We've seen sunny days that we thought would never end. We've seen lonely times when we could not find a friend."
And for cliché lovers, I've got good news and bad news.
The good news is that the securities industry's three-year recession appears to be behind us. Gross domestic revenue of $147 billion in 2002 was 40 percent below 2000's record $245 billion. Domestic pre-tax profits fell to an eight-year low of $7 billion in 2002, or one-third the record $21 billion the industry posted just two years ago. In addition, securities firms have cut more than 10 percent from their payrolls since April 2001.
But the plunge in industry revenues and profitability appears to have bottomed out in late 2002. Fixed-income trading helped boost profits to an estimated $1.7 billion for the first quarter 2003, and gross revenues, estimated at $38.5 billion, were eight percent above fourth-quarter 2002 levels and roughly matched results for the same quarter last year.
The markets, too, are rebounding from three years of consecutive losses. With the war in Iraq behind us, and the economy showing signs of life, the markets are up slightly for the year. Investors have shown renewed optimism that low interest rates, the recently enacted tax-cut plan, and consumer confidence could further boost the economy.
More good news is that we have a new, capable, thoughtful and politically adept SEC Chairman, Bill Donaldson, whose initial decisions and early steps - such as appointing Bill McDonough as Chair of the new Public Company Audit Oversight Board and overseeing implementation of the global settlement - have already helped to enhance the SEC's luster, morale, and respect. Chairman Donaldson's leadership will undoubtedly help us meet our mutual challenge of restoring the public's trust and confidence in our capital markets.
The bad news, though, is that the very trust and confidence we are working so hard to re-establish has reached all-time lows. By year-end 2002, the public's trust and confidence had dropped to the lowest level since SIA began measuring it eight years ago. And, although the monthly UBS/Gallup Index of Investor Optimism recorded its largest one-month gain in April 2003, the investing public is still angry. The telephone lines of radio talk shows are jammed with livid investors reeling from their losses. Major newspapers feature front-page stories reporting on accounting, auditing, and corporate scandals, and allegations against our research analysts, diminishing faith and trust in the capital markets and the securities industry.
Increasing our challenge is the desire of politicians and regulators to "do something" to address corporate wrongdoing, bad faith behavior, and outright criminal conduct. As a result, we find ourselves at a dangerous intersection of a bull market in new regulations and increasing industry costs at the same time that we face plummeting investor confidence, uncertain markets, and falling revenue.
Our ability to change, to convert challenges into opportunities, and to create and innovate are the hallmarks of our industry. That is why SIA has developed an ambitious program containing four key elements - advocacy, values, education, and communication - to help restore the public's trust and confidence in our capital markets and our industry.
In the advocacy arena, we have been actively involved in the effort to improve the quality of information to investors without raising costs on the industry. We helped implement scores of new regulations and policies governing disclosures in research reports and analysts' behavior. We also worked with Congress in the enactment of the Sarbanes-Oxley Act, the toughest set of investor protection rules in the industry's history. With that came the establishment of a new accounting watchdog, the Public Company Accounting Oversight Board, charged with setting audit firm standards and overseeing quality control, ethics, and independence issues. Importantly, the PCAOB has real power to discipline accountants.
A further improvement to the quality of information is the new standard created by Standard & Poor's to measure core earnings. The revisions provide for consistency and transparency as well as a clearer definition of "core earnings." Finally, we are also working to harmonize accounting standards.
A critical component of SIA's advocacy agenda is the enactment of incentives to help Americans save and invest. Last summer, SIA urged the Treasury and Administration to eliminate the double taxation of dividends, raise the capital loss deductible carryforward, and expand retirement savings incentives. The enactment of such proposals would provide a strong boost to the economy by encouraging more Americans to invest. In turn, that investment will generate more capital that companies can use to expand and create jobs.
The sharp reduction in the dividend and capital gains tax rates contained in the recently enacted $350 billion tax-cut plan will have a major impact on the capital markets and the cost of capital, and will significantly benefit investors. Congress should follow up on that accomplishment by passing legislation that will allow employees to have greater access to advice about how to manage their investments in their employer's retirement savings plan. One specific measure we are advocating is the House-passed Pension Security Act (H.R. 1000), which would allow companies to let their pension-plan providers offer expert advice to employees.
Federal privacy protections mandated by Gramm-Leach-Bliley have given consumers control over who sees and utilizes their personal financial information. SIA has devoted considerable time and energy in Congress and the statehouses to defeat legislation that went far beyond the Gramm-Leach-Bliley standards and would have undermined our firms' ability to offer a broader range of products and services to more consumers. If each state were to adopt its own privacy laws, the ensuing complications of this balkanization would hurt the very people the states are trying to protect.
The most important thing we can do to restore the public's trust, however, starts at home. We must return to our core value of always putting the customers' interests first. Whether it is through the adoption of best practices, effective self-regulation, tough new laws, expanded educational programs, or improving the quality and integrity of the people in our business and professions, we must live and work by our values, lead by our actions, and do right by our customers.
Toward that end, we have also placed a renewed emphasis on teaching values, ethics, and leadership in our schools and institutions. We started with our own Securities Industry Institute, where we've enhanced our ethics and governance curriculum. For investors, we have expanded our investor education Web site and added new brochures to our extensive library of reading materials available online and in print. The Stock Market Game program is critical to our efforts to educate hundreds of thousands of students every year in the fundamentals of saving and investing.
Not only must we change our behavior, we must communicate those changes to the public. We can increase our outreach efforts to our communities and our colleagues, and we can put an end to negative advertising. If we focus instead on the positive story we have to tell about the capital we raise, the jobs we help finance, and the dreams we help our customers achieve, we will take great strides to restore faith in our markets and our industry.
We face an enormous challenge to recover, rebuild, and revitalize in an uncertain environment. New enforcement actions for various infractions, as well as the prospect of civil lawsuits resulting from the recent global settlement, cast a long shadow on our future. The economy has shown signs of sputtering back to higher growth and low inflation, and dividend tax relief will certainly stimulate it and the markets further. But if the economy gets rolling again, and we get back to the basics of always putting the customer's interests first, we will begin to win back the trust and confidence of investors, and next year we can talk about returning once again to sunny days for our economy, our customers, and us. Thank you.
