FINAL JUDGEMENT ENTERED AGAINST FORMER CFO OF QUEST COMMUNICATIONS

The following excerpt is from the SEC website:

February 28, 2012
“COURT ENTERS FINAL JUDGMENT AGAINST FORMER CFO OF QWEST COMMUNICATIONS INT’L ROBERT S. WOODRUFF
The U.S. Securities and Exchange Commission announced today that the United States District Court for the District of Colorado entered a Final Judgment dated February 3, 2012, in a civil action against Robert S. Woodruff, the former chief financial officer of Qwest Communications International Inc., a Denver-based telecommunications company. Woodruff, without admitting or denying the Commission’s allegations, consented to the entry of a Final Judgment that enjoins him from violations of Section 17(a) of the Securities Act of 1933, Sections 10(b) and 13(b)(5) of the Securities Exchange Act of 1934 (Exchange Act) and Rules 10b-5 and 13b2-1 thereunder, and from aiding and abetting violations of Sections 13(a) and 13(b)(2) of the Exchange Act and Rules 12b-20, 13a-1, 13a-11, and 13a-13 thereunder; finds that he is liable for disgorgement of $1,731,048, plus prejudgment interest of $640,427, imposes a civil penalty of $300,000; and prohibits him from acting as an officer or director of a public company for a period of five years. It is anticipated that the Commission will ask the Court to add the disgorgement, interest and penalty to a Fair Fund which was established in SEC v. Qwest Communications, Inc., Civ No. 04-cv-1267 (D. Colorado). The Commission thus far has distributed approximately $275 million from the Fair Fund to harmed investors
According to the SEC’s complaint, from at least April 1, 1999 through March, 2001, Woodruff and others at Qwest engaged in a large-scale financial fraud that hid from the investing public the true source and nature of the company’s revenue and earnings growth. The complaint alleged that, although Qwest publicly touted its purported growth in services contracts which would provide a continuing revenue stream, in fact, the company fraudulently and repeatedly relied on revenue recognition from one-time sales of assets known as “IRUs” and certain equipment without making required disclosures. The complaint also alleged that Woodruff and others fraudulently and materially misrepresented Qwest’s performance and growth to the investing public. The complaint further alleged that Woodruff sold Qwest stock in violation of the insider trading prohibition of the securities laws."

U.S. TREASURY SECRETARY TIM GEITHNER ON FINANCIAL CRISIS REFORMS

The following excerpt is from a Department of the Treasury e-mail:

 You are subscribed to Wall Street Reform for U.S. Department of the Treasury.
Geithner Op-Ed: ‘Financial Crisis Amnesia’

  WASHINGTON – In an op-ed to be published in the March 2, 2012 edition of the Wall Street Journal, Treasury Secretary Tim Geithner discusses the perils of financial crisis amnesia, contrasting the terrible costs of crisis with the complaints of those attempting to weaken or repeal crucial Wall Street reforms.

 The full text of the piece follows. Financial Crisis Amnesia By Tim Geithner

My wife looks up from the newspaper with bewilderment at another story about people in the financial world or their lobbyists complaining about Wall Street reform. Four years ago, on an evening in March 2008, I received a call from the CEO of Bear Stearns informing me that they planned to file for bankruptcy in the morning. Bear Stearns was the smallest of the major Wall Street institutions, but it was deeply entwined in financial markets and had the perfect mix of vulnerabilities. It took on too much risk. It relied on billions of dollars of risky short-term financing. And it held thousands of derivative contracts with thousands of companies. These weaknesses made Bear Stearns the most important initial casualty in what would become the worst financial crisis since the Great Depression. But as we saw in the summer and fall of 2008, these weaknesses were not unique to that firm. In the spring of 2008, more Americans were starting to face higher mortgage payments as teaser interest rates reset and they could no longer refinance out of them because the value of their homes stopped rising—the leading edge of a wave of foreclosures and a terrible fall in house prices. By the time Bear Stearns failed, the recession was then already several months old, but it would of course get much worse in coming months. These problems were partly the result of amnesia. There was no memory of extreme crisis, no memory of what can happen when a nation allows huge amounts of risk to build up outside of the safeguards all economies require. When the CEO of Bear Stearns called that night, it was not because I was his firm's supervisor or regulator, but because I was then the head of the Federal Reserve Bank of New York, which serves as the fire department for the financial system. The financial safeguards in the law at that moment were tragically antiquated and weak. Neither the Fed, nor any other federal agency, had the necessary comprehensive authority over investment firms like Bear Stearns, insurance companies like AIG, or the government-sponsored mortgage giants Fannie Mae and Freddie Mac. Regulators did not have the authority they needed to oversee and impose prudent limits on overall risk and leverage on large nonbank financial institutions. And they had no authority to put these firms, or bank holding companies, through a managed bankruptcy that wound them down in an orderly way or to otherwise adequately contain the damage caused by their failure. The safeguards on banks were much tougher than those applied to any other part of the financial system, but even those provisions were not conservative enough. A large shadow banking system had developed without meaningful regulation, using trillions of dollars in short-term debt to fund inherently risky financial activity. The derivatives markets grew to more than $600 trillion, with little transparency or oversight. Household debt rose to an alarming 130% of income, with a huge portion of those loans originated with little to no supervision and poor consumer protections. The failure to modernize the financial oversight system sooner is the most important reason why this crisis was more severe than any since the Great Depression, and why it was so hard to put out the fires of the crisis. The failure to reform sooner is why the crisis caused gross domestic product to fall at an annual rate of 9% in the last quarter of 2008; why millions of Americans lost their jobs, homes, businesses and savings; why the housing market is still so far from recovery; and why our national debt has grown so significantly. For all these reasons, President Obama asked Congress to pass tough reforms quickly, before the memory of the crisis faded. The Dodd-Frank Wall Street Reform and Consumer Protection Act, signed into law by the president on July 21, 2010, put in place safer and more modern rules of the road for the financial industry. Yet only four years after the financial crisis began to unfold, some people seem to be suffering from amnesia about how close America came to complete financial collapse under the outdated regulatory system we had before Wall Street reform. Remember the crisis when you hear complaints about financial reform—complaints about limits on risk-taking or requirements for transparency and disclosure. Remember the crisis when you read about the hundreds of millions of dollars now being spent on lobbyists trying to weaken or repeal financial reform. Remember the crisis when you recall the dozens of editorials and columns against reform published on the opinion pages of this newspaper over the past three years. Are the costs of reform too high? Certainly not relative to the costs of another financial crisis. Credit is relatively inexpensive and growing across most of the U.S. financial system, although it is still tight for some borrowers. If the costs of reform were a material drag on credit growth, then loans to businesses would not have grown faster than the overall economy since the law passed and its implementation began. Are these reforms complex? No more complex than the problems they are designed to solve. And, it should be noted, most of the length and complexity in the rules is the result of the care required to target safeguards where they are needed, not where they would have a damaging effect. Is there some risk that these reforms will go too far with unintended consequences? That depends on the quality of judgment of regulators in the coming months as they flesh out the remaining reforms. But our system provides considerable protection against that risk, with the rules subject to long periods of public comment and analysis and with room in the law to get the balance right. The greater error would be for Congress or the regulators, under tremendous pressure from lobbyists, to once again exempt large swaths of the financial industry from rules against abuse. These reforms are not perfect, and they will not prevent all future financial crises. But if these reforms had been in place a decade ago, then the rise in debt and leverage would have been less dangerous, consumers would not have been nearly as vulnerable to predation and abuse, and the government would have been able to limit the damage that a financial crisis could have on the broader economy. President Obama, along with Sen. Chris Dodd and Rep. Barney Frank, deserves enormous credit for pushing for tough reforms quickly. My wife occasionally looks up from the newspaper with bewilderment while reading another story about people in the financial world or their lobbyists complaining about Wall Street reform or claiming they didn't need the Troubled Asset Relief Program. She reminds me of the panicked calls she answered for me at home late at night or early in the morning in 2008 from the then-giants of our financial system. We cannot afford to forget the lessons of the crisis and the damage it caused to millions of Americans. Amnesia is what causes financial crises. These reforms are worth fighting to preserve.”
 Mr. Geithner is secretary of the U.S. Treasury.

FINAL JUDGEMENT ENTERED IN MAGNUM D'OR RESOURCES, INC., KICKBACK SCHEME

The following excerpt is from the SEC website:

February 24, 2012
COURT ENTERS JUDGMENTS AGAINST DEFENDANTS MAGNUM D’OR RESOURCES, INC., DAVID DELLA SCIUCCA, JR., AND DWIGHT FLATT
Securities and Exchange Commission v. Magnum d’Or Resources, Inc., et al., Civil Action No. 11-60920-CIV-JORDAN/BANDSTRA (S.D. Fla.)
The Securities and Exchange Commission announced that on February 13, 2012, the Court entered a final judgment of permanent injunction and other relief, by consent, against defendant Magnum d’Or Resources, Inc. The final judgment against Magnum enjoins the company from violations of Sections 5(a), 5(c), and 17(a) of the Securities Act of 1933, and Section 10(b) of the Securities and Exchange Act of 1934 and Exchange Act Rule 10b-5. In addition to injunctive relief, the Court orders Magnum to pay disgorgement in the amount of $7,728,824, representing profits gained as a result of the conduct alleged in the Complaint, together with prejudgment interest in the amount of $233,543.01, and imposes a civil penalty in the amount of $725,000. Also, on December 8, 2011 and January 4, 2012 the United States District Court for the Southern District of Florida entered judgments of permanent injunction and other relief, by consent, against defendants David Della Sciucca, Jr. and Dwight Flatt, respectively. The judgments enjoin Sciucca and Flatt from violations of Sections 5(a) and 5(c) of the Securities Act. Sciucca and Flatt also are barred from participating in any penny stock offering and from owning, receiving or purchasing Form S-8 stock. The judgments against Sciucca and Flatt provide for disgorgement and the imposition of civil penalties in amounts to be determined by the Court upon motion of the Commission.

The Commission commenced this action by filing its Complaint on April 29, 2011, against Magnum, Sciucca, Flatt, and others. The Complaint alleges Magnum issued stock pursuant to false Form S-8 registration statements, and used bogus consultants to funnel more than $7 million in illicit stock proceeds back into the company. The Complaint also alleges that in facilitating this kickback scheme, Magnum garnered the assistance of Flatt, Sciucca, and others, who liquidated Magnum S-8 stock, kept a portion of the sales proceeds, and then returned the remaining sales proceeds to Magnum under the guise of loan agreements. The Complaint further alleges that Magnum made false and misleading statements in its Form S-8 registration statements and in various press releases during the relevant time period.”

SEC SPOKESMAN ON LEARNING LESSONS REGARDING MONEY LAUNDERING COMPLIANCE

The following excerpt is from the SEC website:

“Broker-Dealer Anti-Money Laundering Compliance – Learning Lessons from the Past and Looking to the Future”
by
David W. Blass
Chief Counsel, Division of Trading and Markets
U.S. Securities and Exchange Commission
SIFMA Anti-Money Laundering & Financial Crimes Conference
February 29, 2012
The Securities and Exchange Commission, as a matter of policy, disclaims responsibility for any private publication or statement by any of its employees. The views expressed herein are those of the author and do not necessarily reflect the views of the Commission
or the staff of the Commission.

Introduction
Good Afternoon, I was honored to be asked to speak at this year’s anti-money laundering and financial crimes conference. I would like to thank Kevin Carroll and SIFMA’s AML committee for inviting me here and for SIFMA’s continued commitment over the years in promoting strong practices to combat money laundering.

Working on AML matters in my new role as Chief Counsel in the Division of Trading and Markets is in many ways a return to my roots at the SEC. I joined the Division almost a decade ago, as the primary attorney working in the AML area. Among other things, I represented the SEC during the 2006 FATF Evaluation of the United States and also participated in special due diligence rulemaking for correspondent and private banking accounts. While I have mainly been involved in other regulatory areas before returning to the Division, I’m pleased to be returning to this critically important and interesting area.
As you may know, my office is responsible for legal interpretations and policy issues relating to AML obligations for broker-dealers. Attorneys in the office work with our colleagues internationally, our fellow regulators domestically, in particular, Treasury, the Financial Crimes Enforcement Network, the U.S. Commodity Futures Trading Commission, and the banking agencies. We also work cooperatively with the industry on a variety of AML initiatives.

As I stated, I joined the SEC almost ten years ago, shortly after the passage of the USA PATRIOT Act.1 As I am returning to my original home at the SEC, it has caused me to reflect on the developments in the AML space during this time. I hope today’s talk will highlight the enormous strides made over the years, both by the industry and by regulators, in combating the abuse of the financial system by money launderers and criminal financiers. I also hope to highlight areas for further focus going forward.
Before I do, though, please let me remind you that my remarks represent my own views, and not those of the Commission, any individual Commissioners, or other members of the staff.

PATRIOT Act Transforms the AML Landscape for Broker-Dealers
Getting the basics right.
As we all know too well by now, the tragic events of September 11, 2001, were a watershed moment for the country and for the US financial service industry’s AML and counter-terrorist financing obligations. However, 9/11 was not the beginning of the story for the securities industry in the AML area.

Broker-dealers have been subject to many aspects of the Bank Secrecy Act since it was adopted in the 1970s.2 A focus on AML compliance has been part of the SEC’s program ever since, as evidenced by the early enforcement cases against a few broker-dealers for blatant violations of the Bank Secrecy Act’s currency reporting requirements.3
Still, while some aspects of AML compliance have long been applicable to securities firms, it was only in 2001 that broker-dealers became fully subject to anti-money laundering obligations with passage of the PATRIOT Act. In fact, within a few years of the President signing the PATRIOT Act into law, broker-dealers went from having basic reporting and recordkeeping obligations to a robust and complimentary set of obligations aimed at detecting and deterring money laundering and criminal financing. We at the SEC recognize that implementing those obligations was a significant challenge to the industry, requiring a considerable devotion of resources.

In the immediate aftermath of the PATRIOT Act, our primary focus was on trying to help firms get educated and started with their new AML obligations. In particular, our examiners focused on determining whether broker-dealers had fully implemented adequate AML programs, including identifying customers, detecting and reporting suspicious activity, and in certain cases, developing and implementing enhanced due diligence procedures.

Our enforcement actions from this period reflected that we were in the early days of firms’ AML understanding and compliance. Many firms were cited for failing on the basics. For example: some did not adopt and implement an adequate AML compliance program that complied with the basic AML requirements, including failing to designate an AML officer, to establish an AML training program, to perform basic customer identification, or to create suspicious activity monitoring procedures.4

Lessons learned -- filling out the contours and assessing the gaps
With the passage of time, all of the players – industry, regulators, and, likely, criminals – have become more sophisticated in their approach to AML. With this sophistication and experience, our expectations have changed, and frankly have increased, as is typically the case when a rule has been on the books for a while. As regulators, we have moved beyond the basic question of whether all the required parts are in place and generally functioning to a more nuanced approach addressing the rigor and effectiveness of a firm’s overall AML compliance structure. This evolution is reflective in the enforcement cases that have been brought by the SEC and FINRA over the last couple of years.

Take, for example, a recent action based largely on violations of CIP requirements, which, as you know, broadly require firms to obtain and verify certain identifying information about their customers. In the SEC’s enforcement action, the firm held master omnibus accounts for foreign entities, which in turn were subdivided into sub-accounts for other foreign entities.5 In this case, the holders of the sub-accounts were “customers” for CIP purposes because they were able to conduct unintermediated transactions directly on the US securities markets, but the firm failed to identify and verify the identities of the sub-account holders as required by the CIP rule. Merely calling an account an “omnibus” account did not relieve the firm of its CIP or other obligations with respect to the underlying customer of that account.

Of course, there are many legitimate account structures where it would be appropriate not to look through the account to the underlying accountholders for CIP purposes, and there is some guidance in this area that you may find helpful.6 What this enforcement action should make clear, however, is that we expect firms to look beyond the account label to the substance of their relationship with the underlying accountholders to determine whether those accountholders are in fact “customers” for purposes of CIP.
Moreover, even where firms adequately comply with CIP requirements, they must always consider the risks associated with grouped and other accounts, regardless of whether they are required to look through to the underlying customer for CIP purposes. A recent National Risk Alert on master/sub-accounts prepared by the SEC’s Office of Compliance Inspections and Examinations addressed some of these issues.7

We have also continued our focus on the adequacy of firms’ suspicious activity monitoring and reporting, which is an absolutely fundamental aspect of BSA compliance. As you know, the SAR rule requires reporting of transactions conducted or attempted “by, at or through” the broker-dealer, and we interpret this language broadly. Accordingly, firms should be monitoring any activity for red flags across their business lines, products, and transactions. Monitoring is not limited to “customer” activity or to certain types of transactions such as cash or securities movements. Instead, monitoring extends to all activity conducted “by, at or through” the broker dealer regardless of whether it is conducted by a “customer” of a firm for CIP or other purposes. So, for example, the fact that a trader in a subaccount may not be a “customer” for the CIP rule doesn’t mean that that trader’s transactions can be ignored for monitoring and reporting purposes. As part of this monitoring, we expect firms to have policies and procedures to resolve or report appropriate red-flags in a timely manner.

In one significant customer case brought by FINRA, a firm failed to obtain the names of the beneficial owners of a number of “high risk” accounts due to concerns that obtaining such information could cause the account holders to move their accounts elsewhere.8 This occurred despite repeated and ongoing requests from the firm’s counsel and the firm’s clearing firm to obtain the names of the beneficial owners before conducting transactions in the accounts. Turning a blind eye because of a fear of losing revenue is never an acceptable excuse for failing to fulfill a firm’s AML obligations or any other obligation under the federal securities laws or FINRA rules.

It is also important to note that suspicious activity monitoring and reporting is not only the responsibility of the firm but also individuals at the firm that are directly responsible for filing SARs on the behalf of the firm. The SEC and FINRA have brought a number of cases citing firms’ AML officers or Chief Compliance Officers for failing to follow up on red flags that are presented at the firm. These actions have resulted in significant fines, supervisory bars and industry suspensions.9

We have also become increasingly focused on how AML obligations interact with a broker-dealer’s other obligations under the securities laws and SRO rules, and with ensuring that firms do not silo information or take an overly narrow view of information that they have for other purposes. Firms should not view AML compliance as unrelated to their other obligations. AML obligations should be viewed as both complementary to and enhancing a firm’s compliance function. Firms should consider how to best leverage these corresponding requirements for a more holistic view of their risks. For example, a firm’s suitability and “know your customer” obligations require firms to obtain a significant amount of information about their customers that is useful in conducting the initial and ongoing customer due diligence necessary to assess the risk of and to adequately monitor an account for all suspicious activity, including securities fraud and other violations of the securities laws and SRO rules.

Learning from the Past to Predict the Future
The past ten years have clearly illustrated that AML compliance is not simply a “banking” issue or only a concern of “cash businesses.” Instead, it has affirmed our long-held belief that AML should be among the forefront of broker-dealers’ compliance concerns. The importance of AML compliance for us extends beyond money laundering and terrorist financing. AML compliance helps us detect and prevent securities fraud and other violations of the law. Accordingly, as we look forward, we will continue to emphasize the significance of this area in the securities industry to firms as well as to other regulators.
By looking back at the past ten years, we can also begin to identify some trends that I predict will manifest themselves in the future. Looking at the enforcement actions I have highlighted, it becomes clear that firms have been living under an expectation that they will be engaging in some form of due diligence of their customers and accounts.

While it is true that there currently is no rule that expressly requires due diligence in all instances, firms are required to have an AML program that at a minimum includes the establishment of policies and procedures reasonably designed to detect and cause the reporting of suspicious activity. It seems difficult to envision how a firm can comply with AML program or SAR responsibilities without having risk-based policies and procedures that allow firms to know who their customers are, what activities they may be reasonably expected to engage in, and also to have procedures to keep this information up to date over the course of the customer relationship. Of course, as SIFMA’s AML committee quite correctly explained in guidance issued in 2008, a firm’s AML program should be designed to permit firms the ability to make risk-based determinations about its customers, its customer’s source of income, and the customer’s expected activity.10 A firm should assess any risks associated with particular customers or transactions by evaluating its business to determine the likelihood that suspicious or potentially illegal activity will be present.11 This kind of common-sense approach to knowing who you are dealing with and what your dealings might reasonably entail should be no surprise to anyone in this room.
While I am on the topic of due diligence, I would like to take the opportunity to applaud David Cohen and his staff at Treasury and FinCEN for the issuance of the customer due diligence advance notice of proposed rulemaking earlier today. We in government should acknowledge and embrace our responsibility to speak clearly about our expectations for firms’ compliance. I believe Treasury’s ANPR can provide a solid roadmap of what a rule in this area could look like, or, at the very least, provide a starting point for discussions about that rule. It is my hope that any rulemaking for customer due diligence would further clarify regulatory expectations regarding this critical BSA obligation, and I encourage you to respond to the solicitation for comments.
As I mentioned, I do take seriously the responsibility to at least try to speak clearly about our expectations as regulators. I also believe we should be good listeners, to ensure that we understand the perspectives of all parties affected by our rules. While success is difficult to measure in this area, my goal is to strive to develop a productive, open relationship with the securities industry in dealing with AML concerns. I invite you to highlight for me and my team comments and concerns regarding the AML regime that are specifically targeted to the securities industry, in addition to those that cross industries. Identifying these issues is enormously helpful for us in working with Treasury, FinCEN, and other regulators in developing an effective AML regime.

To help us in this regard, I would like to let you know of a new initiative designed, at least in part, to enhance our understanding of how you comply with your AML obligations. We are partnering with the CFTC to establish a Capital Markets Working Group that will focus on money laundering vulnerabilities in the capital markets. Given the inherently complex and specialized nature of our capital markets, developing an accurate risk assessment requires the expertise and leadership of various public and private stakeholders, including regulatory agencies, the law enforcement community and representatives from the private sector. So we anticipate reaching out to some of you regarding this initiative. I would like to thank Chip Poncy, Katrina Carroll and Lawrence Scheinert, all from Treasury, for their strong support in this area. Also, I should thank the talented team of attorneys with vast AML expertise with whom I have the privilege of working with at the SEC for their continued dedication to all things AML.

Conclusion
To say the least, we have come a long way. But we could not have made such enormous strides in the area of broker-dealer AML compliance without the collective effort of the regulatory community and the securities industry participants.
I would also like to acknowledge you, as industry professionals, for your invaluable contribution to this shared effort. I know that success can often be difficult to measure in the AML area. An AML officer’s job might seem like a thankless job, but I am here to thank you. We in government appreciate the hard task that you and your firms face.
Thank you for the opportunity to speak today and for your giving me your time and attention. I would be happy to answer any questions.”
1

SEC COMMISSIONER DISCUSSES HOW SHAREHOLDER MONEY IS SPENT

The following excerpt is from the sec Website:

Shining a Light on Expenditures of Shareholder Money
by
Commissioner Luis A. Aguilar
U.S. Securities and Exchange Commission
Practising Law Institute’s SEC Speaks in 2012 Program
Ronald Reagan Building and International Trade Center
Washington, D.C.
February 24, 2012
Good morning. It is my pleasure to be here today. This is my fourth SEC Speaks and my first after being sworn-in for a second term as an SEC Commissioner. I can report that the issues before the Commission and the magnitude of what is at stake remain of top concern, just as they have throughout my tenure. Before I begin, let me start by issuing the standard disclaimer that the views I express today are my own, and do not necessarily reflect the views of the Securities and Exchange Commission, my fellow Commissioners, or members of the staff.

In thinking through how to use my time with you today, many issues immediately came to mind. To name just a few, I thought of discussing:

The SEC’s work on Title VII to regulate the security-based derivatives industry – what has been proposed and the longer list of what has yet to be adopted;
The SEC’s new no admit/no deny policy involving parallel criminal proceedings,1 and how it applies in so few situations that it needs to be revised to be more useful and effective; and
The lengthy delay in re-establishing the Investor Advisory Committee, a committee required by Dodd-Frank to amplify the voices of investors and ensure that the Commission is carrying out its core mission.
However, I decided to focus my time today on one issue – an issue that highlights the Commission’s fundamental responsibilities as a regulator.

The Commission’s core mission is to protect investors. William O. Douglas, a former chairman of the Securities and Exchange Commission, who went on to serve as a Supreme Court Justice, described the SEC’s role by contrasting it with a well-represented industry. Chairman Douglas said: “We’ve got broker’s advocates, we’ve got exchange advocates, we’ve got investment banker advocates, and we [the SEC] are the investor’s advocate.”2
Not much has changed since Chairman Douglas spoke those words at his first press conference as SEC Chairman in 1937. The industry, with its lobbyists and spokespeople, remains the loudest voice – in fact, one could say that things have gotten much worse. As a result, investors need an advocate today more than ever.3
Given that this is so, a true investor’s advocate would be focused on whether shareholders and investors receive adequate disclosure about the companies they own or may buy. In serving as an investor advocate, it is the responsibility of the Commission to promulgate rules to make sure that investors are armed with the appropriate information they need during each step of their investment decision – whether it is to buy, sell, or hold their securities, or to vote their securities. When it is clear that investors are in the dark and not receiving adequate disclosures, the Commission should act, and act swiftly, to ensure that investors have the information they require.

Background of Citizens United
I want to illustrate this point by looking at an issue that dominates the headlines on a daily basis. And that is the undisclosed corporate campaign spending arising from the Supreme Court’s decision in Citizens United v. Federal Election Commission.4 In January 2010, the Supreme Court struck down federal restrictions on the ability of corporations “to use general treasury funds to make campaign expenditures defined as an ‘electioneering communication’ or for speech expressly advocating the election or defeat of a candidate.”5 The Court was quick to also say “[t]he Government may regulate corporate political speech through disclaimer and disclosure requirements, but it may not suppress speech altogether.”6
Fundamental Deprivation
The ramifications of this decision and its resulting impact on campaign finance laws and practices have been significant and swift.
For example, it has been reported that outside groups spent four times as much in 2010, after the Citizens United decision, as compared to in 2006.7 A recently released poll found Americans across all parties oppose the ruling; and among all voters, 62% oppose the decision.8 President Obama described the impact of the Supreme Court’s decision as
… dealing a huge blow to [our] efforts to rein in this undue influence. In short, this decision gives corporations and other special interests the power to spend unlimited amounts of money – literally millions of dollars – to affect elections throughout our country. This, in turn, will multiply their influence over decision-making in our government.9

As to whether or not corporations should be making political contributions at all, that is a question I will leave to other agencies, corporations, institutions, and to the American public at large.
I want to focus on the shareholders of corporations and how they are often in the dark as to whether the companies they own, or contemplate owning, are making political expenditures. Withholding information from shareholders is a fundamental deprivation that undermines the securities regulatory framework which requires investors receive adequate and appropriate information, so that they can make informed decisions about whether to purchase, hold, or sell shares – and how to exercise their voting rights. Investors are not receiving adequate disclosure, and as the investor’s advocate, the Commission should act swiftly to rectify the situation by requiring transparency.

Many interested parties have weighed in and enumerated significant reasons for requiring these disclosures.10 These reasons include, but are not limited to, the following:
Investors may not want to invest in companies that engage in any political expenditure.
Individual investors may want to avoid investing in a company whose political spending advances causes or candidates with which that investor disagrees.

To ensure that political spending decisions do not further the interests of corporate managers at the expense of shareholder interests. On this topic, John Bogle, founder of Vanguard, has stated, “corporate managers are likely to try to shape government policy in a way that serves their own interests over the interests of their shareholders.”11

The view that when corporations are able to obtain favorable conditions through political influence, rather than meritoriously adding value through a better product or service, it distorts the operation of the marketplace, which undercuts capital formation.
A lack of transparency regarding political expenditures directly fosters destructive pay-to-play corruption. As just one example, nearly half the states have adopted pay-to-play bans, after corruption scandals revealed government officials demanding corporate payoffs in exchange for public contracts.12
Despite the abundance of reasons investors have for requiring this information and the transparency it would provide, the fact remains that no comprehensive disclosure framework exists.
There are tens of thousands that have urged the Commission to address this issue, ranging from investors, academics, non-profits, state treasurers, and businesses.13 To highlight just a few of the requests, in August 2011, ten law professors from distinguished universities across the country filed a petition for rulemaking requesting that the Commission promulgate rules to require that public companies disclose political expenditures.14 The Commission has also received letters from Members of Congress,15 from elected government officials with fiduciary responsibility for nearly one trillion dollars in pension fund assets,16 and from a coalition of United States Senators.17 Each of these letters asked the Commission to take action to require public disclosure of corporate political spending.

In November 2011, a coalition of asset managers and investment professionals representing over $690 billion in assets wrote to the SEC to express their strong support for the SEC to promulgate rules requiring corporate political transparency. This coalition lamented that corporate political expenditures “may be subject to a variety of state and federal rules, but there are no current rules that require that companies disclose this spending to their shareholders, and there are significant gaps in the type of spending that is required to be disclosed to anyone.”18

In a separate letter, the Council for Institutional Investors described the fundamental issue as
Shareowners have a right to know whether and how their company uses its resources for political purposes. Yet the existing regulatory framework creates barriers to this information. Disclosure is either dispersed among several regulatory authorities or entirely absent in cases where political spending is channeled through independent organizations exempt from naming donors.19
Ted Wheeler, the State Treasurer of Oregon, and a vocal advocate for rules regarding corporate disclosure of political donations, stated “[c]ompanies have the ability to spend heavily on political causes and they have the right to do so. However, corporations also have the ability to obscure that spending from shareholders, such as Oregon beneficiaries of trust funds . . . That’s wrong.”20 It is troubling that many companies are funding political campaigns without their shareholders’ consent or even knowledge.
Evidence of Investors Trying to Obtain the Information

The importance of this topic to shareholders is evident. The Commission itself has received tens of thousands of letters requesting that it take action.21 The record is replete with examples and evidence of investors trying to obtain information regarding corporate political expenditures.

For example, in 2011, out of the 465 shareholder proposals appearing on public company proxy statements, 50 proposals were related to political spending.22 In fact, more proposals of this type were included in proxy statements than any other type of proposal.23 During the 2011 proxy season, 25 of the companies in the S&P 100 included proposals on their proxy statements requesting disclosure of corporate spending on politics.24

The demand from investors has been so significant that large public companies have increasingly agreed to adopt policies requiring disclosure of companies’ political expenditures. In the S&P 100, this number has risen from a trivial level in 2004 to close to 60% by 2011. However, it is important to keep in mind that while some companies are voluntarily providing disclosures, many others are not. In addition, the disclosure that is provided is not uniform and may not be adequate.
Unfortunately, there is no comprehensive system of disclosure related to corporate political expenditures – and that failure results in investors being deprived of uniform, reliable, and consistent disclosure regarding the political expenditures of the companies they own.

This is a Core Responsibility of the SEC
Arming investors with the information they need to facilitate informed decision-making is a core responsibility of the SEC. In fact, it is one of the factors that led to the creation of the SEC. It is one of the SEC’s core functions to identify gaps in information that investors require, and then close that gap as quickly as possible.
Shareholders require uniform disclosures regarding corporate political expenditures for many reasons, including that it is impossible to have any corporate accountability or oversight without it. The Supreme Court recognized that need. For example, even as it struck down restrictions on corporate campaign contributions, the Supreme Court cited “[s]hareholder objections raised through the procedures of corporate democracy”25 as a means through which investors could monitor the use of corporate resources on political activities. The Court envisioned that
… prompt disclosure of expenditures can provide shareholders and citizens with information needed to hold corporations and elected officials accountable for their positions and supporters. Shareholders can determine whether their corporation’s political speech advances the corporation’s interest in making profits, and citizens can see whether elected officials are “in-the-pocket” of so-called moneyed interest.26
Unfortunately, the Court envisioned a mechanism that does not currently exist.
This is not the first time that the Commission has been faced with a lack of transparency regarding political expenditures. In 1999, the Commission proposed a pay-to-play rule in direct response to egregious pay-to-play conduct by investment advisers that had harmed investors with sweetheart deals and bribes.27 The egregiousness of the conduct and the need for new rules was clear. It was obvious that depending solely on the SEC’s ability to use its anti-fraud authority would be too little, too late. However, the pay-to-play rule was shelved – lost to the wasteland where un-adopted SEC rule proposals go. It took a decade of scathing scandals, egregious fraud, and significant harm, before the Commission made pay-to-play a priority, and acted on it in 2010.28 If the Commission had adopted new rules in 1999, it is likely that much of the tremendous harm of the pay-to-play scandals from the last decade could have been averted. The cost of Commission inaction – particularly in the face of compelling evidence for the Commission to act – can be devastating, as we have seen over and over again.

Requiring transparency for corporate political expenditures cannot wait a decade. It is the Commission’s responsibility to rectify this gap and ensure that investors are not left in the dark while their money is used without their knowledge or consent. The Commission should provide for disclosure of corporate political expenditures that results in uniform and consistent disclosure.

Conclusion
As Commissioners, it is crucially important that we listen, and respond, to the needs of investors. The Commission receives investor input in various forms, from comment letters on proposed rulemakings, to formal rulemaking petitions. Unfortunately, the voices of investors are often drowned out by the louder, better-funded, and often better-connected voices of issuers, financial institutions, and corporate lawyers. When that happens, it is incumbent upon us to not only remember, but also make evident by our actions, that the fundamental mission of the SEC is to protect investors.
In closing, I want to thank you for your kind attention.
I also want to thank the many SEC staffers who are participating at this year’s SEC Speaks – as well as the many others who devote themselves to the protection of investors. I am proud to work at their side.
Thank you.”

FDIC INSTITUTIONS HAD BEST YEAR IN 2011 SINCE 2006

The following excerpt is from an FDIC e-mail:

FDIC-Insured Institutions Earned $26.3 Billion in the Fourth Quarter of 2011
Full-Year Net Income of $119.5 Billion Is Highest Since 2006

 FOR IMMEDIATE RELEASE
February 28, 2012

Commercial banks and savings institutions insured by the Federal Deposit Insurance Corporation (FDIC) reported an aggregate profit of $26.3 billion in the fourth quarter of 2011, a $4.9 billion improvement from the $21.4 billion in net income the industry reported in the fourth quarter of 2010. This is the 10th consecutive quarter that earnings have registered a year-over-year increase. As has been the case in each of the past nine quarters, lower provisions for loan losses were responsible for most of the year-over-year improvement in earnings.

FDIC Acting Chairman Martin J. Gruenberg said that "2011 represented the second full year of improving performance by the banking system. Banks reported higher positive aggregate earnings, the numbers of 'problem' banks and failures declined, and loan balances increased in the final three quarters of the year." He also noted that "insured institutions of all sizes continued to make substantial progress in improving their profitability."

A majority of all institutions (63 percent) reported improvements in their quarterly net income from a year ago. Also, the share of institutions reporting net losses for the quarter fell to 18.9 percent from 27.1 percent a year earlier. The average return on assets (ROA), a basic yardstick of profitability, rose to 0.76 percent from 0.64 percent a year ago.
Fourth-quarter loss provisions totaled $19.5 billion, about 40 percent less than the $32.7 billion that insured institutions set aside for losses in the fourth quarter of 2010. Net operating revenue (net interest income plus total noninterest income) was $3.8 billion (2.3 percent) lower than a year earlier, due to a $4.4 billion (7.4 percent) decline in noninterest income.

Asset quality indicators continued to improve as insured banks and thrifts charged off $25.4 billion in uncollectible loans during the quarter, down $17.1 billion (40.2 percent) from a year earlier. Noncurrent loans and leases (those 90 days or more past due or in nonaccrual status) fell for a seventh quarter, but the percentage of loans and leases that were noncurrent remained higher than in previous crises.

Financial results for the fourth quarter of 2011 and the full year are contained in the FDIC's latest Quarterly Banking Profile, which was released today. Also among the findings:

Growth in loan portfolios continued. Loan balances posted a quarterly increase for the third quarter in a row. Total loans and leases increased by $130.1 billion (1.8 percent), as loans to commercial and industrial borrowers increased by $62.8 billion, residential mortgage loan balances rose by $26.0 billion, and credit card balances grew by $21.3 billion.

Money continued to flow into insured deposit accounts. Deposits in domestic offices increased by $249.7 billion (2.9 percent) during the quarter. More than three-quarters of this increase ($191.2 billion or 76.6 percent) consisted of balances in large noninterest-bearing transaction accounts that have temporary unlimited deposit insurance coverage. The 10 largest insured banks accounted for 73.6 percent ($140.7 billion) of the growth in these balances.

The number of institutions on the FDIC's "Problem List" fell for the third quarter in a row. The number of "problem" institutions declined from 844 to 813. This is the smallest number of "problem" banks since first quarter of 2010. Total assets of "problem" institutions declined from $339 billion to $319 billion. Eighteen insured institutions failed during the fourth quarter. For all of 2011, there were 92 insured institution failures, compared with 157 failures in 2010.

The Deposit Insurance Fund (DIF) balance continued to increase. The unaudited DIF balance — the net worth of the fund — rose to $9.2 billion at December 31 from $7.8 billion at September 30. Assessment revenue and fewer expected bank failures continued to drive growth in the fund balance. The contingent loss reserve, which covers the costs of expected failures, fell from $7.2 billion to $6.5 billion during the quarter. Estimated insured deposits grew 3.1 percent in the fourth quarter.
In conclusion, Acting Chairman Gruenberg noted, "The industry is now in a much better position to support the economy through expanded lending. However, levels of troubled assets and 'problem' banks are still high. And while the economy is showing signs of improvement, downside risks remain a concern."