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U.S. Securities and Exchange Commission

Speech by SEC Chairman:
Remarks at the Second Annual Seniors Summit


Chairman Christopher Cox

U.S. Securities and Exchange Commission

SEC Headquarters Main Auditorium
Washington, D.C.
September 10, 2007

Good morning, and welcome to the SEC's Second Annual Seniors Summit. I'm delighted by this impressive turnout for our program. The preparations for today's events have been underway for months, and so I'd particularly like to thank the SEC staff, the leadership and staff of AARP, the Financial Industry Regulatory Authority, and the North American Securities Administrators Association for doing so much to ensure that this will be an informative and exciting day. We've got four great panels that will help us focus on the issues that are of most importance to older investors.

And of course, the highlight of the program will be the "free lunch." [Laughter] The truth is, the lunch we've planned for you later on in today's program may be the only opportunity you'll ever have to enjoy a complimentary meal without someone peddling timeshares, or asking you to turn over your investment portfolio before you leave the room. Still, at the SEC just as everywhere else, there is no such thing as a free lunch. What you'll have to give in return for your mid-day nourishment is your wisdom, your active engagement, and for many of you, your participation in the outstanding panels that we have lined up. Since the SEC is always concerned with full disclosure, you should know that while the Commission is happy to provide the venue and the agenda for today's Summit, the Financial Industry Regulatory Authority, FInRA, is providing the lunch. So there is every reason to hope that when you leave at the end of these sessions, not only your expectations, but your appetites will be fully satisfied.

This Second Annual Seniors Summit includes a cast of panelists whose expertise is unmatched — including representatives of public and private organizations dedicated to ensuring that America's seniors can safely invest their savings in an open and honest system. But the most important participants in today's program are the seniors and the senior advisers who are bringing with you your own life experiences, and your own knowledge and understanding, to help us tackle these important challenges.

There are many good reasons that we are all assembled here this morning. One of the most important is that, given the trends in modern medicine, health, and nutrition, many of today's 50-year-olds have nearly another half of their life yet to live. Not only are Americans living longer, but there will be many more of us living longer than ever before: the 76 million Baby Boomers who are now reaching the traditional age of retirement represent the largest demographic wave in our nation's history.

All of this has enormous consequences for those of us who fight securities fraud. Already, the 37 million Americans who are 65 and older account for 12% of the total population. In other words, it's as if the entire population of the state of California — every man, woman, and child — were senior citizens. And because longevity is now the norm in our country, that fraction is rapidly growing. In the 21st century, Americans will live significantly longer than their parents. And here's the key from the SEC's standpoint: they'll live longer than most of them planned for their retirement. That means they'll be likely to take greater risks with their investments in order to achieve higher returns, instead of switching into low-yield, safe investments like the retirees of yesteryear.

These facts, plus all of the money that seniors will have — fully three quarters of all investable assets by 2010, according to McKinsey & Co. — will make older Americans the number one target for scam artists and securities swindlers.

Another reason that our efforts to protect senior investors are more important than ever is that the way seniors manage their money has changed. In 1983, the vast majority — in fact, a remarkable 88% — of American workers were covered by defined-benefit pensions. By 2004, only a minority had traditional pensions. What's happened is that responsibility for managing retirement savings has shifted to workers through 401(k) and similar plans. Instead of a monthly pension check, retirees typically get a lump sum. And that means greater opportunities for fraudsters. Now, instead of defrauding a victim of $5,000 a month over time — which is what a fraud artist would have to do with the traditional pension — the thief can make a single big score by stealing the entire retirement nest egg which generates that $5,000 per month.

It's clear that the ascendancy of 401(k) plans is also raising other issues. The Enron and WorldCom scandals — and the attendant annihilation of thousands of employee pensions — vividly demonstrated that betting your retirement success on your employer's stock might be a poor investment strategy. Investing heavily in any single stock is risky — and so, you should assume, is any advisor who suggests otherwise. Nevertheless, approximately 22% of all 401(k) assets remained in company stock in 2005, with one in five participants holding half or more of their balances in company stock.

Traditional pension funds are prohibited by law from holding more than 10% of their assets in company stock. In contrast, some companies with 401(k) plans not only encourage heavily investing in company stock, but even require workers to retain matching contributions in the form of company stock. You can see why a few more "Danger Ahead" signs should be posted along the retirement highway.

Since I became Chairman, we've been working hard to warn seniors about all of these road hazards. We've strengthened our investor education initiatives for seniors, and partnered with other regulators and consumer organizations, including AARP, FInRA, and NASAA, to sponsor more than 50 events designed to reach senior investors. In total, more than 50,000 people already have attended.

One way we at the SEC are addressing fraud against senior citizens is to marshal our examination staff to conduct targeted sweeps in areas where we suspect misconduct. Last year, our examination staff joined with FInRA and state securities regulators in Florida, Arizona, Texas, North Carolina, South Carolina, and Alabama in a sweep of firms that sponsor "free lunch" sales seminars. Today, we're announcing the findings of over 100 of these examinations that were conducted during the past year.

The results, sadly, are revealing. Fraudulent misrepresentations to senior investors are far too common. Even in cases where senior investors were sold legitimate products, often as not those products were unsuitable for the seniors who bought them. For example, we've seen an alarming number of senior customers with conservative investment objectives and risk tolerances who've been advised to invest a significant percentage of their assets in illiquid securities that involve a high degree of risk.

Yet while this sweep has brought some bad news about the sales tactics being used to lure older Americans into buying financial products, it's also a terrific example of what law enforcement can achieve when all of us — the SEC, our state securities regulatory partners across the country, and FInRA — work together. In the past 20 months alone, the Commission has brought more than 40 enforcement actions involving fraud against seniors. Many of these actions were coordinated with state and criminal authorities.

Another way the SEC is working to protect senior citizen investors is through carefully targeted regulatory reforms. For example, today the SEC is announcing its approval of a new FInRA rule aimed at abusive sales practices in the marketing of deferred variable annuities. Concerns about sales practices for these products were raised at our first Senior Summit last year. These products are also on NASAA's annual list of top threats to investors. The new rule mandates three important reforms. First, it spells out specific requirements for the suitability of sales agents' recommendations. Second, it requires a review of all prospective transactions by a principal of the sales agent's firm. And third, it requires written supervisory procedures and training programs to insure compliance with the new rule. This action we're taking today is of special relevance to seniors, because deferred variable annuities are so often marketed to investors looking toward retirement. So I commend FInRA for its exceptional work with the SEC on this important new reform.

The purpose of this new rule is really the same as our overall purpose here today: it's to arm both seniors and senior advisors alike with the information they need to prevent financial injury. Of course, no amount of new rules is going to eliminate the need for careful study and evaluation of investment alternatives. Here, just as elsewhere in life, older Americans and their advisers are going to have to let experience be their guide. But of course experience is one thing older Americans seem to have more of than anyone else. As George Burns once said, "you know you're getting old when you stop to tie your shoes, and wonder what else you can do while you're down there." Older Americans may have a few more aches and pains, but they also have something that any man or woman should want: the wisdom that comes with years of experience. The Roman playwright Seneca wisely said, "no man was ever wise by chance." Wisdom derives from learning, which combines information and experience. At the SEC, we help provide investors with the very best information about the investments and investment professionals they have to choose from.

So, too, do many of our panelists and participants at this Senior Summit. So let's get on with the show. Our first panel this morning is going to tackle the question of why financial fraud against seniors is becoming such an urgent issue, what the greatest challenges are, and what each of us can do about it. They'll provide an overview for all of the discussion that will follow. And it's fitting that the panelists include some of the nation's foremost leaders in the fight against investment fraud directed against older Americans.

Joe Borg is serving his second term as president of the North American Securities Administrators Association — the oldest international organization devoted to investor protection. He's also the Director of the Alabama Securities Commission, and he served as the state's top securities cop for 13 years. Both he and NASAA have been stalwarts in this fight.

Chris Hanson is one of the top leaders at AARP. He's the Group Executive in charge of all of AARP's State and National Initiatives. And of course he and AARP have no higher priority than protecting the investment savings of older Americans.

Mary Schapiro is the CEO of FInRA — the Financial Industry Regulatory Authority — which was formed from a combination of the NASD and the regulatory arm of the New York Stock Exchange. FInRA as an organization, and Mary personally, have been active leaders in ensuring that brokers and markets do everything possible to protect the financial interests of older Americans. In addition to serving as the CEO of FInRA, Mary is also the chairman of the FInRA Investor Education Foundation, the largest foundation in the United States dedicated to investor education.

So to each of our panelists: thank you, and welcome. And to all of you who are participating in person or over the web, thank you for coming. This is going to be a great event. Now Joe, it's over to you to kick off the first discussion.

[At the conclusion of the day's events, Chairman Cox delivered the following closing remarks]

As we wrap up the panel discussion portion of the Second Annual Seniors Summit, I want to give a very special thanks to the men and women who led our discussions today. Thank you, first, to Joe Borg, Chris Hanson, and Mary Schapiro, and to NASAA, AARP, and FInRA for getting us off to a great start. Thank you to SEC Commissioner Kathleen Casey for leading the presentation of the sweep findings, and to Lori Richards, Bob Errico, and Dave Massey for laying out the implications. Commissioner Paul Atkins and Kristi Kaepplein did an excellent job, along with John Gannon, Gene Setzfand, and Karen Tyler, in helping us think about new ways to reach senior investors. Commissioner Roel Campos and Linda Thomsen from the SEC nicely complemented Steve Luparello and Patti Struck on enforcement topics — on which George Gaberlavage of AARP was also very informative. The last panel, with SEC Commissioner Annette Nazareth and Brian Lantagne, Elisse Walter, and Ryan Wilson, was especially stimulating on the topic of improving sales practices.

We've accomplished a great deal today. And yet, there's still a great deal more to do. The securities regulators among us will meet immediately afterward to continue to hammer out a solution to the problem of the proliferation of meaningless senior specialty designations. Our enforcement team will go back to work on the scores of cases we have across the country that are focused on investment fraud targeting senior citizens. And our investor education, regulatory, and communications specialists will all continue to devote ourselves to what is undoubtedly one of the most pressing securities regulatory issues of our time.

We all know why this is so important: because if we fail, millions more seniors will be at risk of falling victim to scam artists, at the very time of their lives when they can least afford it. Our collective efforts, if we plan well and start now, can spare a lot of people a great deal of anguish.

As has been pointed out several times today, this problem can only grow. When my father was born, life expectancy in the United States was 49 years. At the end of the 20th century, it was 77. For children born since then, fully half will live to see their 90th birthday; and at least 10% will pass 100. This kind of revolutionary change in our society will demand corresponding changes in the way we work, and in the way we save and invest. And since saving for one's future will mean a much longer future than we ever before imagined, the stakes for our investor protection mission couldn't be higher.

So we've got to constantly re-think our own role as regulators. While helping protect experienced investors from the 21st century's latest scams, we've also got to remember that for every seasoned investor, there is a woman with dementia, or a man with heart disease, who can least afford to lose their life savings along with their health. We've got to have programs tailored to all of their diverse needs. This great challenge of the coming century will require our best minds and our best efforts.

If we work together, all of us, the future of every American of every age can be bright. As we set out on this journey, I can't tell you how much I respect your dedication and the work that you do every day. We at the SEC are proud to be your partners.


Modified: 10/12/2007