Speech by SEC Chairman:
Chairman's Address to the North American Securities Administrators Association 2008 Public Policy Conference
Chairman Christopher Cox
U.S. Securities and Exchange Commission
April 1, 2008
Thank you, Karen [Tyler, NASAA president] for that kind introduction. It's a pleasure to join you once again at this important annual Washington gathering.
It's been just a month or so since you and I announced our joint initiative on senior protection. So, to keep the tradition alive, this seems the perfect time to launch another major, new initiative — an unprecedented 50-state sweep investigation aimed at combating the sale of illegal investment contracts in the form of NCAA Tournament office pools. [Laughter]
As you all know, the typical NCAA office pool scheme involves an investment of money in a common enterprise (the pool itself) — with profits to come solely from the efforts of others (the teams and players). That fits the definition of "investment contract" to a T — so we'll be mounting a full-court press through this sweep. It's high time we moved together against a scheme that's increasingly being used as a vehicle to defraud unsophisticated office workers out of tens and sometimes even twenties of dollars of their hard-earned life savings. We've dubbed the effort "Operation Bracket Racket." The scams that this operation is targeting are so widespread that many of you may even have been victimized yourself. This should be a slam dunk for the SEC and NASAA. Our agency's effort is being led by Deputy Enforcement Director Bobby Knight and we have every confidence that he will throw the chair at them. [Laughter]
By the way, those of you who may be holding one of these illegal investment vehicles might want to contact legal counsel — because, fittingly, the crackdown begins today, April 1st. [Laughter]
I want to welcome all of you to Washington on this brisk April Fool's Day when, notwithstanding the cold weather, you can still enjoy the cherry blossoms. When T. S. Eliot said that April is the cruelest month, he may well have had Washington, D.C., in mind — because around here, it often seems no sooner do the blossoms open up in all their glory, than the rains come and knock them all down.
So, by all means, enjoy the blossoms while you can — but of course not during the important parts of today's program. This year's conference is blessed with a number of distinguished speakers — including Sen. Jack Reed, my recent colleague on the Commission Roel Campos, my current fellow Commissioner Kathy Casey, as well as SEC alum Lynn Turner. Beyond that, this is an exceptional opportunity for all of us here to share our experiences, our viewpoints, and our expertise.
The partnership that everyone in this room is working so hard to build among the states and the federal government is stronger than it has ever been before. Our cooperative and complementary state-federal relationship has a proven record of serving investors well, and we're building on it and making it stronger every day. Much of that success is due to the exceptional leadership at NASAA in recent years — including in particular Patty Struck, Joe Borg, and Karen Tyler.
Our current high level of collaboration is reflected in NASAA's leadership role in our joint national initiative, which includes the SEC and FINRA to protect seniors from investment fraud and sales of unsuitable securities. This year, as we prepare for our Senior Summit, we are hard at work examining the various practices used by financial services firms in dealing with senior investors, so that we can provide information about these practices publicly. The SEC, NASAA, and FINRA are all soliciting input to help us identify strong supervisory and compliance practices used by financial services firms to deal with specific concerns of senior investors in areas such as marketing and advertising to seniors; account opening; product and account review; the ongoing review of the customer relationship; and the suitability of products for investors as they get older.
And we're tackling difficult questions, such as how a firm can identify a customer's diminished capacity as he or she ages — and what firms can do to best deal with it. We'll publish our joint findings on all of these topics later this year, so that every firm and every investor can benefit from them.
The SEC and NASAA have also worked closely together on your model rule for senior designations. The Senior Designations Task Force, chaired by Melanie Lubin, who is of course Securities Commissioner for the State of Maryland, has performed a tremendous service by developing a rule that every state can adopt to curb the misuse of senior-specific certifications and professional designations by those who would prey on retired and elderly investors. The model rule that the NASAA membership has already approved, and which you've announced today, will offer important protections to senior investors.
I am strongly supportive of this approach, and I will do everything I can to help you promote it — because the more states that adopt the model rule, the more effective these protections will be. A uniform approach to the issue of senior designations at the state level will make it easier for both customers and firms to detect the improper use of senior-specific designations.
Yet another area that's important to seniors where NASAA and the SEC have been working closely together is the very difficult set of legal issues surrounding equity indexed annuities. As NASAA has noted, the sale of equity-indexed annuities has risen dramatically over the last decade. Some $25 billion of these products were sold in 2005, driven in large part by the high commissions that sales agents earn on them. These products can be extremely complex. They often contain a number of features that make them unsuitable for older investors, including long accumulation periods and high surrender charges.
The SEC, state securities regulators, and the SROs are receiving an increasing number of complaints about equity-indexed annuities, because they are often pitched with deceptive marketing tactics. As we found in our recent joint sweeps of free lunch seminars, equity-indexed annuities are often marketed to senior citizens through investment seminars nationwide.
For far too long, the status of equity-indexed annuities as securities has been shrouded in uncertainty. The SEC first solicited public comment on the appropriate treatment of equity-indexed annuities under federal securities law in 1997. But together with NASAA, we're working to provide much-needed guidance and clarification on this issue this year.
FINRA has already cautioned its members that equity-indexed annuities may well constitute securities, depending upon the facts and circumstances in each case. It requires member firms to follow special precautions when their associated persons sell equity-indexed annuities, regardless of whether they are deemed to be securities. Where equity-indexed annuities are promoted and sold primarily as investments rather than insurance products, investor protection requires that the enforcement tools of the SEC and state securities regulators be brought to bear. Securities regulators at both the state and federal level are best situated to address the abuses at the point of sale. And the strong suitability standards that come with federal and state securities regulation will help to ensure that equity-indexed annuities are sold only to investors for whom they are appropriate — and only after the investor has received complete, understandable, and accurate information regarding all material aspects of the investment.
The SEC's Office of the General Counsel, working with our Divisions of Investment Management and Trading and Markets, is preparing to share with NASAA an approach to the legal questions surrounding equity-indexed annuities that will deal with the thorny issue of retroactivity, while providing clear guidance on separating the insurance component from the investment component to inform a determination of whether a particular product is primarily insurance or primarily an investment.
Still another area in which we are working very closely with NASAA is our examination of the various regulatory schemes affecting both broker-dealers and investment advisers.
But there's nowhere that our joint collaboration with our state regulatory partners is more important than in our daily battle to combat fraud. That's central to what we do at the SEC, and to what each of you does every day.
So let me share with you, if I may, some of the brand new things we're doing in our enforcement program. Over the past year, the SEC has distributed more than $2 billion in penalties and disgorgements to injured investors — and more than $3.5 billion since 2005. This year, we intend to significantly exceed last year's mark and get the bulk of the remaining $5 billion that we've collected from fraudsters and securities law violators back to the investors they cheated. To assure this happens, we've just announced the creation of the Office of Collections and Distributions. Its job is to build on what the agency has learned in the first few years of our experience using the Fair Funds authority of the Sarbanes-Oxley Act of 2003, and truly professionalize these distributions back to investors.
This year we've also fully deployed our new enforcement software systems, called the Hub and Phoenix. Phoenix is allowing us to track every disgorgement, penalty, and other forms of monies owed to the SEC and to investors. The Hub will let us share information about every ongoing case throughout the SEC's national enforcement program with every professional within the agency, all in real time. It will promote collaboration and sharing of resources and information as never before.
Another significant 2008 initiative is designed to confront the problem of suspected insider trading, securities fraud, and market manipulation by hedge funds and other large, non-public investors. This kind of activity remains a significant threat to market integrity. A special enforcement working group is integrating the skills of a number of professionals to tackle this problem. Any hedge fund or other large investor who thinks they'll get away with dishonest and unfair dealing in our markets will face the concentrated resources of a relentless SEC.
To deal with the global threat of Internet fraud and the special enforcement challenges it presents, the Division's Office of Internet Enforcement will continue to train a spotlight on this shadowy technological underworld. This group's message to cybercriminals is clear: We'll find you, wherever in the world you are, and make you pay for what you're doing to innocent and unsuspecting investors.
The subprime crisis and its still-unpredictable consequences present immediate problems for both the U.S. and global markets. Last year we launched an initiative in this area to investigate possible fraud or breaches of fiduciary duty involving collateralized debt obligations. Among the issues confronting us are determining whether bank holding companies and securities firms made proper disclosure in their filings and public statements of what they knew about their CDO portfolios and their valuations. We'll determine whether brokers carefully followed suitability requirements when they sold complex debt-related derivatives that shortly afterward went bad. And in this area, as elsewhere, we'll be investigating whether unscrupulous insiders used non-public information to bail out of these securities or to sell them short, in violation of the securities laws.
These are challenging times for America's markets, and indeed for global capital markets as well. There's never been a time when our partnership has been more important or more necessary. The security and well-being of millions of investors — and beyond that, the health of America's and the world's economy — depends on what each of us can accomplish together.
I can't tell you how much I respect your dedication and the work that you do every day. We could not do our jobs at the SEC without you. We're proud to be your partners.