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U.S. Securities and Exchange Commission

Speech by SEC Chairman:
Address before the Solutions Forum on Fraud


Chairman Mary L. Schapiro

U.S. Securities and Exchange Commission

Washington, D.C.
October 22, 2009


Thank you very much, Gene, for that kind introduction. I am pleased to join you today at this Solutions Forum on Fraud.

Today’s forum is so important for consumers and investors alike. That is because it is often easy to identify problems that need to be resolved, but focusing on the solutions is the hard part. So, I would like to thank the AARP Public Policy Institute and the National Consumers League for hosting today’s event.

I also want to congratulate Chairman Leibowitz for the work he is doing at the FTC to protect consumers. In so many ways, our two agencies have remarkably similar missions. The FTC protects consumers. The SEC protects investors. And, both of our agencies work to keep hard-earned savings out of the hands of fraudsters and in the pockets of those who earned it.

Overview on Fraud

The fact is regardless of whether you are a consumer or an investor, fraud is fraud. It comes in many shapes and sizes. It occurs in good times and in bad. And, its victims can be first-time investors as well as seasoned experts.

Importantly, regardless of the form it takes, fraud undermines the confidence we have in our markets. In the securities arena, when fraud occurs, it leads even the most experienced investors to question market integrity. And, it causes everyday investors to wonder whether they should put their dollars in the stock market or stuff them in stockings.

In a down market, like we’ve had during much of the last year, when fraud occurs, ordinary Americans become fearful. They become disillusioned and they become — rightfully — angry.

But this distrust of our securities markets serves no one’s interest. When fraudsters win, real people lose. And, we cannot let that happen. Seventy-five years ago, Congress established the Securities and Exchange Commission to protect investors. And, today the men and women of the SEC work diligently to do just that.

When I became Chairman in January I set out to revitalize the agency and refocus it on its core mission of protecting investors. We have embarked on an aggressive rule writing agenda intended to address problems exposed by the financial crisis and to begin to restore investor confidence in the markets. We have embraced the most difficult issues from corporate governance to the regulation of credit agencies to market structure.

One of the first areas of focus was our enforcement program where I streamlined procedures for opening investigations and for setting penalties for corporate defendants. In addition, I brought on-board a tough prosecutor to head our Enforcement Division — Rob Khuzami — who has engaged in the most significant reorganization of the division in decades.

The newly reorganized division will include specialized units that will enable staff to concentrate their expertise in focused areas and help detect patterns, links and motives. And, by reducing bureaucracy, we will speed up the enforcement process and put more seasoned-investigators back on the street — all in an effort to better prevent and detect fraud.

Fighting Fraud through Enforcement

One type of fraud that has been a great focus of the SEC is fraud against seniors. It’s not always the large, headline-grabbing type of fraud you have all read so much about in the last year. But for the SEC, the size of the case is not the only important variable. Fraud against seniors is particularly pernicious because the money that is lost usually comes from retirement savings — savings that have grown over a lifetime and can no longer be easily replenished.

In the case of seniors, the fraud often involves smaller groups or relies on personal relationships that are exploited for monetary gain.

Just today, the SEC filed a case against a promoter and group of brokers charging that they coaxed about 90 individuals — mostly seniors — to invest $12 million in a real estate investment program.  According to our complaint, the defendants literally handed out free lunches to pitch investments that they knew full well were risky unregistered real estate securities.   And, later, even after the real estate venture started to crumble, we allege that certain defendants continued to line their pockets with the investors’ money, while falsely assuring them that all was well.

Today’s case is just one of nearly 70 cases targeting senior citizens that the SEC has brought in the past three years alone. Many of these cases involve supposedly profitable and secure investment programs that are really nothing more than Ponzi schemes.

Last month, we filed a suit against a Michigan man, charging that he lured elderly investors into refinancing their homes to fund investments in a phantom company. We allege that he used so-called “investor seminars” to persuade 800 investors — mainly senior citizens and retirees — to invest more than $70 million in the company, but the victims’ money was being piped into a Ponzi scheme.

We also have filed cases against investment advisers who promise security for retirees, but deliver only risk and catastrophic losses. Earlier this year, for instance, the Commission filed a suit against a California investment adviser charging that he sold his retired clients a dream. According to our complaint, he told his clients that his margin-based investment strategy was “guaranteed,” with “practically no risk,” while in fact, his highly-leveraged approach was extremely risky and ultimately cost his clients more than 70% of their assets.

And, finally this past Spring we sued seven members of a church in New York, charging them with orchestrating an investment scheme that targeted elderly parishioners. We alleged that they swindled scores of investors out of more than $12 million by promising returns as high as 75%. — but rather than investing the money as promised, they simply pocketed it.

Complaints and Whistleblowers

These — as well as the other cases involving seniors — are significant successes for the agency in our efforts to stop fraud, but they require significant resources. And, with only 3,700 employees overseeing more than 35,000 registered entities, I know we cannot do it alone.

That is why one of my constant refrains is to leverage the resources of others, wherever and whenever possible — and to collaborate with everyone from state regulators, to federal agencies to advocacy and consumer groups like those present here today.

One place where I am committed to improving the way we leverage third parties is in the area of tips and complaints. Currently, we get anywhere from 750,000 to 1.5 million of them each year. And, we have reached out to the FTC and other agencies to identify the best system for handling those complaints.

But, we also have recognized that sometimes the most actionable complaints are the ones that come from insiders — or whistleblowers, so I have strongly advocated for a whistleblower program at the SEC that would encourage more insiders to come forward. In fact, in devising the right program, we reached out to agencies like the IRS and the Justice Department to learn how their whistleblower programs work and to imitate their best features. And, I am pleased that Representative Kanjorski recently introduced legislation that would enable us to compensate whistleblowers who provide valuable information that exposes a fraud.

Life Settlements

The benefit of a whistleblower program is that it gives the SEC potentially many more eyes and ears inside institutions that are cooking up new ways to defraud seniors. And, because fraud is always evolving, it is important for us to look ahead to tomorrow’s fraud as well.

One area of emerging interest to us at the SEC relates to life settlements. Life settlements involve the purchase of life insurance policies from those who no longer want the policies or can no longer afford to pay the premiums.

After paying out a lump sum to the insured, the purchaser generally assumes the responsibility of paying the premiums on the policy and then receives the payout when the insured dies. What that means is that someone is actually hoping and banking on another person’s early demise.

As unsettling as this might sound, life settlements are a growing market. And, there is a belief that this potentially could become the next big securitized product offered by Wall Street.

Unfortunately, many seniors may not fully appreciate the implications of selling their life insurance policy to someone who is purchasing it for investment purposes. For instance, it is possible that seniors may lose the ability to obtain life insurance in the future, that they may lose certain tax benefits, and that they may find that certain personal information about their health is being shared with or monitored by strangers.

On the other side of the transaction, investors may not have a complete understanding of the investment risks associated with a life settlement policy, including the risks related to the health and life expectancy of the insured.

The growth in the life settlements market, the potential harm that could come to seniors from aggressive and unscrupulous actors, and the emerging prospect of securitization of life settlements caused me to establish an SEC Task Force on Life Settlements.

The Task Force already is meeting with outside representatives to understand the range of issues presented by the life settlements market. We also are working with fellow regulators to figure out whether there is sufficient regulation of this market and whether any regulatory gaps exist.

The fact is we need to be out in front on this issue so that seniors who sell their policies, and those who may invest in securitized pools of life settlements, are well protected as the life settlements market grows.

Retirement Investments

Enforcement activity alone will not fully restore investor confidence. Curtailing fraud is critical but just as critical is curtailing industry practices that do not put the interests of investors first. This is particularly important as an ever increasing percentage of America’s workers are relying on their own investment decisions to fund their retirements.

The statistics bear this out. During the three decades between 1975 and 2005, the number of active participants in traditional defined benefit plans dropped from 26 million to 21 million. Meanwhile, those who actively participated in defined contribution plans increased five-fold from 11 million to 55 million.1

In my view, financial service firms should engage in responsible product development in the retirement market. Barraging investors with retirement products that feature the latest financial gimmick or marketable fad will not ultimately serve investors’ interests.

America’s future retirees deserve products that they can understand and evaluate. This means that complex fee arrangements or product descriptions should be discarded in favor of simple, clear disclosure.

Our future retirees should have access to products that will help them meet their retirement goals without imposing inappropriate risks. Products offering enhanced leverage and avant-garde investment techniques may be appealing to those investors that want to speculate. But they are not the type of investment products that belong in the retirement portfolio of the average American seeking to provide for security in retirement.

In addition, extolling the eye-popping results of the short-term performance of certain investment products, without focusing on the long-term implications or risks, can result in disappointed investors and potentially angry plaintiffs — not to mention an SEC prepared to be aggressive in enforcing the investor protection rules.

These types of disclosure, product development and marketing issues surrounding retirement products will be areas of focus in the coming year for those of us at the SEC. The burden imposed on those investing for retirement is significant, especially after the market events of last year and we must be committed to assisting those investing for retirement.

Target Date Funds

One area of particular focus is target date funds, which are products specifically designed for the retirement market. These funds and other similar investment options are financial products that allocate their investments among various asset classes. As a “target” date approaches, these funds automatically shift that allocation to more conservative investments.

The “set it and forget it” approach of target date funds can be very appealing to investors — especially for retirement investors who are overwhelmed by more complicated investment options. In fact, in 2007 immediately before the market downturn, nearly 10 percent of 401(k) assets were in target date funds.2 And those numbers will inevitably continue to grow because 70% of U.S. employers now use target date funds as their default investment.3

In some sense, this isn’t surprising. Target date funds, after all, were expected to make retirement investing easier by eliminating the need for investors to constantly monitor market movements and re-align personal investment allocations. But, the performance of these funds was quite surprising last year.

It has been reported that the average loss in 2008 among 31 funds with a 2010 target date was almost 25 percent. Perhaps even more surprising were their widely varying performance results. In 2008, target date funds for 2010 suffered losses of as little as 4 percent to as much as 40 percent. 4

I share the concerns of many investors who were surprised by these results, and particularly the wide disparity of returns for funds with the same “target” date. In fact, these concerns led the Commission to hold a joint hearing with the Department of Labor.

And, at the SEC, we are currently focusing on the use of a target date in a fund’s name and how the meaning of that date — and the nature of a fund’s investments — can be better communicated to investors. We also are closely reviewing advertising, marketing materials and related disclosure to determine whether investors are receiving accurate messages about their target date funds.


Our focus on retirement investing, however, is not limited to specific products. We also are committed to — and we all should be committed to — enhancing our financial literacy efforts.

Earlier this month, I named a new head of our Investor Education office, which I believe can play a significant role in empowering investors planning for retirement. Lori Schock, who I know worked with many of you in her previous positions at the SEC, is already working to get more feedback from investors and use research-based findings to enhance our investor education program.

It cannot happen too soon. According to one survey, only 44% of workers or their spouses have taken the time to estimate their financial needs for retirement. And nearly one-half of retirees have left the workforce before they planned.

So, it is particularly important the SEC and other groups reach individuals at or near retirement and give them effective tools and materials to make informed financial decisions.5

In the coming weeks, our education office will begin work on a “soup to nuts” financial handbook with an emphasis on research-supported information on key financial decisions during various life stages, including saving for and managing money during retirement, and strategies for avoiding fraud.

In approaching this project, we will try to make critical information and tools in these areas as accessible as possible to reach investors of all ages.

And, today we launched a new website — investor.gov — that is entirely investor-focused, with a dedicated section for seniors.  It’s a site that pulls from the vast body of existing materials at the SEC and reshapes it to be more reader-friendly.


All of these initiatives — as well as all the other items on our agenda — take significant resources, especially for an agency of 3,700 people. And, especially for an agency whose staff size and budget for investments in new technology are less than they were in 2005.

That is why, in addition to leveraging third parties, I have been advocating for significantly more resources and staff.

The SEC has seen large ups and downs in our budget over the past ten years, making it difficult to do long term planning or develop adequate technology. In my view, it is truly critical that, if the SEC is to become the kind of regulatory agency that the American people have a right to expect, we have sufficient, stable long term funding.


In short, I am committed to using all the resources I have at my disposal — and relying on whatever additional resources I can get — to tackle investor fraud among the elderly. By rooting out fraud, incentivizing whistleblowers, pressing for understandable retirement-oriented products, and enhancing our financial literacy program, we can make it harder for the next fraudster to succeed. And, we can clear up the climate of confusion that many investors face today.

The stakes are high for America’s future retirees. And, those retirees are counting on all of us.

Thank you very much.

1 Investment Company Institute, 401(k) Plans: A 25-Year Retrospective (Nov. 2006) at 3.

2 Fran Hawthorne, “In Target-Date Funds, Hidden Homework,” The New York Times (Oct. 15, 2009) (citing data from Hewitt Associates).

3 Margaret Collins, “Target-Date Retirement Funds May Miss Mark for Unsavvy Savers,” Bloomberg (Oct. 15, 2009) (citing a Mercer, Inc. study of more than 1,500 companies).

4 Mark Jewell, “Target-Date Funds Take Time and Attention, Too,” Washington Post (Jan. 18, 2009).

5 Ruth Helman, Craig Copeland, and Jack VanDerhei, “The 2009 Retirement Confidence Survey: Economy Drives Confidence to Record Lows; Many Looking to Work Longer,” EBRI Issue Brief, no. 328, April 2009.



Modified: 10/22/2009