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U.S. Securities and Exchange Commission

Speech by SEC Chairman:
"The Consumer in the Financial Services Revolution"


Chairman Mary L. Schapiro

U.S. Securities and Exchange Commission

Consumer Federation of America 21st Annual Financial Services Conference
Washington, D.C.
December 3, 2009

Thank you very much for that kind introduction. I am so pleased to be here today.

The Consumer Federation of America has long been a vigorous watchdog for consumers everywhere. Every time that I step inside a store, open a bank account, buy insurance, or set up a telephone plan — I know that I'm benefiting from the work of the CFA.

And, the same can be said every time any of us invests in a financial product or turns to an investment professional for help. That is why I so greatly appreciate the work of this organization.

Today, we are undergoing a financial services revolution. And, I know that both of our organizations will continue to be on the front lines looking out for individual investors — finding ways to better protect Americans who contribute to a 401(k) plan, open a college investment account or simply buy a single stock, bond or mutual fund.

As we all know, last year's financial turmoil had a real impact on real people. Many older Americans had to put off their retirements. Many families with high school students saw their college investment plans plummet. Many workers came to work to find a pink slip on their desk. And many middle-aged Americans saw their future financial security replaced with uncertainty.

In recent months, the market has improved and the financial forecasters have become more optimistic. But we cannot let down our guard. We cannot presume the weaknesses in our financial regulatory system have been resolved. And, we cannot let our memories be so short as to avoid learning lessons from the mistakes of the past.

There is too much at stake.

For this reason, we must continue our efforts to reform the financial regulatory system — both at the Congressional level and at the agency level.

Both the Administration and Congress have recognized the need for meaningful and effective financial reforms — and have been working hard in recent months on legislation to achieve these goals.

We have certainly made progress, but we still have a ways to go.

On The Legislative Front

We need a regulatory system that is focused on identifying and minimizing systemic risk — one that can eliminate gaps in our regulatory structure, protect investor rights and promote fair competition.

We need a credible resolution regime that permits large institutions to fail without taking the system or taxpayers down with them — a regime that eliminates artificial advantages and incentives that encourage institutions to get so big and complicated in the first place.

We need to bring managers of hedge funds and other private funds under the regulatory umbrella. For too long, these large players have managed to avoid effective oversight.

We need to have a strong fiduciary standard for all securities professionals.

And, finally, we need to bring greater transparency and stability to the over the counter derivatives market — a market that has grown enormously in the past decade.

This is particularly important because derivatives directly affect the regulated securities and futures markets and can infuse significant risk into our financial system. They serve as a less regulated — but economically equivalent — alternative to the markets and products that you and I rely upon.

To address these gaps and regulatory arbitrage dangers, legislation is essential to bring greater transparency and oversight to OTC derivative products and market participants. The existing regulatory chasm cannot be allowed to continue.

I believe Congress has made real progress in this regard. As this process moves forward, however, we must remain ever vigilant against even small exceptions, carve outs and arbitrage opportunities that might create tomorrow's risks.

For example, to prevent bad actors from hiding their trading activities, I also believe we — at the SEC — need the tools to effectively apply the securities laws and police the securities-based derivatives market.

That is why we have been pushing for security-based swaps to be subject to at least all the oversight and transparency that would apply to any other over-the-counter security, such as an OTC option. This would ensure that we have the ability to inspect and examine all relevant market participants — including swap dealers, central counterparties, trading venues, and swap repositories.

We need to have quick access to comprehensive, real-time data on securities-related OTC derivatives — so that fraudsters cannot just use securities-based derivatives to engage in insider trading or market manipulation.

Regulatory Activity

But the need for meaningful regulatory reform does not exist solely at the Congressional level. It is not limited to macro-economic issues. There is much that the SEC can do on its own.

In fact, over the past year, we have already undertaken initiatives to protect client assets at investment advisers, address market structure inequities, enhance corporate governance, strengthen the resiliency of money market funds, and upgrade regulation of credit rating agencies.

Protecting the Individual Investor

All of these initiatives — and many more — will ultimately help individual investors.

And, it is to that constituency I believe the SEC must be most attuned.

After all, broker-dealers and investment advisers put lots of thought and energy into selling their products and services to the public. They figure out how they can get new investors in the door and how they can make a profit.

So, I want to be sure that we — at the SEC — are putting just as much thought and energy into how to protect individuals who are entrusting their money to our capital markets.

I want to know that we've thought through what investors encounter when they walk into a financial professional's office or call them on the phone. For example:

  • Does the investor make a distinction between brokers and investment advisers, the way the law does?

  • Does the investor get the relevant, simple and comparable information at the point of sale or recommendation, or only after the sale has occurred, if at all?

  • Does the investor know about all the fees they are being charged and whether they are getting the services they are being charged for?

  • And, does the investor appreciate the nuances of retirement investments and products?

Today I want to discuss the initiatives we are undertaking to address these questions — and perhaps it's easiest to do so from the perspective of that individual investor.

Treating Securities Professionals' Similarly

Applying the Same Standards

So, imagine an investor walking down Main Street in the town where you grew up. He steps into the office of the local securities professional and is handed a business card.

But he doesn't look to see whether it says broker-dealer or investment adviser. Chances are he doesn't know the difference. Or even care. All he wants is helpful, investor-focused advice, a fair deal and a professional he can trust.

These seem to me to be reasonable expectations. But today that investor — whether he knows it or not — is treated differently depending on what that business card says. If it's a broker-dealer, he's sold a product that is, "suitable" for him. If it's an investment adviser, he gets treated under a higher standard — the fiduciary duty standard — meaning that the investment adviser has to provide advice that puts the investor's interest first.

Investors today should not be treated differently based on what door they walk into — or based on what is written on the business card they are handed.

Instead, I believe that all securities professionals should be subject to the same fiduciary duty — and that all investors receiving advice should rest assured that the advice they get is being given with their interest at heart.

But, to be effective, the fiduciary duty needs to be meaningful and uniform across all securities professionals. It cannot be weakened or diluted just so that it can be applied broadly.

At the same time, we should not assume that the investor is fully protected just because the professional on the other side of the desk is subject to a fiduciary standard.

To fully protect the interests of that investor, we must couple the fiduciary duty with an effective oversight regime. And because that investor doesn't differentiate between broker-dealers and investment advisers, our rules should not either.

Securities professionals, regardless of what their business card says, should be subject to the same standard of conduct, the same licensing and qualification requirements, the same disclosure obligations, the same regulatory and recordkeeping standards and a robust examination and oversight schedule.

This approach may disrupt a number of entrenched interests. But, we are doing no service to retail investors by continuing with a distinctly different regulatory approach for professionals who perform virtually the same or similar services.

I thank Congress and the Administration for their leadership in moving us toward a unified fiduciary standard and a harmonized regulatory regime for broker-dealers and investment advisers.

Securities Professionals' Compensation and Conflicts

Point of Sale Disclosure

So, now let us assume our investor is dealing with a professional who is subject to a fiduciary standard. He puts the business card in his pocket and proceeds to listen to the advice he is given.

But exactly what information is he provided? Is it helpful? Is it easy to understand?

Surely, buying a security is not like buying cereal in the grocery store. But, when we enter a grocery store, we at least can see nutrition labels that are easily comparable; we can see prices that are clearly marked. We can count calories and save cents, as we walk through the aisles comparing products.

But, back at that office of the financial professional, comparative shopping is not so easy. In my mind, this should not be the case.

I believe retail investors should be provided clear, simple, meaningful disclosure at the time they are making an investment decision — disclosure that includes comprehensible and comparable information about the securities products and services being offered.

It also should include information about the compensation the professional will receive on each product being sold — and information about the conflicts that may be causing the advisor or salesman to steer the investor to a certain investment.

I realize this is a difficult task, but we will not be deterred by the complexity of the product. Our staff already has announced that it is developing a simplified "summary prospectus" for variable annuities, which are widely regarded as one of the most difficult-to-understand products on the market. It is precisely in this type of product where simplicity of disclosure is essential.

At the end of the day, our investor in that Main Street office just wants to know the facts, so he is not taken advantage of by hidden fees or questionable motivations. And he needs this information when it is most meaningful — at the time he is making his investment decision.

Naturally, not every securities product is purchased while sitting in an office on Main Street. With technology it doesn't quite work that way anymore. For this reason, the mode of disclosure will need to be tailored. A solely paper-based disclosure system is a thing of the past. We should harness the power of the Internet to better serve retail investors. But because disclosure should inform, and not overwhelm, the goal of this disclosure initiative will be to achieve simplicity and clarity, whether on the page or on the screen.

Based on past experience, I know that getting to the point where we can have meaningful point of sale disclosure will be difficult. There will likely be significant pushback from the industry related to cost and convenience. But anything worth doing is not easy.

Ultimately, if we can improve the timeliness and clarity of disclosure for that investor on Main Street, it will have been well worth the effort.

12b-1 Fees

Directly related to this, is the issue of 12b-1 fees. These are fees that are automatically deducted from mutual funds to compensate securities professionals for sales and services provided to mutual fund investors.

The problem is that our investor may have no idea these fees are being deducted or who they are ultimately compensating.

That's why I believe there needs to be a better approach.

When it comes to these fees, there is a need for more fundamental change than merely disclosure reforms and a name change. We must critically rethink how 12b 1 fees are used and whether they continue to be appropriate.

For example, do they result in investors overpaying for services or paying for distribution services that they may not even know they are supposed to be getting? This is no small matter. In 2008, these fees amounted to more than $13 billion — up from just a few million dollars in 1980 when they were first permitted.

Of course, in 1980, they may have made sense — but after 30 years of growth and change in the mutual fund market, it is past the time to reassess their need and their effectiveness.

So, I have asked the staff for a recommendation on 12b-1 fees for Commission consideration in 2010.

Retirement Products

Finally, as we look back in on the office on Main Street — we see our investor asking about retirement products. In fact, today that's happening more and more as Americans are being asked to fund their own retirements.

That is why I believe our nation needs to commit to helping everyday Americans invest for their retirements. It is a financial goal that no one should ignore, whether just entering the workforce or approaching the end of a career.

Essential to this effort are education and financial literacy. Earlier this fall, the SEC launched a new "investor.gov" Web site to better connect with retail investors, with a particular focus on seniors. And we recently brought on a new management team to oversee Investor Education to assure an undiluted focus on the need to better educate investors.

In addition, I have requested that the staff, early next year, present the Commission its recommendations on target date funds. As you may know, these are products specifically designed for Main Street investors planning for their retirement.

They are funds that contain a "target" retirement date in their very name and are designed to become more conservatively invested as the target date approaches. However, last year, many investors were surprised when target date funds marketed to 2010 retirees lost between 9 and 41 percent of their values.

The "set it and forget it" slogans of these funds resulted in shocked investors who were on the verge of retirement. It was a wake-up call for investors, employers and regulators, alike.

Earlier this year, the SEC held a joint hearing with the Department of Labor, which has designated target date funds as qualified default options for 401(k) retirement plans.

Since that hearing, our staff has been focused on the marketing materials related to these funds and the use of target dates in fund names. I believe this an area in need of reform for the benefit of America's retirement investors, and I look forward to completing the work we have started.


To succeed on behalf of all investors will take not only the will but the resources. I can assure you we have the will. We have dedicated men and women at the SEC who wake up every day committed to protecting investors. And we are stretching our existing resources. But we will not likely be able to achieve all we seek to do without additional funding.

You may not know, but the SEC is a relatively small agency for what we are tasked to do.

We have a staff of 3,700 individuals responsible for overseeing more than 35,000 entities, and areas as diverse as accounting, market structure, corporate governance, mutual fund and intermediary regulation to name just a few.

And, our examination staff — tasked with inspecting 11,000 investment advisory firms and 8,000 mutual funds — numbers less than 500. As a result, our investor on Main Street has about a 10% chance of walking into an investment adviser who has been inspected by the SEC in the previous year.

What's more, as the financial world and product complexity were growing exponentially, our budget was shrinking. Since 2005, the SEC staff size has dropped and funding for discretionary technology has decreased by 50%.

That is why I have been advocating for the SEC to be able to fund its own operations, like virtually every other financial regulator — through the fees we collect. The amount of these fees far surpasses the amount appropriated by Congress to the SEC each fiscal year.

Through self-funding, the SEC will be able to maintain sufficient, stable long-term funding that would enable us to perform long-term planning and better protect the interests of investors and pursue the initiatives I have just described.


2010 will be another year in which I expect the SEC to pursue an ambitious reform agenda. And as we set out on these reforms, we will do so from the perspective of that retail investor on Main Street, who has the unquestioned right to believe that the SEC is on the job. I am committed to restoring confidence and providing the protections investors expect and deserve.

I hope I can count on your support.

Thank you.


Modified: 12/03/2009