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U.S. Securities and Exchange Commission

Speech by SEC Commissioner:
Remarks before the SEC Speaks Conference


Cynthia A. Glassman

U.S. Securities and Exchange Commission

Washington, D.C.
March 4, 2005

Although this is my fourth presentation to SEC Speaks, there is no shortage of topics that I could address. I could have chosen to talk about life in the post Sarbanes-Oxley environment - especially the internal controls requirements of Section 404 -- but since I covered that popular topic in a speech just last week, those of you interested in my perspective can read the speech I gave on February 22. Or, I could have given highlights of our activities in the last year, including my dissents on the mutual fund independent chair rule and hedge fund registration rule, but I did that a week ago in a different forum, so if you are interested, see my February 24 speech. Instead, I want to devote my ten minutes this year to a subject that I feel truly passionate about - enabling investors to make sound investment choices.

As I see it, there are two important ways that the SEC can help investors make good investment decisions. The first is to make sure that they get good information regarding their investment choices. That means that investors get complete, accurate, and timely information about investment products and providers in a manner that the investors can understand. The second is to provide educational materials directly and indirectly to the investing public. The SEC has been actively going down both paths, and I want to highlight some of the important steps we have taken in the last couple of years.

Turning to clear disclosure, it has become apparent to me that writing what are essentially legal documents in a way that is clear to the non-legalese speaking public is a serious challenge. As you know, I am not a lawyer, but after three years here, and despite my vows not to fall into using legal jargon, I seem to have succumbed. This became evident to me as we were working on the draft "point of sale" disclosures for purchasers of mutual funds through broker-dealers. The purpose of the disclosures is to make sure that investors buying funds from broker dealers understand, before they buy, what they are paying and whether the broker has any conflicts of interest relating to the sale. Sounds simple. Not so!

When I saw the first drafts of the proposed forms, I had difficulty understanding them. I have no doubt that they were technically correct, but I did not think the average investor would get the message. At that point, one of my counsels and I took a crack at them, and then enlisted help from our Office of Investor Education. Working with Market Reg staff, we put out a form for comment that I thought was pretty good.

Then our Investor Ed office undertook a major outreach program to get comment from real investors and engaged a consultant to conduct focus groups in various cities, testing evolving versions of the form. The results were very enlightening: the forms needed significant revisions and additions to get the point across. Based on those findings, we are now seeking additional comment on certain disclosure forms based on what the investor focus groups found most useful.

There is an important lesson here - and it is one that marketers have known for years. The choice of words, format, and placement on the page are all critical elements in getting the message across. We need to take that message to heart when we require disclosures so that what we propose does indeed get the message across. And you and your clients should focus on that as well, so that disclosures don't get lost in the fine print. After all, if firms are not comfortable saying clearly what they are doing, perhaps they should rethink whether they should be doing it.

We have applied this learning to other initiatives. For example, we have proposed a rule that would include a requirement for brokers to disclose that they are not acting as investment advisers when giving fee-based, non-discretionary advice that is solely incidental to their brokerage business. I have asked our Investor Ed staff to do some market testing to see if mainstream investors understand the proposed message - that broker-dealers and investment advisors have different obligations to their customers, and therefore customer expectations regarding the advice they may get should take these differences into account. I will be very interested in the outcome of this process.

What we have learned from the outreach exercise also reinforced my view that we need to take a fresh look at all of our disclosures through the eyes of investors, especially mutual fund disclosures. My view is that we need to start with a blank sheet of paper and build up from the basic information that we think investors should know and, perhaps even more importantly, the information that investors want to know in order to make informed decisions. I doubt that many people would disagree with my view that the current disclosures are too cumbersome, too legalistic, and frankly too overwhelming for typical investors. There has to be a better way.

Which brings me to the other half of the equation - investor education. Improving the disclosures is like bringing a horse to water - but we need investor education to get them to drink! To this end, the SEC is involved in a number of new programs that I will just highlight for you:

  • The specific outreach to investors during the comment period on appropriate rule proposals in itself is an education tool. Just by asking the questions, we have raised the level of investor understanding of potential broker conflicts and costs.
  • We are represented on FLEC, the Financial Literacy Education Commission, established by the Fair and Accurate Credit Transactions Act of 2003. FLEC's mission is to improve the financial literacy and education of persons in the United States. One of its first initiatives was to establish a website - www.mymoney.gov - and a toll-free telephone number - 1-800-MYMONEY - to coordinate the presentation of educational materials from across the spectrum of federal agencies that deal with financial issues and markets.
  • The Board of the investor ed fund created from the global settlement is working toward getting its 501(c)(3) designation, after which it will be in a position to fund worthy and cost-efficient programs designed to equip investors with the knowledge and skills necessary to make informed investment decisions.
  • We recently brought a settled action for misleading sales tactics against a registered broker-dealer whose customer base consists almost entirely of active-duty and retired U.S. military personnel. The company agreed to pay $12 million, a portion of which will be used to fund investor education programs for members of the U.S. military and their families.
  • We have continued to broaden our investor education materials, and we have developed a new line of brochures aimed at public reference librarians. As I hope you're already aware, an entire section of the SEC's website (www.sec.gov) is devoted to investor information, including definitions for often used legal terms and links to a host of other investor friendly sites.

I would like to end with my "big idea", and solicit your help in making it happen. As I have watched various prime time TV programs, for example, The West Wing, I realized that often there is a civics lesson embedded in the plot. One that comes to mind was a discussion of how the census is taken. It struck me that a terrific way to raise investor ed issues could be through mainstream TV programs or movies. I am sure we have plenty of story lines from our enforcement actions that illustrate the basic investment tenets of diversification, the risk reward tradeoff, and "if it sounds too good to be true, it probably is." Actually, we could probably build a series around that last one! So if any of you has contacts in the TV or film industry, please pass this idea along - I am absolutely serious! And if this idea comes to fruition, perhaps they will film a segment at SEC Speaks, and you can all be part of the cast!

Thank you for listening.


Modified: 03/04/2005