Opening Remarks on SEC Investor Education and Advocacy to Military Service Men and Women at Ft. Hood
Commissioner Daniel M. Gallagher
Ft. Hood, TX
Feb. 12, 2015
Thank you, Lori [Schock] for that kind introduction.
We at the United States Securities and Exchange Commission (“SEC”) – like all Americans – are indebted to our military for the all of the work you do in protecting us and our country. So let me start out by thanking you on behalf of the SEC for the sacrifices you all make day in and day out. As the sponsor of the SEC Veterans Committee, it is a particular honor for me to be here with you today. We are rightfully proud of the SEC staff who have served our country – both for what they have done as soldiers in the past, and what they do for investors today.
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I want to talk to you today about what the SEC does, and how we can help you.
There are five SEC Commissioners. We are presidentially-appointed, and Senate-confirmed, and no more than three of us can be from the same political party as the President. Our Chair, Mary Jo White, is a Commissioner, but is also responsible for the administrative function of the agency, including the agenda.
The SEC has a three-part mission: (1) to protect investors; (2) to maintain fair, orderly, and efficient markets; and (3) to facilitate capital formation. One way we carry out our mission is by overseeing the key participants in the securities markets, including the securities exchanges, stock brokers and dealers, investment advisers, and mutual funds, among other participants. Today, the SEC’s mission is carried out by over 4,300 dedicated staff members in five divisions and 21 offices in Washington, DC and 11 regional offices around the country, including one near here in Ft. Worth. I wish I had time to talk about all of those offices, but let me spend a few moments focusing on the divisions.
You are probably most familiar with the work of our Division of Enforcement, which investigates alleged violations of the federal securities laws and, where appropriate, recommends to the Commission that it bring civil enforcement actions against individuals and companies for misconduct such as insider trading, accounting fraud, providing false or misleading information, and other violations of the securities laws. I apologize if I disappoint anyone in the process, but I’ll note here that although we often work closely with law enforcement agencies, the SEC has no criminal authority. I suppose it’s probably safer not to have a bunch of SEC lawyers and accountants rappelling from helicopters waving badges and carrying guns! Our sanctioning authority is limited to monetary penalties, remedial relief such as injunctions and public company officer and director bars, and equitable relief such as disgorgement of ill-gotten gains.
The Division of Corporation Finance assists the Commission in ensuring that corporations are appropriately disclosing certain important information to the investing public as required by law. In fact, although the SEC is often thought of as an enforcement agency, it was originally established as a disclosure agency. What this means is that the SEC seeks to ensure first and foremost that investors have access to certain basic information about their current and potential investments, including, among other things, the risks associated with those investments, so that they can make their own informed investment decisions.
Let me take a moment to stress that it is not, nor should it be, the SEC’s job to eliminate all risk from the securities markets. If we tried to eliminate all investment risk, our securities markets wouldn’t be as vibrant as they are today, and investors would suffer.
I’ll give you an example. In 1985, the year Steve Jobs left what was then known as Apple Computer, Inc., the company’s stock traded for less than $1 per share. That low price reflected the difficulties and uncertainties faced by the company at the time, and investors risked losing part or even all of their investment if the company faltered or failed. In return for accepting that risk, that investor gained the opportunity – assuming he or she held onto the stock – to profit from Apple’s eventual success. Today, Apple stock is now worth about $120 per share, meaning that someone who invested $2,000 in Apple stock in 1985 would, taking into account the stock’s splits, be sitting on a more than $800,000 investment today.
That’s a very different outcome than if that investor had put their money away in a savings account. Today’s interest rates are at historic lows – around half a percentage point – so for the sake of argument let’s multiply them by ten. That $2,000 investment in a savings account paying 5% interest, compounded annually since 1985, would be worth just over $8,000 today. Not bad – but not too good compared to the more than $800,000 you would have in Apple stock.
Please don’t get me wrong – traditional savings accounts and other low-risk or risk-free financial instruments and arrangements are crucial to our nation’s financial infrastructure. They simply can’t offer the same possibilities of high returns that our equity and debt markets – with the risks they entail – offer to investors.
The Division of Trading and Markets (“TM”) assists the Commission in providing day-to-day oversight of the major securities market participants, including, for example, broker-dealers as well as securities exchanges such as the New York Stock Exchange or NASDAQ. My last job at the SEC before I became a Commissioner was as a Deputy Director of TM. I was very proud to have worked with the dedicated and talented TM staff during the recent financial crisis, a particularly difficult time for the agency.
The Division of Investment Management (“IM”) assists the Commission in overseeing and regulating America’s $62 trillion – yes, that’s ‘trillion’ with a ‘t’ – investment management industry, which includes mutual funds and investment advisers. One of IM’s primary responsibilities is to ensure that disclosures about mutual funds, exchange-traded funds, and other investments are accurate and useful to individual investors.
Last but certainly not least, the Division of Economic and Risk Analysis (“DERA”) is the SEC’s newest division. DERA, among its many other responsibilities, plays the crucial role of studying the potential costs and benefits of our proposed rules. Our rules, while vital to protecting investors, carry costs, and it’s DERA’s job to help us ensure that we don’t accidentally do more harm than good. It’s absolutely crucial to us, as regulators, to be able to quantify those potential costs and benefits. We need to know, for example, if a potential rule that could provide a million dollar benefit to investors would cost ten million dollars to implement.
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Today, my colleague Lori Schock and I want to talk about ways the SEC can help service men and women like you invest responsibly and avoid falling into the financial traps that all too often befall members of our armed forces.
We have seen fraud targeted at military members and their families – just as we have seen fraud targeted at other identifiable groups – such as the elderly, or religious or ethnic groups. We have brought many enforcement cases to stop this kind of fraud, which we call “affinity fraud”.
For example, in 2006, the SEC sued a Waco, Texas insurance company and its affiliates for targeting American military personnel with a deceptive sales program that misleadingly suggested that investing in the company’s product would make the investor a millionaire. Unlike insurance products legitimately offered to a wide range of potential buyers with a potential interest in the insurance features of those products, this product was targeted at military personnel who had little or no interest in insurance because they already were provided access to low-cost insurance sponsored by the government. Between 2000 and 2006, approximately 57,000 members of the United States military purchased the product. The vast majority earned little or nothing on their investment. The defendant in that case agreed to pay $10 million to the military personnel who invested in the product.
In 2008, the SEC sued three stock promoters who targeted military families in a multi-million dollar fraud that forced victims into personal bankruptcy and their homes into foreclosure. The defendants held sham investment seminars to recruit service men and women to purchase real estate investment contracts and claimed that the money investors earned would go towards mortgage payments for investment properties purchased on their behalf. In reality, the defendants were operating a Ponzi-like scheme that defrauded more than 75 investors out of approximately $10 million.
In 2013, the SEC halted a hedge fund investment scheme by a former Marine who pretended to be a successful trader to defraud fellow veterans, current military, and other investors. The SEC alleged that the defendant raised nearly $1.8 million from investors, but invested less than half of that amount, while using more than $400,000 for personal expenses such as a Hollywood mansion, luxury automobiles, and extravagant tabs at high-end nightclubs. The defendant allegedly solicited friends, family members, and fellow veterans to invest in his hedge fund, and the defendant controlled a so-called charity called the Veterans Financial Education Network that claimed to teach veterans how to understand and manage their money.
The lesson from these cases is that even if you know the person making the investment offer, be sure to check out the investment and the person’s background – no matter how trustworthy the person seems.
The payday lending industry is another area ripe for potentially predatory practices targeted at members of the armed services. In 2010, the Financial Industry Regulatory Authority (“FINRA”) reported that more than one in five military personnel reported engaging in non-bank, alternative borrowing methods such as payday loans, advances on tax refunds, or pawn shops. Unfortunately, some of these lenders prey on and victimize service men and women, setting up storefronts around military bases and aggressively marketing their services to military personnel. Although the SEC does not directly regulate these companies, we have resources that can help you avoid falling into the predatory traps laid by some in this industry.
One of the key ways we protect investors is by providing investor education – and here, by investors, I mean all of you and your families, and the other military and civilian employees at Fort Hood. You are an investor if you own a mutual fund, a stock, a bond, or participate in the Thrift Savings Plan. The SEC has been committed for many years to providing investor education to the military. We are an active member of the U.S. Department of Defense’s Financial Readiness Campaign, and have conducted financial workshops on military installations throughout the country. We regularly issue investor alerts to educate the public about potentially fraudulent activity, like the affinity fraud examples I described earlier. We also support Military Saves Week – which is in just a couple of weeks – and other financial readiness events and activities by providing our free educational brochures, and we have copies of those with us today. We have a website dedicated to retail investors – Investor.gov – that has content helpful to service members and their families.
In today’s complex world, having a solid understanding of the financial marketplace is a key foundation to be able to handle life’s big events – paying for college, marriage, buying a home, and saving for retirement. In addition to the crucial roles you play in protecting the American people, you all have a responsibility to protect and take care of your own financial affairs. Members of the armed forces face especially difficult challenges with these responsibilities when one spouse is deployed in a combat zone for months or years at a time, and even more in situations where both spouses are deployed.
So today, my colleague, Lori Schock, is going to discuss three topics that are important to your financial security: (1) credit; (2) savings; and (3) investing. Each of these is important because the amount of credit you take on impacts your savings, and the amount of your savings impacts your investing. And most importantly, the amount you invest impacts your financial security.
Thank you for your time today, and of course, for your service to our great country.
 SEC v. American-Amicable Life Insurance Company of Texas; Pioneer American Insurance Company; and Pioneer Security Life Insurance Company, SEC Lit. Rel. No. 19791 (Aug. 3, 2006), available at http://www.sec.gov/litigation/litreleases/2006/lr19791.htm.
 SEC v. James B. Duncan; Hendrix M. Montecastro; Maurice E. Mcleod; Pacific Wealth Management, LLC based in Murrieta, California; Stonewood Consulting, Inc.; and Total Return Fund, LLC, Defendants, and Christopher J. Oetting, DBA Oetting Industries; Anthony M. Contreras; and Biocybernaut Institute, Inc., Relief Defendants, SEC Lit. Rel. No. 20469 (Feb. 27, 2008), available at http://www.sec.gov/litigation/litreleases/2008/lr20469.htm.
 SEC Halts Ex-Marine’s Hedge Fund Fraud Targeting Fellow Military, SEC Press Rel. No. 2013-149 (Aug. 6, 2014), available at http://www.sec.gov/News/PressRelease/Detail/PressRelease/1370539753649.
 FINRA, Financial Capability in the United States Military Survey—Executive Summary (Oct. 2010), available at http://www.usfinancialcapability.org/downloads/NFCS_2009_Mil_Exec_Sum.pdf.