Speech by SEC Chairman:
Remarks to the North American Securities Administrators Association
Chairman Christopher Cox
U.S. Securities and Exchange Commission
May 9, 2006
Thank you, Patty, for those kind words. As most of you know, Patty is the Administrator of the Wisconsin Division of Securities, and she does a spectacular job. During her presidency of the North American Securities Administrators Association, she's been outstanding in her efforts to encourage state-federal collaboration. She's served three terms on NASAA's board of directors, and her commitment to investor protection is long standing. Patty, the nation is fortunate to have your leadership.
To all of my fellow regulators, and our other distinguished guests - welcome to the nation's capital.
Washington, in one uncharitable description, has been called "Hollywood without the beautiful people." In the hyper-political environment of this town, there's a lot of opportunity for sarcasm. Even the city's beautiful monuments aren't immune from the critics.
For example, here's what Mark Twain had to say about the Washington Monument:
"The ungainly old chimney that goes by that name is of no earthly use to anybody else, and certainly is not in the least ornamental. It is just the general size and shape, and possesses about the dignity, of a sugar-mill chimney. … It's an eyesore to the people."
Now admittedly, he made those comments in 1868, before the monument was completely finished. But he was hardly the first, nor was he anything like the last, to poke fun at this city - which some have said has no more connection with the real world than Neverland.
For what it's worth, by the way, today is J. M. Barrie's birthday. You remember him, of course - the author of Peter Pan, and the creator of Neverland. It's a fair observation about all of us here in this room that we've a lot in common with the young hero of his story. After all, like Pan, we spend most of our days dueling with pirates.
The one difference, of course, is that we're not immune to the aging process. In fact, our nation's blue sky authorities - if not all of you - are actually quite old. And the role of state securities regulators is a venerable one.
Your history and your responsibilities go back well before there was any such thing as the federal securities laws. Just a quarter century after the Washington Monument was completed, the first blue sky law was enacted in Kansas in 1911. It served as a model for similar statutes across the country. By 1919, there was even a national association of state regulators - the North American Securities Administrators Association.
You've been at it ever since. Your estimated 1,400 securities regulators are the local cops on the beat. And in many cases you have powers that the SEC doesn't.
Together, we can accomplish a lot of good for investors and for our economy. That's because we share a common mission - to protect investors. And since more than half of Americans own stock today, we share a big job.
The good news is, we have a long history of working together. In just the past several years, the SEC has granted hundreds of requests from state and local governments to access our investigative files. We've referred thousands of investor complaints to state regulators. And you, in turn, have shared thousands of leads with us.
That's why I'm so pleased to be working to continue that tradition.
Our current mutual initiative, to establish "best practices" to guide our federal and state enforcement staffs, is close to completion. A working group of six representatives from the SEC's enforcement staff, and six from the state securities commissions, is preparing recommendations on ways to improve enforcement cooperation between the Commission and the states.
We hope to set clear guidelines for determining when it makes sense for one rather than two regulators to work a case - to avoid the duplication that can sometimes result from both the states and the SEC being involved.
We also want to clearly set out when it's appropriate for both of us to work a case. For those occasions, we'll have guidelines to help us coordinate and cooperate with each other.
Partly as a result of our improved coordination in allocating enforcement resources, the SEC and state regulators have recently achieved some spectacular results in a number of high profile cases. The historic global analyst settlement is an excellent example of how much we can accomplish working together.
By pooling our resources and sharing our expertise, we succeeded in winning a speedy and far-reaching settlement that's already returned over $280 million to injured investors.
All told, 12 firms were ordered to pay over $875 million in disgorgement and civil penalties. That's in addition to over half a billion dollars to fund independent research and investor education.
It's worth recalling some of the other recent successes from our cooperative efforts.
Working with state regulators, the SEC recently reached a $1.6 billion settlement with the American Insurance Group. Another state-federal partnership concluded a $375 million settlement with Banc of America. The combined efforts of federal and state securities regulators led to a settlement with Invesco Funds Group, AIM Advisors, and AIM Distributors that totals over $375 million.
Likewise, the settlements with Pilgrim Baxter and its principals totaled a quarter of a billion dollars; with Massachusetts Financial Services $225 million; with Fleet's Columbia Mutual Fund Adviser and Distributor, $140 million; and with Strong Capital Management and its founder, Richard Strong, another $140 million.
In the last two years, as state regulators have asked for more referrals from the SEC, our Division of Enforcement has developed a process to screen cases for issues of potential concern to the states. Following this approach, the SEC has proactively referred complaints that have a nexus to a particular state, or that raise legal issues of special local concern. This improvement in the referral process has led to an increase in the number of referrals by the SEC to the states.
Of course, our federal-state coordination is much broader than just enforcement.
Our examination staffs meet regularly across the country in National and Regional Examination summits. Through these collaborations, we've been able to discuss areas of mutual concern, trends in compliance, priorities in exams, and a host of other issues.
Just yesterday, the SEC and NASAA held a first-ever "Investment Adviser Examination Summit Meeting," to discuss ways we can help each other in this specific area.
One particularly successful joint effort is the Annual Joint Regulatory Examination Training program. Every year, examiners from the states, the SEC, and the SROs receive training from experienced leaders in each organization. They learn about exam strategies and techniques, compare notes on emerging compliance problems, and discuss a host of other issues. Most importantly, our exam staffs in the field gain the opportunity to meet each other, and to develop valuable contacts that continue to grow when they return to their offices.
This year's Joint Regulatory Examination Training is taking place next month, in St. Louis - and I want to thank NASAA for your continuing support and active participation in this vital endeavor.
Of course, what I've just described is barely the tip of the iceberg when it comes to our joint efforts. Our staff at the federal and state levels are taking advantage of many other joint conferences, panels, and meetings to share information and to work together.
Today's annual 19(d) conference (or what used to be the 19(c) conference) is a great example. Then there's NASAA's annual fall meeting; the SEC's annual enforcement training for both regulators and criminal authorities; the many other standing meetings in each region between SEC offices and state regulators; and of course the annual NASAA Winter Enforcement Conference, where senior enforcement staff from the SEC often participate.
Today, we're building on these relationships to start work together on a new initiative - to better protect our nation's seniors.
It's always a terrible thing to steal someone's savings - but there surely is a special place in Hell for those who would prey on the Greatest Generation, and rip off the life savings of the children of the Depression who defeated Nazism, Fascism, and Communism.
Our national strategy to combat fraud aimed at seniors is threefold. It begins with aggressive enforcement against those preying on seniors. Second, it includes targeted examinations to uncover this special kind of fraud. And third, it will redouble our specialized investor education aimed at older Americans.
I am very pleased that NASAA, under Patty's leadership, is partnering with the SEC in these efforts.
Now it's time to announce the next steps in this important national effort. To bring together the very best thinking about protecting the older members of our society, I am pleased to announce today that this summer, the SEC will convene a Seniors Summit.
This will bring together every regulator and important organization with an interest in protecting seniors, to work together to combat fraud against seniors.
The NASD Foundation has commissioned important research on why our nation's elderly citizens are more frequently victimized by investment fraud. At the Seniors Summit, we will review this research and explore its practical ramifications.
Of course, we'd much rather prevent fraud before it happens, than mete out justice after the fact. That's particularly true when it comes to seniors. It's a very real fact of life that older investors may not have time to recoup their losses. And their savings may represent all they have left in the world. So we're pursuing a number of new investor education efforts focused on areas where seniors may be most vulnerable.
On our website, sec.gov, we've launched a new section specially dedicated to seniors.
It's designed to draw attention to the concrete steps that seniors, their families, and their caregivers can take to avoid fraud. Our educational programs help explain what seniors most need to know about potential investments including the people who sell them. We explain the importance of assessing one's risk profile, and the best way to go about it.
We are also expanding our efforts to reach out to local community organizations and enlist their help in educating older Americans about investment fraud and abuse.
And our work to protect seniors includes detecting fraud as early as possible. You already know about our work together in Florida. We are working with Florida officials and with NASD to launch a series of on-site compliance examinations of firms that sponsor "free lunch" seminars, often targeted to seniors. One big concern is that these seminars are being used by unscrupulous individuals or firms to sell investment products that are unsuitable to their would-be clients. We don't want seniors exposed to high-pressure sales tactics, wild claims about projected returns, and no disclosure of the actual risks of an investment. And we're also looking at whether the sales seminars held by firm employees are approved by firms' supervisors and are being adequately supervised.
What we are finding is that, unfortunately, we were right to launch these examinations.
Today, I am pleased to announce that we will be expanding this examination initiative to still more parts of the country.
Again, we'll be working hand in hand with state securities regulators and the NASD. For those who thought preying on senior citizens would be easy, there will be no free lunch.
And more broadly, as part of our collaboration with state securities regulators and the NASD, examiners in our SEC field offices will also share regulatory intelligence to better identify firms that may be preying on seniors. Then, we'll examine those securities firms to make sure their sales practices are lawful. And we'll be taking aggressive enforcement actions whenever we find that investors have been defrauded. In the last two years alone, we've had 26 enforcement actions aimed specifically at protecting elderly investors.
It's vitally important for us to strengthen our focus on protecting America's seniors now, before the World War II generation, in General McArthur's phrase, "just fades away." But there are even more good reasons to re-focus our energies on the investment issues facing older Americans.
As I was listening to Patty's introduction, and all the things she said I've done - many of them even true - all I could think was, man, I'm getting old. The inability to face the fact that, yes, we're getting old, too, is reflected in the very name of our generation. Baby Boomer. Even as we inexorably approach senior citizen status, we cling to a label that evokes images of a bouncing baby perpetually in diapers.
But ready or not, this year, the first of the boomers are turning 60. And after that, comes the deluge. Over the next 20 years some 75 million Americans will become sexagenarians. To paraphrase George Burns, for many, that'll be their first sex in a long time.
That's about 10,000 people turning 60 every day. Think of it as everyone in a medium-sized American town turning 60, and then another town, and then another, every day for two decades.
Of course, boomer membership in AARP, where "older Americans" is defined as reaching the ripe old age of 50, has already exploded. But the real milestone in this march to mortality will be reached a scant five years from now, when the first Baby Boomer reaches Social Security's official retirement age of 65.
Six years ago, as we began the new millennium, the 65-and-over population represented just 13% of all Americans. But by the time all the boomers have crossed that threshold of Social Security eligibility, more than 20% of the population will be 65. And that's the way it will continue for many decades.
As the generation known for its youth, energy, and rebellion turns to easy chairs and comfortable shoes, as we finally admit that Mick Jagger really does look old, what will we do in retirement? Will we, like our parents who were reared in the Depression, continue their habits of responsibility and work? Or will we follow the new retirement mantra of "if it feels good, do it"?
There is some trepidation among those academics who have studied the tea leaves. According to one study by Frank Fernandez, chief economist at the Securities Industry Association, America's future seniors fall into three distinct groups.
The first group, roughly the top fifth in terms of wealth, have accumulated all the funds they need to retire, and more. They can kick back and enjoy the last years God will give them. The vast majority of them will not only have enough, but will be able to leave an estate to their children. They can, and probably will, safely switch their assets to fixed-income securities that bear little or no risk.
The second group, representing the bottom fifth in terms of wealth, have saved next to nothing. They'll try to rely on Social Security, Medicare, and probably Medicaid and other government income supports for the rest of their lives. They'll suffer a steep decline in their living standard.
And the third group is the great American middle - perhaps 60% of all future seniors -who have some savings, but not enough to last them through their extended life expectancy. Many of the people who will be in this group are even now fantasizing that they're in that top one-fifth. Actually, some will have their work cut out for them just to stay out of the bottom group.
What will they do? Almost certainly, most of those whose health allows it will continue to work past their parents' retirement age. And research shows they'll stay in equities and other higher-risk investments for much longer than the textbook savings plan prescribes. They'll have a higher tolerance for risk, because growing their nest egg is the top priority.
That last fact of life is what requires everyone in this room to pay attention. Because it will put millions more seniors at risk of falling victim to scam artists, at the very time of their lives when they can least afford it.
Our collective efforts, if we plan well and start now, can spare a lot of people a great deal of anguish.
I apologize if this brief talk has been a bit depressing. Any time we focus on the fact that we're all getting older - that we're not Peter Pan - we're forced to confront our own mortality. But while most of what I just said sounds like bad news, the basic point is in fact great news. The underlying reason that securities fraud directed at seniors is a growing problem is that we're living longer.
When my father was born, life expectancy in the United States was 49 years. At the end of the 20th century it was 77. For children born since then, fully half will live to see their 90th birthday; and at least 10% will pass 100.
This kind of revolutionary change in our society will demand corresponding changes in the way we work, and in the way we save and invest. And since saving for one's future will mean a much longer future than we ever before imagined, the stakes for our investor protection mission couldn't be higher.
The time for us to start doing something about all this is now. And that includes planning for our own retirement.
When it comes to leading by example in this area, I can think of no better role model than Joy Payne. She's a dynamo who worked up to 50 hours a week as an intern in my congressional office.
As a political science student on loan to me from the UC-Irvine, she did everything from taking notes at bioterrorism hearings, to answering phones and greeting visitors at the front desk, to performing legislative research. Wherever she works in the future, her employer is going to dread the day she decides to retire. Her strong work ethic and her energy would be tough to replace.
But there's one more thing about Joy Payne: she's nearly 79 years old.
She came to work for me just a few weeks after 9-11, and just in time for the anthrax attacks on Capitol Hill. Her husband was a pilot for the old North Central Airlines, who was killed in a crash at Chicago's O'Hare International Airport. She retired from a bank in Washington state in 1989, and since then has worked as a security guard, and even gotten her real estate license. She finally decided to return to school full time to study political science - and I ran into her when she was a senior - in both senses of the word.
Joy is one amazing woman, but it's entirely likely that, as the 78 million-strong Baby Boom generation reaches their golden years, "we ain't seen nothin' yet."
After all, Warren Buffett will turn 76 this summer, Kirk Kerkorian is 88, and even Alan Greenspan is 80. They're all living proof that neither work, nor investing, needs to stop at any predetermined age.
So as we tackle questions like how to restructure 401(k) plans so they don't induce people to retire at a certain age; how to rethink the role of Social Security; and how to encourage the healthy segment of the huge boomer generation to keep being productive - we've got to constantly re-think our own role as regulators.
While helping protect experienced investors from the 21st century's latest scams, we've also got to remember that for every Alan Greenspan, there's a woman with dementia, or a man with heart disease, who can least afford to lose their life savings along with their health.
We've got to have programs tailored to all of their diverse needs. This great challenge of the coming century will require our best minds and our best efforts.
If we work together, all of us, the future of every American of every age can be bright.
And as we set out on this journey, I can't tell you how much I respect your dedication and the work that you do every day. We at the SEC are proud to be your partners.