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U.S. Securities and Exchange Commission

Speech by SEC Commissioner:
Remarks before the CFP Board Program Directors Conference


Commissioner Roel C. Campos

U.S. Securities and Exchange Commission

Santa Monica, California
August 3, 2006

I.  Introduction.

Good afternoon everyone, and thanks Sarah Teslik for that kind introduction. It's always great to return to the Los Angeles area, especially now that I've managed to miss the worst of your heat wave out here. I think I've also managed to miss the worst of the heat wave back in D.C. -- I understand that we hit triple digits yesterday and are expected to do so again today. Frankly, I'm just happy I was able to make it out here - apparently, it's so hot back East that the trains aren't even working properly. This is actually a true story: I often take the Metro, our subway, to work. My particular line is the Red Line, and you can sign up for emails from Metro that alert you to delays on whichever Metro line you take. Typically, these alerts say things like, "10 minute delay at Metro Center in the direction of Dupont Circle," or something to that effect. Well, let me quote from an actual alert that went out yesterday, which caused me to laugh out loud: "Disruption at All Stations towards All Stations. Expect crowded conditions and delays due to extreme temperatures." Needless to say, I don't miss standing on a crowded platform in 100 degree heat. So, I think the timing of this conference has worked out pretty well for me. I just wish I could stay longer.

Before I jump into my remarks, I have to issue the standard SEC disclaimer that this speech expresses my personal views, and does not necessarily reflect those of the Commission, other Commissioners or members of the Staff. With that said, let's move on to business. I thought that I would talk about a few topics relevant to this audience. First, I'll start preaching to the choir by discussing the importance of financial planning. Next, I'll discuss how we can increase the financial literacy of underserved communities, particularly minorities. Finally, I'll conclude by mentioning what the SEC is doing to promote financial literacy as well as highlighting some of our more recent regulatory initiatives relevant to this group, including developments related to our broker-dealer/investment-adviser rule.

Speaking of that rule, I know that there are some minor tensions between brokers and advisers, so I think I'm on safe grounds with this joke: Two brokers are in a bank, when, suddenly, armed robbers burst in, waving guns and yelling for everyone to freeze. While several of the robbers take the money from the tellers, others line up the customers, including the two brokers, against a wall, and proceed to take their wallets, watches, and other valuables. While this is going on, one of the brokers jams something into the other broker's hand. Without looking down, the second broker whispers: "What is this?" The first stockbroker replies: "It's the $100 I owe you!"

II.  Role and Importance of Financial Planning.

Ok, all jokes aside, let's move on to business. I'll begin by emphasizing the importance of financial planning to families and individuals here in the United States. I know that we're all in agreement on this point, but it is just so important to raise our country's collective knowledge because financial literacy is fundamental to the well-being of individuals and families. I don't mean to suggest that a person's happiness should be tied to his or her financial well-being, but I think that this quote from Gertrude Stein is apt: "I've been rich and I've been poor. It's better to be rich."

Financial planning and literacy are perhaps even more important today than ever before, as American families have been left mostly on their own to plan their finances and their retirements. I've discussed this point in significantly more detail in an article I recently wrote regarding disclosures for retirement investors, but let me highlight some facts here. The bottom line is that over the course of the last two decades, we've seen a dramatic shift in the way people save for retirement. A landscape that used to be dotted with traditional, company-sponsored defined benefit pension plans is now dominated by a different type of retirement plan - the defined contribution plan, of which the most popular kind is the 401(k) plan. The number of defined contribution plans, and perhaps more importantly, the assets contained in those plans, has exploded, far eclipsing the assets held in defined benefit plans. Moreover, while 53% of workers in private industry today have access to defined contribution plans, only 21% of workers are covered by defined benefit retirement plans. As a result of this shift, many American workers and retirees are essentially on their own when it comes to establishing and protecting their retirement savings. The uncertainly about the future of Social Security further underscores this fact.

Moreover, I should make the point that the foregoing discussion touches only the investment side of financial planning. Despite the fact that I deal with securities on a daily basis, I certainly understand that the world of financial planning is much broader than the world of investing in securities. However, I think my point is especially true even viewed in this broader context. Earlier I noted that only 21% of workers are covered by defined benefit plans. While this figure is certainly less than before, the bright side is that 1/5 of the working population participates in retirement plans in which their employer bears the investment risk. I think most of us would be very gratified if 1/5 of the families today had formal training (or even informal training) in: how to prepare a family budget; whether it makes more sense to buy or rent property; how to find the best mortgage type and rate; what kind and how much life insurance to purchase. The list goes on. I know that this is "Topic A" in most books about financial planning, but it's small consolation to a family to know that they've made sound investment choices only to suffer the untimely death or disability of the primary breadwinner.

Given the importance of financial planning, financial planners have a significant opportunity to step into this void, and I encourage the use of financial planners. While many people can do their own research, it's simply not practical to think that everyone can manage finances without outside help. That said, people must be careful when consulting financial planners. My experience at the SEC has often allowed me to see the worst of people, and there are many unscrupulous people (and outright criminals) claiming to be financial planners.

Although the Commission is quick to bring cases of fraud involving financial planners and those claiming to be financial planners, unfortunately, neither we nor the criminal authorities can put a stop to all of the shenanigans. But this is where organizations such as the CFP Board can help, by creating and enforcing standards of competence, practice and ethics for financial planners. Indeed, I should note that the SEC's public website explicitly cautions investors to check the CFP Board's website if planners claim they are credentialed through you. I think this can help to prevent improper behavior and fraud before it occurs, and before an SEC enforcement action becomes necessary. Moreover, certification, education and training have the potential to raise the bar when it comes to the competence of financial planners. That is, in addition to helping prevent fraud, certified financial planners can affirmatively do positive, by raising the level of financial discourse. Of course, CFP certification and all the training in the world are not going to eliminate incompetent financial planners or prevent criminal behavior by outright fraudsters, but it's a good first step.

III.  Increasing Financial Literacy by Reaching Underserved Communities.

This brings me to my next subject, which is: how can we raise the level of financial literacy in this country? While the full answer is undoubtedly complex, I think we can make significant progress by targeting underserved populations, which includes minorities. I know that this is one of the CFP Board's missions, and as the SEC's first Latino Commissioner and as one who has spoken out in favor of diversity in the financial sector, I applaud this.

A. The Changing Demographics in the United States.

I'll first mention some statistics about diversity in this country. At the risk of getting ahead of myself, let me summarize my main point so that I don't lose everyone with a dry recitation of statistics: namely, the increasing numbers of minorities and minority investors, coupled with the relative absence of minorities from high-level financial services jobs, means that we find ourselves in a situation where the financial professions would be well-served by increasing their minority employees if for no other reason than to more easily reach minority customers. Of course, there are plenty of other reasons to hire minorities, but this is an important one. More on this later. For now, here are some statistics.

According to recent data published by the U.S. Census Bureau, approximately one-third of U.S. residents were part of a group other than single-race non-Hispanic white. That is, in 2005, the nation's minority population totaled 98 million, or 33 percent, of the country's total of 296.4 million. Hispanics continue to be the largest minority group at 42.7 million. The second largest minority group was African-Americans at 39.7 million, followed by Asian-Americans at 14.4 million.

These statistics also demonstrate that virtually all minority groups are growing at rates significantly higher than non-Hispanic whites. Indeed, with a 3.3% increase in population from July 1, 2004, to July 1, 2005, Hispanics are the fastest-growing group, and moreover, we accounted for almost half of the national population growth during this period. I should also point out that last year, my home state of Texas joined Hawaii, New Mexico and California as a majority-minority state, along with the District of Columbia. Five other states - Maryland, Mississippi, Georgia, New York and Arizona have minority populations of about 40%.

Many of you probably know, or at least are generally aware of the statistics that I just mentioned, but let me cite some additional data that has not received as much mention in the popular media but which might be more relevant to you - which is a point that I'll return to in a moment. First, as calculated by median age, minority populations are much younger compared to the population as a whole. Indeed, in 2005 the median age of the population as a whole was 36.2 years, while the Hispanic population had a median age of 27.2 years - a full nine years younger. About a third of the Hispanic population was under 18, compared with a quarter of the total population. These same statistics, albeit to a lesser extent, are present with respect to other minority groups. The African-American population had a median age of 30.0 years and the Asian-American population had a median age of 33.2 years, compared to the population as a whole at 36.2 years.

The second set of statistics shows that minority groups are increasing their business ownership at a higher rate than the national average, according to data from the U.S. Census Bureau that covered the period between 1997 and 2002. While the number of U.S. business increased by 10% during this time: (i) the number of African-American owned businesses increased by 45%; (ii) the number of Hispanic-owned businesses increased by 31%; (iii) the number of Asian-American-owned businesses increased by 24%; and (iv) the number of women-owned businesses increased by 20%.

B. Diversity in the Financial Services Industry.

Having talked generally about minority demographics, let me now turn to the topic of diversity in the financial services industry. In June 2006, the GAO released a study of the financial services industry in which it reviewed overall trends in management-level diversity and diversity initiatives from 1993 through 2004. With respect to the degree of diversity in the industry at the management level, the study disappointingly revealed insubstantial changes over the 11 year period. The 2005 SIA Report on Diversity Strategy, Development and Demographics adds a little more to the picture by suggesting that the increases in minority demographics have primarily taken place over the last few years. The study found an increase in minority representation from 18% in 2003 to 21% in 2005 (noting that much of the rise was attributable to an increase in the number of Asian/Pacific Islanders and not widespread to other minorities such as African-Americans and Hispanics).

C. Reaching Out to Minorities by Increasing Minority Representation.

Let's sum up what the numbers tell us: (1) minorities are growing at rates significantly faster than the population as a whole; (2) minorities are significantly younger than the population as a whole; (3) the rate of increase in new business ownership by minorities far outstrips the national average; yet (4) management level diversity in the financial services industry has lagged. So, what does this mean?

I think it means two things, primarily. First, it makes good sense to target minorities as customers, and second, it makes good sense to target minorities as employees. Increasingly in the United States, the labor force will consist of minority individuals - we are growing faster and are younger than the population as a whole. Further, we are increasing our business ownership at a rate much higher than the population as a whole. (Of course, we're also selling our own businesses, like I did a few years ago.) It's just good business sense - indeed, I think it's a business necessity - to reach out to minorities and to develop strategies to grow your businesses by extending your financial planning and counseling to minorities. It also stands to reason that you should be thinking of how to recruit this growing work force to become financial planners.

I am of the opinion that these goals are linked - that is, I believe that increasing the number of minorities in your business will also lead to an increasing ability to reach this population as clients. Diversity in the financial sector is critical to reaching diverse audiences. Not only is it a question of familiarity generally, but by knowing your audience, you can more adequately and appropriately calibrate the message you want to deliver. Further, you can reach out to potential clients by tapping into existing networks, such as churches and community organizations. In some respects, this can be a cycle of self-promotion: having more minority financial planners can lead to having more minority clients; increasing the financial sophistication of minority clients can lead to more minorities (and their children) owning businesses or taking jobs in the financial services industry; and so on.

It's one thing to say this, I know, but it's quite another to actually do this. The question is how. The GAO study found that more firms have recently been initiating programs to increase their minority workforce, including developing scholarships and internships, establishing programs to foster employee retention and development, and linking managers' compensation with their performance in promoting a diverse workforce. Even so, overall success is limited and some firms noted problems in recruiting and retaining minorities and in gaining employee support for diversity programs.

That said, the GAO study primarily dealt with larger financial institutions. Perhaps the financial planning business is different. As I understand it, there are fewer barriers to entry into your business. Namely, one doesn't have to obtain a fancy two-year or three-year graduate degree costing over a $100,000 (not to mention the opportunity costs of foregoing employment at this time). Instead, a college degree is all that's necessary, coupled of course with the requirements necessary to use the CFP mark. This is an excellent career to consider for those just out of college. Moreover, practice as a financial planner is not limited to Wall Street or Los Angeles. Financial planners are just as easily found on Main Street.

Let me sum of this part of my remarks by stating that, like all of you, I believe financial planning to be critical for families across the United States. That said, there is an underserved population out there that deserves your attention, and I think it makes good business sense for financial planners to focus on this ever-growing segment of the population.

IV.  SEC Initiatives.

Having discussed the importance of financial planning and the implications of our country's increased minority population on this topic, let me turn now to what the SEC is doing to assist in increasing financial literacy. In summary, I think this is actually the beginning of an exciting era as we're seeing the maturation of the Internet into a tool that investors can use on a daily basis. The SEC has been at the forefront of this.

A. Office of Investor Education.

Specifically, we have a wealth of information for individuals that can be found in the Investor Information section of our website, at www.sec.gov. I should also take the time to note that we have a specific office that is designed to assist individual investors, which is called the Office of Investor Education and Assistance. The Office of Investor Ed tries to ensure that the problems and concerns of individual investors are known throughout the SEC and considered when the agency takes action. Tens of thousands of investors contact that Office each year to ask questions on a wide range of securities-related topics or to complain about problems with their investments or their financial professionals. The Office's trained specialists and attorneys provide information, seek informal resolutions of complaints, and collect data on investor contacts to track trends in the securities industry and provide critical intelligence to other SEC offices and divisions.

The Office of Investor Ed also carries out the SEC's investor education program, which includes producing and distributing educational materials, participating in educational seminars and investor-oriented events, and partnering with federal agencies, state regulators, consumer groups, industry associations, and others on financial literacy initiatives. Investors can use the SEC's online forms to file a complaint or ask a question. We also have a "mutual fund cost calculator" on our website, as well as links to other helpful cost calculators, such as a college savings calculator, a loan calculator and a mutual fund breakpoint search tool. I know that Sarah Teslik has been exhorting us to create an interactive tutorial on our website, which I think is a good idea. And while we might not have that right now, we do have an Investor Quiz, which allows people to test their "money smarts."

In short, we're trying to level the playing field so that all investors - not merely those with access to high-priced investment advisors - are able to understand the basics of investing.

B. Recent Investor Initiatives.

In addition to maintaining an Investor Education section of our public website, the Commission has also undertaken several recent initiatives to further protect and serve investors. Let me briefly touch on a few of them.

Interactive Data. We currently have a pilot program to help us explore how interactive data (also called XBRL) can improve the financial reporting process for investors, financial intermediaries, the SEC, and the companies themselves. Currently, 17 companies have agreed to participate in this pilot program to use interactive data in their financial statement filings. The pilot program will enable these participant companies to determine the benefits of using interactive data, provide feedback to the Commission, and enable investors and analysts to assess new techniques for analyzing interactive data reports submitted to the SEC in the XBRL format. I won't bore you with technical jargon here, but simply put, interactive data is a means by which investors and other can more easily compare the financial data of companies and, perhaps more importantly to individual investors, mutual funds. We're just at the beginning of this process, but it has the potential to revolutionize financial reporting.

Also, like the CFP Board, we're also targeting underserved populations with our investor initiatives.

Seniors Summit. Namely, just a few weeks ago, the Commission held its first ever "Seniors Summit" to examine how regulators and others can better coordinate efforts to protect older Americans from investment fraud and abusive sales practices. In connection with this, the SEC is also working with state regulators and the NASD to evaluate the "free lunch" seminars aimed at convincing seniors to purchase complex and perhaps inappropriate financial products. Moreover, just a few weeks ago, the Commission filed an emergency enforcement action to halt a fraudulent real estate investment scheme that bilked senior citizens and retirees out of millions of dollars since 1996.

Teachers/Military. In addition to seniors, we're also focusing our efforts with respect to teachers and military personnel. We have a "Just for Teachers" web page, which, among other things, helps teachers evaluate appropriate investments for 403(b) retirement savings plans. Further, we have a "For Military Personnel and Their Families" web page, which tackles issues germane to the military and their families. Our Enforcement division has also been actively investigating scams directed at military personnel, and just today, we announced the filing of a settled civil action against American-Amicable 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 one a millionaire. Since 2000, approximately 57,000 members of the United States military services purchased the product, and the vast majority earned little or nothing on their investment. I was very pleased to support this case, and I'm confident that our Enforcement division will be on the lookout for more fraudulent schemes directed at our military personnel.

C. Recent Regulatory Initiatives.

Finally, I'd like to discuss some of our more recent regulatory initiatives that have the potential to impact financial literacy in a positive way or are otherwise of interest to this audience.

Internet Proxy. Late last year, we proposed amendments to the proxy rules that would provide an alternative method for issuers and other persons to furnish proxy materials to shareholders by posting them on an Internet Web site and providing shareholders with notice of the availability of the proxy materials. Under the amendments, shareholders could choose to affirmatively "opt out" of the Internet delivery regime and receive paper copies of the materials at no cost, but the default rule would be one of "notice and access." The proposed amendments are intended to put into place processes that would provide shareholders with notice of, and access to, proxy materials while taking advantage of technological developments and the growth of the Internet and electronic communications. Issuers that rely on the proposed amendments may be able to lower costs of proxy solicitations that ultimately are borne by shareholders. While I have some specific concerns about this proposal, I am in full agreement with what it is trying to do, which is to lower costs for issuers and shareholders and to make proxy materials more easily available to all. If we can work through the issues raised by commenters, then I think we'll be doing a service to investors of all types.

IA-BD Rule. Finally, let me touch upon the elephant in the room, namely the rule we adopted last year under the Advisers Act that addresses when a broker-dealer is subject to the Advisers Act. Of course, I can't talk about the pending litigation, but I think I can manage to steer a relatively safe course here. The bottom line is that the statutes regulating broker-dealers and investment advisers were first crafted over 65 years ago. In financial markets terms, this time period is equivalent to eons. Therefore I don't think it's surprising that the premises of the original exemption for broker-dealers - which allowed them to avoid the Advisers Act if their advice was incidental to their brokerage services and if they received no special compensation - have broken down. Consequently, the Commission has been dealing with the difficult issues arising as a result of the convergence of the broker-dealer and investment adviser industries, many of which relate to the changes in how these two groups must do business in today's world.

I think we took a middle road with our rules last year, although, not surprisingly, we made no one particularly happy. However, I want to point out that in addition to adopting an exemption for fee-based brokerage accounts and clarifying that certain types of advisory activities are not incidental, we also announced that we would initiate a study to explore the larger issues of the protections afforded investors who deal with advisers and those who deal with broker-dealers.

I'm happy to report that just two days ago, the Commission issued a request for contract proposals - what we call an "RFP" - to conduct the first stage this study, which will compare how the different regulatory systems that apply to broker-dealers and investment advisers affect investors. As I'm sure you'll notice, we were responsive to commenters' concerns (including concerns raised by the FPA) on the draft RFP that we issued earlier. I do want to make clear that the scope of the RFP is limited; that is, it is a data gathering exercise with respect to, among other things: (1) the types of financial products, accounts, programs and services provided by BD's and IA's and (2) the perceptions of individual investors regarding these products, accounts, programs and services and the duties and obligations investors are owed. As the RFP makes clear, "the findings are intended to be used by the Commission as factual background for evaluating the current legal and regulatory environment for the provision of financial products, accounts, programs and services to individual investors by broker-dealers and investment advisers and for determining, consistent with the Commission's investor protection mission, the most effective legal and regulatory approach to regulating investment professionals in today's marketplace."

I want to remind everyone that whatever we do, it will be consistent with our investor protection mission. I know that both BD's and IA's have taken very different positions and have argued their positions from the perspective of investor protections and costs. That said, it's also clear that there is a competitive dispute between the differing business interests of these two types of investment professionals. The bottom line, however, is that we will be guided by investor protection. Although we will certainly look at the costs and benefits of any rules that we may issue, and the burdens and benefits on competition that may result, at the end of the day, the dispute over business interests will not be driving our rules. Simply put, we remain very concerned about investor confusion with financial services providers and the differences in the protections received depending upon what type of financial service provider is being used. The goal is to update our regulations in order to properly reflect the current realities of the marketplace, and I'm hopeful that the study will provide independent research that will help us meet this goal. I do think we're one step closer to realizing it.

IV.  Conclusion.

In conclusion, I'd like to thank all of you for taking the time to listen to me. As I mentioned earlier, I'm encouraged by the increased attention given to financial planning, and I think that the certification process is very useful. Finally, I'm hopeful that you can, as the CFP Board's mission statement reads, help underserved communities. That certainly is a goal of mine as well. I think we have time for some questions.


Modified: 08/10/2006