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U.S. Securities and Exchange Commission

Speech by SEC Staff:
An Update From the SEC for Institutional Investors:
Remarks Before the Public Fund Boards Forum


Lori J. Schock

Acting Director, Office of Investor Education and Assistance
U.S. Securities and Exchange Commission

San Francisco, California
December 11, 2006

Thank you for that kind introduction. I'm very happy to join you this morning. It is a privilege to address this Public Fund Boards Forum. At the SEC, the primary mission is to protect investors and maintain the integrity of the securities markets.

Of course, the financial resources and sophistication of the investors vary greatly. At one extreme are institutional investors, including public pension funds. At the other end are novice investors and those who turn to the markets to help secure their futures, pay for homes, send children to college, and pay for their retirement.

It's this second part of the investor spectrum that's the focus of my office - the Office of Investor Education and Assistance. The mission of OIEA is to help individual investors invest wisely and avoid fraud. I have no doubt that you, as representatives of the public pension industry and stewards of the financial investments of millions of individuals, also share this mission.

This morning I'd like to give you an update of some of the major initiatives at the Commission and its efforts to protect investors - both large and small. Before I continue, I must give the standard disclaimer that the views I express today are my own, and do not necessarily reflect the view of the Commission or its staff.1

Investor Protection

First and foremost, the SEC is a civil law enforcement agency. This follows from the SEC's threefold mission to protect investors, to ensure fair and orderly markets, and to promote capital formation. These highly complementary objectives require a tough cop on the beat.

This past year, cooperation with state and other federal regulators and criminal authorities made our enforcement efforts more effective, and gave American's investors even more protection for their hard earned money.

The Commission obtained near-record settlements, with penalties in the two largest accounting cases totaling $1.2 billion. The Commission also took decisive action against the backdating of the stock options, and moved to deregister a record number of companies that failed to make required filings.

As important as these actions were to all investors and our markets overall, perhaps no action piqued this audience's interest more than last month's order sanctioning the City of San Diego for committing securities fraud. The order sanctioned the city for failing to disclose to the investing public important information about its pension and retiree health care obligations in the sale of its municipal bonds in 2002 and 2003. To settle the action, the city agreed to cease and desist from future securities fraud violations and to retain an independent consultant for three years to foster compliance with its disclosure obligations under the federal securities laws. If nothing else, this action signifies the Commission's resolve to hold state and local governments accountable when they commit fraud while seeking to borrow the public's money.

Seniors Initiative

Fraud - more specifically fraud aimed at senior citizens - has been another key area of focus for the Commission in 2006. Protecting seniors from investment scams may be one of the most important issues of our time. The numbers give us an idea of the magnitude of this issue.

The 75 million baby boomers start turning 60 this year. Over the next two decades, they'll do so at the rate of 10,000 every 24 hours. And the baby boomers will be taking the bulk of American wealth with them into old age. Households led by people over 40 already own 91% of America's net worth. And the baby boomers will in all likelihood heed Dylan Thomas's famous words and will "not go gentle into that good night." Instead, because they'll live longer - and, in the main, healthier - than their parents, they'll likely work longer, and remain active and aggressive investors even longer still. At the same time, the growth of defined contribution plans has put more and more individuals in the driver's seat of their financial future.

All these trends - a huge number of people suddenly turning older, the prospects of longer lives but fewer guarantees of financial security, and at the same time a substantial percentage of our national wealth in the hands of seniors - have the makings of a perfect storm. Fraudsters will go after seniors because, following the Willie Sutton principle, "that's where the money is." Many certainly would like nothing better than to line their pockets with someone else's nest egg.

That's why the Commission has taken significant steps to protect senior investors against fraud, and has recently announced a comprehensive national strategy that includes three main components: enforcement of the federal securities laws, examinations to prevent fraud, and education of senior investors.

First, I'd like to draw your attention to some of the more recent cases brought by the SEC's Division of Enforcement, which, I think, are instructive and illustrate how some recent frauds against seniors were effected.

In July of this year, the SEC brought an emergency enforcement action against Pittsford Capital Income Partners and others, seeking, among other things, an asset freeze and the return of the defendants' ill-gotten gains. Over the course of 8 years, the defendants in this matter allegedly raised some $15 million from several hundred investors, many senior citizens, by issuing unregistered promissory notes in various real estate investment companies.

In a second matter, announced this past August, the SEC took emergency action to halt an ongoing securities fraud that raised over $22 million by targeting investors' retirement funds. The defendants allegedly solicited investors by direct mailings that pitched free dinner and retirement planning seminars. The defendants allegedly promised unrealistically high rates of return, as high as 24%, in order to entice investors to transfer their IRA savings to the defendants for investment in purported businesses - which many did.

And just last week, the Commission filed an emergency enforcement action against an individual and two of his corporations to halt an ongoing fraud in which the defendants have obtained over $2 million from at least seven investors, most of them senior citizens.

Next, in addition to the enforcement of the federal securities laws, the Commission is focusing a significant amount of effort on examinations to prevent fraud from occurring in the first place, and to detect it early when it does. As the saying goes, "an ounce of prevention is worth a pound of cure." For example, the examiners in the Office of Compliance Inspections and Examinations are focusing on the manner in which seniors may be drawn to sales pitches, such as through the "free lunch" seminars. In fact, along with the NASD, NYSE, and state securities regulators, examiners have been examining firms that sponsor these seminars, particularly in states with a concentration of seniors, to determine whether they have used high-pressure tactics to sell unsuitable products.

Finally, the Commission is educating seniors to protect themselves against investment fraud. The Commission has sought to arm senior investors with information that they can use to identify and avoid potential fraudulent investment schemes, to deal with aggressive sales tactics, and to assess many of the financial products available to them. Quite significantly, this summer the Commission held its first Seniors Summit at SEC headquarters in Washington. At the summit, participants discussed how regulators and others can coordinate their efforts to protect older Americans from investment fraud and abusive sales practices.

I know that many seniors, and many children and caregivers of seniors, use the Internet to search for information on investing. That is why OIEA created a page on the SEC's website aimed specifically at senior investors.

In addition to providing critical information on investments commonly marketed to seniors, such as variable annuities, promissory notes, and certificates of deposit, the page also provides key information about how to detect and avoid fraudulent schemes. The page also includes a link to our "Seniors Care Package," a collection of OIEA's most popular brochures for seniors (which are also available in hard-copy).

The Commission doesn't copyright any of the materials so anyone is free to use any materials - from our brochure on investing lump sum payouts to the alert on senior specialist designations. Simply cut and paste and it's yours to keep.

Financial Literacy

In addition to the materials targeted for seniors, OIEA routinely creates and disseminates neutral, unbiased information on saving and investing for Americans of all ages. These materials are a critical part of the Commission's efforts to improve the overall financial literacy in this country.

If you are aware of the Jump$tart Coalition, you may know that it conducts an annual financial literacy survey of high school seniors. In its most recent survey, students, on average, answered only 52% of the survey questions correctly. In addition to the low average scores, I found some of the findings to be of particular concern:

  • Based on several questions in the survey, fewer than half of respondents demonstrated an accurate understanding of the impact of inflation on savings.
  • And when asked which investment vehicle tends to have the highest growth over a period of 18 years - and given the choice of a US Savings Bond, a checking account, a savings account, or stocks, only 14% knew that the correct answer is stocks.

This is of great concern when we reflect on the wonderful news that Americans' life expectancy continues to increase. It is essential that they get into the savings habit early and that they take advantage of the best opportunities to grow their wealth, allowing them someday down the road to cover the costs of a retirement that may last for decades. To put it another way, these kids will face the Mt. Everest of financial planning if their plans do not include exposure to the equity markets, especially when they are young. Just as we need to teach kids that the stock market is no place for the summer job earnings that they need at college this fall, they also need to understand the powerful role of stock investments in building wealth over the long haul.

While the Commission cannot tell investors which products to purchase, we can and do arm them with the information they need to assess various products and investment strategies. For example, OIEA's "Get the Facts on Saving and Investing" brochure helps individuals create a basic financial plan, explains the differences between stocks and bonds, and highlights the magic of compound interest. Another brochure explains the basics of asset allocation, diversification and rebalancing. Overall, OIEA has published hundreds of educational brochures, investor alerts, and short topics of interest - all of them available through the Investor Information section of the SEC's website.

But that's not all OIEA does. We pride ourselves on reaching investors in new and innovative ways. For example, we run a series of fake investment scams on the Internet, all designed to illustrate the warning signs for on-line investment fraud. Our most recent foray into the world of Internet fraud is a Katrina-related "fake scam site" at Growthventure.com. Like our other fake sites, it offers a "can't miss" investment, offering truly unbelievable returns. If the user clicks to invest, he or she gets a message from us about the necessity of researching before investing. The goal is to warn investors about fraud before they lose their money. OIEA also has begun beta testing of investor education delivered through "podcasting." This initiative allows individuals to download short audio programs on saving and investing onto their iPods, or other handheld listening devices, just as they would their customized music playlists.

But improving financial literacy is not a task that can be undertaken solely by the Commission. Efforts by multiple parties play an important role in equipping individuals with needed financial skills. That's why the SEC works with a larger number of private and public organizations to tackle financial literacy needs jointly. An example is the American Savings Education Council. Their Ballpark E$timate planning tool allows individuals to project how much they need to save to fund a comfortable retirement. You can access the calculator from our website or directly at ChoosetoSave.org. As pension plan advisers and fiduciaries, you have a unique and vital interaction with investors. I encourage you to find appropriate opportunities to help them become more informed investors and to use the SEC's Office of Investor Education and Assistance as a resource in this undertaking. You can help us in this effort.

Interactive Data

Lastly, I'd like to give you an update of the Commission's interactive data initiative. Put simply, interactive data means using technology to provide investors with quicker access to the information they want, in a format they can most easily use. Today, publishers of financial information offer a wealth of data about stocks, bonds and mutual funds. Unfortunately, investors seeking financial information direct from the source must often attempt to read lengthy corporate annual reports or mutual fund prospectuses. Even if these documents are online, they are often digital blobs with limited search capability.

We believe interactive data will transform disclosure by giving investors faster access to information that they can easily use. It will liberate investors from having to laboriously undertake manual searches and painstakingly re-key data into electronic spreadsheets, or pay someone else to do it. Interactive data also will allow investors to easily use software to make apple to apple comparisons of companies.

Two dozen companies, representing more than $1 trillion of market value, have joined the SEC's test group and have agreed to voluntarily submit their annual, quarterly and other reports with interactive data for a period of one year. These companies are helping the markets and the SEC determine the best ways to make interactive data serve America's investors. In return, the SEC provides test group companies with expedited reviews of their various SEC filings.

On the SEC's website at sec.gov, we now feature prototype software for viewing and analyzing the voluntary interactive data filings submitted by our test group of companies. Investors and analysts will test drive the new software to get a sense of the possibilities with interactive data. Even today, the SEC's EDGAR system is considered the most robust business information warehouse in the world. The challenge is to make that information readily available to every potential American investor-and every potential investor in America.

In doing so, it's important to note that the prototype software is for demonstration purposes only. The SEC has no intention of getting into the financial analysis business, and we won't attempt to compete with the popular web-based financial portals. As the existing EDGAR system to a fuller interactive data system, investors will be offered faster, easier ways to access information about their investments, but more importantly, better and faster information will feed the analytical tools created by securities analysts, private software developers, web publishers, and other media outlets.


I hope my discussion of some of the areas the SEC is focusing on has been informative and useful to you. As trustees, administrators and personnel responsible for public pension plans, you have millions of retirees and taxpayers dollars depending on the success of your efforts. This is a responsibility I know you take very seriously. I thank you for your attention.



Modified: 12/12/2006