Speech by SEC Commissioner:
"Equalizing Opportunities for All Americans to Participate in Financial Services"
Commissioner Luis A. Aguilar
U.S. Securities and Exchange Commission
NYSE Euronext Roundtable on Financial Literacy in Minority Communities
New York, New York
April 27, 2009
Thank you for that introduction. The topic of today's Roundtable, "Financial Literacy in Minority Communities" is one I care deeply about. As someone who arrived in the United States at the age of six as a refugee from Cuba, I feel passionately about ensuring that opportunities in this country are available to all individuals, regardless of race, ethnicity or country of origin. It is vital that we equip all Americans with the education and skills they need to succeed in this country, including the ability to fully participate in today's increasingly sophisticated financial services market. As is customary, the views I express today are my own, and do not necessarily reflect the views of the Securities and Exchange Commission, my fellow Commissioners, or members of the staff.
The increasing growth of financial services and products has substantially contributed to the complexity involved in making financial decisions. As the days of lifetime employment with one company that ensured a defined benefit pension fade into memory, it is imperative that all Americans have the skills they need to save for their retirement years. Moreover, financial education is also important to help individuals avoid unsuitable investments and assist them from becoming victims of fraud.
In my remarks today, I will address:
the need for financial education in communities of color;
the SEC educational outreach efforts to these same communities,
recent SEC enforcement cases against those who target people based on race and ethnicity, and
the importance of diversity for government agencies and for the financial market industry.
The Need for Financial Education in Communities of Color
Studies indicate that the need for financial education is most acute in communities of color. Research has shown that despite the significant contribution of minority communities to the national economy, these communities are less likely to participate in mainstream financial services. According to a Financial Literacy and Education Commission report, in 2006 53% of Mexican immigrants and 37% of other Latin American immigrants did not have bank accounts.1 Similarly, 20% of Asian immigrants did not have bank accounts.
Not just recent immigrants have lower rates of participation. While roughly the same percentage of African-Americans are estimated to have at least one bank account as the general population, African Americans have lower rates of participation for different kinds of financial services. According to a 2008 report, only 54% of African-Americans have IRAs or 401(k) plans, compared to 72% of the general population (and just 32% of the Hispanic population).2 Both groups have similarly low percentages that own stocks, bonds or shares of mutual funds (33% of African-Americans and 18% of Hispanics, as compared to 60% of the general population). The reasons for this low rate of participation in financial services are many. They certainly include language and cultural differences, but often these communities also have a suspicious attitude toward banks. Access can also be a barrier to participation. In some communities, such as Native American reservations and ethnically concentrated neighborhoods, there may not be an abundance of financial institutions.3
Recently, when speaking at Atlanta's historically black Morehouse College in Atlanta, Fed Chairman Ben Bernanke was asked about the wealth gap between white and minority populations. He responded that "the difference between minority and white wealth is very significant, and part of that is related to income levels where whites have a higher average income." He went on to point out, however, that "even if you control for income level, you find minorities have gathered less wealth." Part of the cause, Bernanke said, is a lack of "financial education."
SEC Outreach Efforts to Minority Communities
Greater outreach efforts are clearly needed to educate those in communities of color that are isolated from the mainstream financial services.
I am pleased that the SEC has a few initiatives in this area. The SEC staff has focused on partnering with both public and private sector organizations to leverage its educational efforts. For example, the SEC participates in the Financial Literacy and Education Commission alongside the Treasury Department, Federal banking agencies and other U.S. government agencies. To that end, the SEC provides input to the Federal government's single-source clearinghouse for financial education, available at "mymoney.gov" (1-888-my-money). This source, along with in-house investor education materials available on the SEC website and on "investor.gov," is available for use by community organizations. The materials, which are not copy-righted, can be translated into other languages and further tailored to reach particular communities. Additionally, all new SEC-produced investor education materials are published in Spanish as well as English.
SEC staff in our Washington headquarters also volunteer their time teaching courses in financial education to fifth grade students, their parents, and faculty at the racially and economically diverse Two Rivers Charter School. In addition, in recent years, staff in the SEC's regional offices have participated in minority-focused investor education events throughout the country. I very much support the staff's efforts in this area and, hopefully, we'll be able to do more.
SEC Enforcement Cases Against Fraudsters Targeting People Based on Race
The financial crisis has served to highlight one of the costs of financial illiteracy: susceptibility to investment scams. Dozens of alleged Ponzi schemes have been uncovered in recent months as greater numbers of investors have tried to redeem or withdraw money from investments. Many of the Ponzi schemes appear to be affinity frauds, in which the scheme operators prey upon members of identifiable groups, such as religious or ethnic communities. These operators are frequently members of the affected group, who often enlist respected community leaders from within the group to spread the word about the scheme. Many times, these community leaders are unwitting participants. Just in the last few months, the SEC has filed several actions against fraudsters preying on investors based on their race or ethnicity. These actions include the following examples:
A case involving a $23 million Ponzi scheme that targeted California's Hispanic-American community and purported to use investor funds to invest in risk-free, high-yield investment programs.
A case against a self-described "Chinese Warren Buffet," who raised as much as $75 million in a Ponzi scheme involving the Chinese community in the U.S. and Canada; and
A case involving $23 million raised from thousands of Haitian-Americans through a network of purported investment clubs that actually operated as a Ponzi scheme. The sponsor of the scheme claimed that trading profits would be used to fund new business ventures to benefit the Haitian community in the U.S. and Haiti, among others.
While these enforcement actions are crucial to bring wrongdoers to justice and re-establish accountability, I strongly believe that the SEC should proactively seek to educate investors about these insidious scams. From my extensive involvement with Latino organizations, I know from personal experience that minority communities are best reached through organizations on the ground. That is why I recently sent out a letter to minority community organizations enclosing the package of materials the SEC has developed to help investors identify the "red flags" indicating affinity fraud. I look forward to finding additional ways to contribute to strengthening the SEC's outreach efforts in this area.
Importance of Diversity for Government Agencies and Market Participants
As we reach out to improve financial literacy across all communities, it is important that government agencies and financial market participants better reflect our increasingly multicultural environment. I firmly believe that if government agencies and the private sector were as diverse as the general population, issues affecting minority communities, such as financial education, would be a natural focus.
According to the Equal Employment Opportunity Commission Report on the Federal Workforce, people of color represented a third of the Federal work force in fiscal year 2007, approximately on par with current U.S. demographics, although Latinos remain underrepresented.4
Some Federal government agencies are doing a better job than others in building work forces that are more representative of the new American demographics. The EEOC, for example, has a work force that's nearly 61 percent people of color, and people of color are 60 percent of employees in its senior pay structure. Unfortunately, however, it is clear that representation of people of color at the management level generally tells another story. The Federal Communications Commission, for example, has a work force that is 42 percent people of color, but only 10 percent at the senior pay level.
Where does the SEC fit into this picture? Unfortunately, we don't do as well as we should. While 32 percent of the SEC work force comprised people of color in 2007, only 19% of our attorneys were people of color, and just 7 percent were at senior-pay level.
It is absolutely clear that the SEC needs to do a lot more to recruit, retain and advance minority candidates at the professional and senior levels. In my roles as sponsor of the SEC's Hispanic Employment Committee and of the African-American Council, just two of several special emphasis groups at the SEC, I am dedicated to improving the SEC's diversity. I know Chairman Schapiro and the other Commissioners share my desire and I can assure you that we will be working to do better — much better.
Two years ago, several SEC staff members partnered with private practitioners to form the Alliance of Securities and Financial Educators (ASAFE), a non-profit organization dedicated to bringing financial and securities education to diverse communities. I am enthusiastic about ASAFE's new initiative to establish a SEC staff-taught securities law seminar at Florida International University, which graduates more Hispanics than any other university in the country. This program is modeled on the SEC's existing program with Howard University, a preeminent predominantly African-American institution. These programs provide access to law students of color to a subject matter that might not otherwise be available to them. Since the SEC prefers applicants for attorney positions that have demonstrated an interest in securities regulation, these courses serve to broaden the talent pool from which the SEC recruits.
In addition to government agencies needing to do better, financial market participants in the private sector also need to do more to achieve diversity in the workplace. For example, studies show the lack of sufficient diversity in the boardroom. That is particularly troubling when you consider a recent California Public Employees' Retirement System report, entitled Board Diversification Strategy: Realizing Competitive Advantage and Shareowner Value, that concluded that a selected group of companies with a high ratio of diverse board seats exceeded the average returns of the Dow Jones and NASDAQ indices over a five-year period.5
In spite of these documented benefits, there remains a persistent lack of diversity in American corporations. Statistics compiled in 2004 by the Alliance for Board Diversity found that the majority of Fortune 100 company board members were white men (72%), and only 28% of board seats were held by women and minorities.6 These statistics have not changed appreciatively in recent years.
The lack of diversity in the securities industry is particularly acute. A 2006 Equal Employment Opportunity Commission report on employment in the finance industry found that the percentage of African American and Hispanic managers and professionals was lowest in the securities sector (4 % and 3%, respectively).7 Clearly, the industry must do substantially better.
In closing, I want to commend Robert Marchman and NYSE Regulation for organizing this event. I look forward to listening to the Roundtable discussion. With better educated providers and consumers of financial services, we all benefit.
Thank you for your attention.
1 Taking Ownership of the Future: The National Strategy for Financial Literacy (2006), available at http://www.mymoney.gov/pdfs/ownership.pdf.
2 "Diversity: Banking Gap Prevails for Hispanics and Blacks; Economic conditions and culture count," US Banker, Oct. 1, 2008.
3 Taking Ownership of the Future (2006).
4 EEOC Report on the Federal Work Force for Fiscal Year 2007, available at http://eeoc.gov/federal/fsp2007/fsp2007.pdf.
5 Board Diversification Strategy: Realizing Competitive Advantage and Shareowner Value (2009), available at http://www.calpers-governance.org/docs-sof/marketinitiatives/initiatives/
6 Alliance for Board Diversity Report on Women and Minorities on Fortune 100 Boards (2007), available at http://www.hacr.org/docLib/20080131_ABDfinalreport12208.pdf.
7 EEOC Report on Diversity in the Finance Industry (2006), available at http://www.eeoc.gov/stats/reports/finance/finance.pdf.