Speech by SEC Chairman:
Remarks Before the Annual Consumer Assembly
Chairman Christopher Cox
U.S. Securities and Exchange Commission
Consumer Federation of America
March 24, 2006
Thank you, Barbara, for that kind introduction. I'm very happy to join you this morning. It is a privilege to address this Annual Consumer Assembly.
As the largest consumer advocacy group in the nation, the Consumer Federation of America is one of the strongest allies the SEC and America's investors could have. Your 300 member organizations, representing some 50 million people, give you a remarkable breadth of interest, knowledge, and experience. And your active leadership on securities issues that concern ordinary Americans has long benefited both the SEC in its rulemaking and enforcement, and the Congress in its consideration of securities and financial services legislation.
Investor protection is a vital component of your overall mission of consumer protection. So I'm very honored to be invited here to speak not just because you're the nation's largest consumer advocacy group, but because of the unique role you play as frequent commentators on (and occasional critics of) SEC rules. No one is more important to the SEC's mission of protecting the consumer. In the most fundamental way, we're on the same team.
When I look at the rich history of the Consumer Federation of America's active engagement with the SEC, I can't help smiling and thinking we're a bit like a long married couple who know each other very well. Sure, you might squeeze the toothpaste in the middle of tube, and for our part, we may leave our socks in the middle of the floor sometimes. And every so often we may even drive each other crazy. But no two partners have ever been more strongly committed to one another. And we're both passionately committed to working together on what really matters in our case, advancing the interests of the American consumer.
Since I joined the Commission, I've worked to redouble our focus on the individual investor. As part of that effort, I've asked Susan Wyderko, who's long been the SEC's leader on investor education and assistance, to take an even greater role across the entire agency in order to ensure that our consistent focus is on investor protection.
Susan is also leading the efforts in our Investment Management Division to make mutual fund disclosure more consumer friendly. With fully half of American households now owning mutual funds not to mention ETFs and with bank deposits now amounting to less than 30% of household liquid financial assets, this is where consumers live when it comes to their savings and their household finances. There is no greater consumer issue in finance. As the investor's advocate, the SEC intends to see to it that consumers get all the mutual fund information they need, and in a form they can actually use.
On this, and so many other issues affecting consumers, we intend to work very closely with all of you. And anyone who would drive a wedge between us will find, in our united strength, a formidable adversary. You can count on it.
Of course, protecting consumers isn't just a matter of microeconomics. Those who would rob investors of their nest eggs, on which so many hopes and dreams are pinned, erode the trust on which our entire financial system, and indeed our entire economy, depend. For that very reason, scam artists end up hurting far more people than just the ones they target. Everyone gets hurt.
And when it comes to protecting the most vulnerable of our ordinary investors, no group is more at risk, or has a greater impact on our entire economy, than older Americans. The largest single cohort in our national demographic profile, the much heralded baby boomers, will soon be retiring. This year, 2006, is the year that the first of the boomers are actually turning 60.
But we haven't yet begun to feel the true effects of what's about to happen. No less than 75 million Americans are due to turn 60 over the next 20 years. That's more than 10,000 Americans every day.
And consider this: Households led by people 40 or over already own 91% of America's net worth. The impending retirement of the baby boomers will mean that very soon, the vast majority of our nation's net worth will be in the hands of the newly retired. Following the Willie Sutton principle, scam artists will swarm like locusts over this increasingly vulnerable group because that's where the money is.
Of course, seniors have always been especially vulnerable to securities fraud. Each and every day the staff in our Office of Investor Education and Assistance field phone calls, letters, and emails from seniors who've been hit with sales pitches for products that simply aren't appropriate.
And we often hear from seniors who've been hurt when a financial professional fails to explain the key features of their investment.
As a result, our enforcement activity has always included a strong component of protection for older Americans. Now, as this segment of society grows, both in numbers and in vulnerability, our focus on seniors is steadily increasing.
In the last 2 years alone, we've had 26 enforcement actions aimed specifically at protecting elderly investors.
Many of these cases are being coordinated with state blue sky authorities. It's vitally important that we partner with them, because the states, unlike the SEC, have traditionally been focused on merit regulation, and the complementary nature of our regulatory regimes makes us far stronger together.
And I should note that our state partners in securities regulation are doing an outstanding job in this area. We're proud to be their partners.
Let me offer you an example of the kinds of cases we're pursuing to protect senior citizens.
In southern California, we recently joined with the Riverside County District Attorney to crack down on a $144 million Ponzi scheme aimed at elderly investors. As you might expect, it offered seniors "guaranteed returns." And as you might further expect, that guarantee was worthless.
As a result of this federal and state teamwork, the purveyors of this scam are no longer at large.
In another case just this month, we went after a Ponzi scheme that was targeting seniors in Allentown, Pennsylvania. Older people in that community were being offered suspiciously attractive CDs so attractive, in fact, that they didn't even exist.
Those CD rates seemed too good to be true and they were.
The Commission obtained an injunction, and shut that operation down and Pennsylvania's retirees are much the better for it.
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 several new initiatives aimed specifically at helping older Americans prevent investment fraud.
In recent weeks, the SEC has introduced 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 site 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.
Today, I can add to this list another new initiative. I'm pleased to announce that just this week, our SEC regional and district offices have come together to propose a comprehensive national strategy for protecting older investors.
Each of our offices across the country will work closely with state and local law enforcement, and both federal and state regulatory agencies, to target scams aimed at seniors. And they'll work together to bring both civil and criminal actions aimed at shutting them down.
Examiners in our SEC field offices will also share regulatory intelligence with their counterparts at the state level, and with other regulators, 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.
We'll also expand our efforts to reach out to local community organizations and enlist their help in educating older Americans about investment fraud and abuse.
This effort is already well under way in California, and we're about to significantly step up our efforts in Florida.
In the Sunshine State, our SEC examiners will work together with NASD and the State of Florida in a coordinated series of exams focusing on both broker-dealers and advisers. In particular, we'll be looking at the ubiquitous marketing vehicles that lure seniors to sales seminars often at fancy hotels and restaurants with promises of the proverbial "free lunch."
For those who thought preying on senior citizens would be easy, there will be no free lunch.
We expect to conduct a series of on-site exams of Florida brokers and advisers, and their employees who conduct these seminars. We want to make sure that the sales pitches and the materials provided to attendees are in fact pre-approved by the firm's supervisors, as is required by the securities laws.
This is going to be an all-out effort, bringing together the SEC, the NASD, and Florida's own examiners. If we find that instead of a legitimate sales seminar and a free meal, seniors are being exposed to pitches for unsuitable products with high-pressure sales tactics, wild claims about projected returns, and no disclosure of the actual risks of an investment, we'll move in hard and fast.
Let me be clear: I don't begrudge anyone a free lunch and I've enjoyed your offer of one here today.
But the SEC's experience thus far tells us that these sales pitches are anything but "free." They come with a very high cost. And so we're quite serious about attacking the problem from all angles, at every level of government, and with every weapon in our arsenal from investor education, to aggressive investigation, to strong prosecution.
The Consumer Federation of America has long been in the forefront of another top concern for investor protection: clear and understandable disclosure to all investors about the facts they need to know. You've long championed the idea that without good information about investment choices, consumers aren't really investing they're gambling.
I was very interested to see the results of a survey recently released by the CFA that got a lot of national media play. According to that survey, more than 20% of Americans think winning the lottery is the most practical way for them to accumulate wealth. And for people over 55, the percentage approaches one third.
Sadly, for too many investors, stock market investments are made with the same due diligence as a quick pick lottery ticket: long on wishful thinking, and short on facts.
And all too often, it's not their fault. There's just too little usable investor information.
As Chairman of the SEC, I'm committed to making certain that the average investor has all the information she needs, and in a form she can understand. It's what distinguishes investing from roulette.
That's why, since the day I began, I've been focused on translating legal gobbledygook into plain English. Our recently proposed proxy rules would require for the first time that the proxy statement be written in plain English.
And that goes double for disclosure about executive compensation, where right now, the situation for investors is a mess.
At the SEC, our starting point, like yours, is the fact that the shareholders own the company. They're entitled to as much information as possible about how, and how much, the executives who work for them are being paid.
It's absurd to think that the owners of an enterprise should be denied full knowledge of how much they're paying their employees. Think about it this way: Which of our nation's corporations issues signed, blank payroll checks for its employees to fill in the amount learning only after the employee has cashed it just how much that check was for?
Improved disclosure of executive compensation will also be useful to the directors who work for the shareholders, by getting them better market information about executive compensation decisions in other companies.
One of the big improvements this reform will make is to treat all compensation, not just salary, in the same way. If the company pays an executive's credit card bill, or for a bicoastal commute, those payments also come out of revenue and affect the profit that belongs to the shareholders.
So our rule proposes exposing corporate perks to the light of day.
We currently permit companies to report lump sums for perks as high as $50,000, or 10% of an executive's salary plus bonus. For an individual perk under the current system to be separately disclosed, it must be worth more than 25% of all perks combined.
That $50,000 threshold is far too high to be nominal. It's what many of a company's shareholders make all year. It is far above the real median U.S. household income of $44,400. So we're proposing that any perk of $10,000 or more be included in the disclosure table and itemized.
And, by the same token, shareholders ought to know how much the compensation committee has promised to pay executives when they leave. If that parachute is made of gold, shareholders should be able to see its shine.
The same goes for retirement benefits, which today are often impossible for shareholders to decipher. Our proposed new tables would outline both the defined benefit and the defined contribution retirement of top officers.
And we want one final, clear number that captures the executive's entire compensation the salary, the benefits, the perks, and the retirement.
Not least of all, our new rule proposes that all compensation to board members also be disclosed. And the board would have to justify its actions, in writing, in a new Compensation Discussion and Analysis section. The new CD&A would be written in plain English our new official language at the SEC.
I've often been asked whether all of this will be enough to rein in the abuses of excessive compensation in some companies. And the truth is, we won't know until we try.
But I do know one thing: People forced to regularly undress in public do pay more attention to their figures.
Put another way, the fear of shame tends to concentrate the mind.
In all that we're doing at the SEC, our goal is to put investors in the driver's seat, and give consumers more control over their money. That's just as true of our initiatives with interactive data, which may someday give investors qualitatively better information than they've ever had before.
Bringing this kind of added flexibility and better usability of information to investors is sheer, unmitigated good.
Then again, earlier this week, a newspaper article about our interactive data initiative, after praising its potential to demystify mountains of financial information for ordinary investors, questioned whether it could ever pass muster with companies because of fears that "it would give investors too much power."
From my point of view, it's all but impossible to give investors too much power. Empowering investors is what the SEC is all about.
Not long ago, something happened that reminded me just how important that is.
Last summer, my mother died. For any of you who has lost a parent, or worse yet both of them, you know that you never feel so alone in the world as when you stand on your parent's grave.
But I also discovered that death changes us, the living. Death makes us more aware of life. It can inspire us to decide what really matters in life and then to seek it.
As hard as it was to accept my mother's death, it was harder still to see my father so vulnerable. So it was nice that it seemed to help both of us to spend some time going through old pictures and mementos in Mom and Dad's apartment.
And in that enjoyable scavenger hunt, I came across a small framed check, made out to my grandfather.
It was for $3.36 representing 56/1,000 of 1% of the hard-earned savings he'd earnestly entrusted, in 1929, to the debentures of Insull Utility Investments, Inc. That was the eventually notorious holding company of Samuel Insull, the Ken Lay of his day who combined scores of power utilities to create a corporate pyramid.
It came crashing down in 1932, and hundreds of thousands of investors, including my grandfather, lost their savings as a result.
The Insull abuses, which FDR railed against in the 1932 campaign, helped give birth to the Securities and Exchange Commission in 1934.
I've hung that small frame on my office wall. It serves as a reminder that being the investor's advocate means standing up for the little guy.
It means never forgetting that the cost of securities fraud is measured not just in accounting losses and diminished stock prices, but in people's lives in their dashed hopes, and their squandered savings; in college dreams that might never materialize, or doctor bills that can't be paid.
Sometimes life changes us in unpredicted ways.
Since last summer, when my mother died, and I became Chairman of the Securities and Exchange Commission, I've had the opportunity to devote myself to the cause of the ordinary investor.
I couldn't be more proud of the dedicated men and women of the SEC with whom it's my privilege to work. And I couldn't be happier to have allies such as the Consumer Federation of America in the struggles that lie ahead.
Thanks for all that you do I look forward to working with you.