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U.S. Securities and Exchange Commission

Speech by SEC Commissioner:
Remarks to the SEC/NASAA 19c Conference

by Paul R. Carey

Commissioner, U.S. Securities & Exchange Commission

Washington Court Hotel

April 3, 2000

The Securities and Exchange Commission, as a matter of policy, disclaims responsibility for any private publication or statement by any of its employees. The views expressed herein are those of Mr. Carey and do not necessarily reflect the views of the Commission, the Commissioners, or other members of the Commission's staff.

Good morning. I am pleased to join you at this year’s conference. I enjoyed meeting with your President, Brad Skolnik, and your president-elect, Deb Bortner, recently. And congratulations on your choice of Executive Director, Marc Beauchamp. They will provide excellent leadership, and I’m enthusiastic about working with them in the future.

I have been asked today to give my perspective on issues of mutual concern to us. These views are mine and not necessarily those of the Commission.

Serving as the SEC’s liaison to state securities administrators has given me a welcome opportunity to appreciate the importance of the state securities regulator. U.S. capital markets are the envy of the world, and they remain attractive for investors in large part because of our system of oversight and regulation. The states are a vital part of that system, because of the special position you occupy relative to local investors and businesses.

Because states are "closer to the ground":

  • You facilitate the early detection of securities laws violations;
  • You know the needs and practices of your local businesses; and
  • You communicate effectively with your local investors.

You are the local enforcers, regulators, and educators. We applaud your success in all of these areas.

Because we have a number of goals in common, we benefit from an effective partnership. I think it’s fair to say that our relationship is as good as it’s ever been. I’ve been impressed by the atmosphere of trust, respect and cooperation. Both sides have demonstrated a true willingness to work together. We have been better at sharing information, and we consult one another more frequently. In the recent past, there have been several instances where Commission Regional Office heads have met with NASAA leadership and enforcement staff in small groups in order to address common concerns. Not only have these discussions been held more often, they have taken on more collegiality and effectiveness. We have made serious efforts to identify areas where we can join forces. As a result, we now have an agreement to try to develop a joint project a year, to focus on specific kinds of fraud. This kind of coordination has produced meaningful results, by increasing our joint efforts, while leveraging our respective resources.

In the investor education area, we continue to join forces as well. This year, over 40 states are participating in the Saving and Investing Campaign. As part of the Campaign, NASAA organized tomorrow’s Forum on Retirement Security and Personal Savings, and I am looking forward to participating in their panel discussion. Our combined efforts continue to make Investor Town Meetings a success as well.

Coordination among regulators has advanced investor protection in other ways. This week, for example, the Commission is going to propose amendments to Form ADV that would update the form and facilitate filing on a new electronic filing system – the IARD. The IARD would be built by NASDR pursuant to contracts with the Commission and NASAA. Under this system, an adviser would be able to register (or withdraw from registration) either with the Commission or the states by making a single electronic filing. All investment adviser representatives could register through the system.

One of greatest benefits of this system is that anyone with Internet access would be able to look up an adviser and review its Form ADV, including the disciplinary records of the adviser and persons associated with the adviser. By working together to develop the IARD, the Commission and the states are each furthering one of our core missions – improving the quality of information that clients receive from investment advisers.

There is another dimension of the coordination between the SEC and the states that I have particularly appreciated. I feel that the Commission’s policy-making process has been enhanced by the independent analysis and commentary provided by the states. The states played an important role in identifying daytrading issues, for example, and the Report of the Day Trading Project Group presented some eye-opening statistics. I also value your comment letters and the perspective you bring to a variety of other issues.

Looking forward, I see the states continuing to play a vital role in overseeing the securities industry, and I believe we can continue our effective working relationship. Together, we need to meet the challenges of today’s rapidly changing market. So many aspects of the market are changing – what’s traded, how it’s traded and who’s trading. We have seen a change in the investor base as more and more individuals enter the stock market. A recent Federal Reserve survey shows that a greater percentage of overall household wealth is attributable to stock holdings. Stocks account for nearly a third of total household wealth, and nearly half of all American households are currently investing in the stock market.

Individuals are becoming more directly involved in managing their own investments. Technology has enabled investors to gain access to on-line research, advice, and trading. This availability - and the performance of the technology sector - have spurred an increased desire to invest directly in equities. Advertising is fueling individuals’ dreams of making fast, easy money. Short-term trading is increasing, and too often, traditional valuation methods are falling by the wayside. We now operate in an environment where disintermediation has changed the relationship between investors and investment professionals.

This atmosphere creates an exciting challenge for us as regulators. As more and more investors turn to the stock market, investor protection is more important than ever. We can attack with two prongs of protection: enforcement and education.

From an enforcement perspective, today’s atmosphere creates a fertile ground for all kinds of fraud and abuse. We certainly haven’t seen any decrease in the number of local con artists, local affinity frauds, or local offering frauds. You serve as the front line for your local investors, and state enforcement efforts are all the more crucial now. In addition, your continuing commitment to coordinate with criminal authorities is especially timely. Maintaining our effective federal-state enforcement partnership will also benefit investors.

From both a federal and state viewpoint, investor education has taken on a new urgency, as well. Investors going for the fast, easy profit may abandon sound, basic investment principles. We need to get back to basics and re-focus investors on the importance of saving and successful investing over time:

  • Investors need to understand the difference between trading and investing.
  • Investors should understand that there is no better way – over the long term – to manage risk than to diversify.
  • We also need to emphasize that IPOs are not a quick, easy and risk-free way to make money.
  • And, we need to make investors aware of the risks of borrowing excessively in order to play the stock market.

Of course, there are many other issues ripe for investor education and, as we continue to navigate our way through the rapidly changing landscape, we will face new issues, and find new ways to protect investors.

In closing, our markets are in a period of great transition. We cannot fully predict what the rise of electronic exchanges, decimalization, demutualization, or market linkage, for example, might bring. But, the federal government, the states, and the SROs, along with an informed public, will provide the matrix of defenses against securities laws violations.

Although each regulator has its own sphere of responsibility, we share many common objectives. We must keep in mind the commonality of our mission and work in harmony - for the benefit of our investors and our markets.

Thank you.