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U.S. Securities and Exchange Commission

Testimony Concerning
The Commission's Role in Empowering Americans to Make Informed Financial Decisions

Susan Ferris Wyderko

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

Before the Subcommittee on Financial Management, the Budget, and International Security, Committee on Governmental Affairs, United States Senate

March 30, 2004

Chairman Fitzgerald, Ranking Member Akaka, and Members of the Subcommittee:

I. Introduction

On behalf of the Securities and Exchange Commission, thank you for the opportunity to testify today about the efforts of the Securities and Exchange Commission to educate our nation's investors.

Numerous studies and surveys show that many Americans-especially young adults-fail to comprehend even the most basic financial concepts. They do not understand how the securities markets work, how to evaluate the risks and rewards of investment products, and how to calculate what they must save in order to achieve their financial goals.

Far too many individuals may needlessly struggle in retirement or miss opportunities to purchase a home or send a child to college simply because they were never exposed to the financial facts of life. Many may suffer financial shocks and losses when financial markets tumble because they failed to diversify their holdings. Others may suddenly see their net worth disappear because they engaged in high-risk investing strategies.

We passionately believe in the importance of educating all Americans so they can optimize their chances to reach their personal savings and investing goals. To achieve this educational objective, more Americans need to learn about the "magic" of compound interest, the virtue of diversification, and the value of planning for retirement. Financial literacy provides the foundation for all of these life skills.

Effective investor education can help all Americans become better positioned to achieve personal financial security and reach their savings and investing goals, including home ownership and college education for their children. Over the long term, effective participation in our financial markets is critical to reaching these goals, as well as to achieving retirement security. It is necessary to understand basic investing concepts even if the investor participates in the markets only through a defined contribution retirement plan.

Beyond helping investors understand financial concepts, increased education can yield significant economic and social benefits. When investors have the opportunity and the ability to invest, they infuse the markets with vital capital resources that help businesses and economies grow stronger. In turn, these investments in the economy ensure that new and creative technologies have a chance to develop and flourish. Saving and investing can also help individuals and families build wealth and become more stable and secure. By actively promoting and supporting financial education at all levels — from the basics to the most complex concepts — regulators, securities professionals, and others can play a key role in assuring that all investors get the facts they need to invest wisely and avoid costly mistakes.

II. The Securities and Exchange Commission's Investor Education Program

At the Securities and Exchange Commission, we have a long-term commitment to improving financial literacy. My Office of Investor Education and Assistance currently has 36 employees. We are the "front door" to the Commission for all individual investors. Each year, my staff handles tens of thousands of complaints and questions from investors who contact the SEC. We attend investor fairs, speak at gatherings, and talk with the media about financial education concepts. We view every contact with an investor as an opportunity to educate, not merely to inform.

A. Investor Education Literature

As part of our commitment to effective investor education, we routinely create and disseminate neutral, unbiased information on saving and investing. Our educational materials are all directed at helping people make wise investment choices and avoid fraud. We do not copyright any of our materials, and we make them freely available to all, in both Spanish and English. Our goal is to empower investors, to give them the tools they need to evaluate their investment options and make informed decisions.

The dominant theme of the SEC's investor education materials is "investigate before you invest." We encourage individuals to ask questions and to check out the background and credentials of any salesperson or financial professional they use. We make sure investors know how to find out whether their brokers, investment advisers, or investment adviser representatives have a history of complaints or fraud. Not only do we list the key questions every investor should ask, but we also provide investors with information on how to confirm whether a financial professional is, in fact, duly licensed. In addition, we give investors resources for researching companies and tips for avoiding fraud.

While we 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, we offer a wide range of publications on many common investment products, including mutual funds (Invest Wisely: An Introduction to Mutual Funds) and variable annuities (Variable Annuities: What You Should Know). We also tell investors about the advantages and disadvantages of such strategies as day-trading and investing on margin.

Moving beyond brochures, we interact directly with the public, talking to investors through our toll free telephone line and answering their e-mails and their letters. Our e-mail address is help@sec.gov or ayuda@sec.gov if you would like to e-mail us in Spanish. ("Ayuda" is Spanish for "help.") We also assist investors when they have complaints about a securities salesperson, firm, or product. In every case, our immediate mission is to help investors resolve their problems or direct them where they need to go to get the assistance they need.

We firmly believe that good government is responsive government, and we live by that creed every day. We are convinced that we can make a difference in people's lives by helping them understand an investment concept or by educating them so they can avoid future problems. One person recently wrote us, "I thought that with all the BIG problems you are handling that mine would be ignored. It was not & I appreciate that tremendously!" While it may not be as newsworthy at times as a mutual fund scandal, investment education is a key component of the agency's mission.

B. Collection of Data and Statistics

I should also point out that, while our immediate objective is to assist the investor, we maintain an extensive database containing information on the products, people, and firms about which people complain. We track the volume of complaints as well as the topics about which people are complaining. We use that information to inform other divisions at the SEC, so that the agency can better deploy our investigative and enforcement resources. We are quick to inform other state and federal regulators when we find problems falling within their jurisdiction. We have spent a significant amount of time during the past year upgrading our ability to search our databases and hope to contribute significantly to the agency's ability to anticipate the next troublesome area where investors may be vulnerable.

C. SEC.gov Website Resources

We use our website — www.sec.gov — extensively to become more accessible to the public. We have published hundreds of educational brochures, investor alerts, and short topics of interest to investors. Our "Publications" page (http://www.sec.gov/investor/pubs.shtml) allows visitors to search for information using a targeted search engine, browse for information by subject matter, or view an alphabetical list of our publications.

In addition, our website gives investors interactive tools to help evaluate their investment decisions. Rather than recreating existing tools, we link to more than half a dozen interactive tools from other federal agencies, self-regulatory organizations, and non-profit educational organizations. We also have our own mutual fund cost calculator, which allows investors to compare the costs of holding different mutual funds over a period of time that they specify. This calculator takes some of the mystery out of mutual funds by enabling investors to estimate and compare costs for different funds. It allows investors to see in dollars and cents how costs can add up over time.

An increasingly popular feature on our website is an interactive question-and-answer database that allows investors to obtain instant answers to the most commonly asked questions and to e-mail us with more complex questions. By matching incoming questions against a pre-loaded database of questions and answers, this feature allows users to receive instant answers even during non-business hours. During fiscal 2003, more than 100,000 unique visitors used this service.

We also have a "Tips & Complaint Center" on our website, which allows investors to fill out an electronic form easily. Through this page, investors can file a complaint or provide the agency with tips on potential securities law violations. The type of behavior the investor selects when describing the nature of the complaint determines whether the complaint will be initially routed to the Office of Investor Education and Assistance or to the Division of Enforcement. During fiscal 2003, the Tips & Complaint Center received approximately 15,000 complaints submitted through the website.

D. Fake Scam Sites on the Internet

We do not limit our efforts to our website alone. Experience has shown that some investors troll the Internet to identify the next "big thing," the next sure-fire investment winner. We have discovered that these folks, some of whom turn out to be victims in the Enforcement actions we bring, did not visit sec.gov to get the benefit of our prudent, sensible advice before investing in a get-rich-quick scheme. Knowing all of this, we go to our audience, instead of expecting them to come to us. We run a series of fake investment scams on the Internet, all designed to illustrate the warning signs of on-line investment fraud. Each scam boasts 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. Our goal is to warn investors about fraud before they lose their money.

Our first foray into the world of Internet fraud was the highly successful (or so it claimed) company McWhortle Enterprises, Inc., www.McWhortle.com. McWhortle purports to be "an established and well-known manufacturer" with a revolutionary product it plans to produce with the money it raises through an initial public offering (IPO). But the company does not exist, and anyone who tries to "invest now" is greeted with an educational message that warns, "Watch out! — If you responded to an investment idea like this, you could get scammed." Within weeks of its launch, the site got more than 1.5 million hits. The McWhortle Webmaster (actually SEC staff) received more than 500 e-mails, nearly all of which were overwhelmingly positive. Since McWhortle launched, we have heard from a number of teachers who have incorporated the site into teaching modules focusing on separating the good from the bad on the Internet. Hits to the McWhortle site soar during final exam months. We are very pleased that so many teachers from so many grades have incorporated McWhortle into their curriculum.

Over the past two years, we have launched the following additional fake scam websites:

Our fake scam site initiative has proven to be a highly successful method of reaching would-be investors while their wallets are open and their guards are down. How do we know? We know because people tell us so. Each of our fake scam websites has an e-mail address, a phone number, and a mailing address. We answer individually every inquiry or comment we receive. And, in many cases, these are wonderful opportunities to educate. We have gotten bank account numbers, wire transfer instructions, and credit card information from would-be investors, who are frustrated because the fake company site would not take their money. While in some cases it may take several attempts before our staff can convince the writer or caller that we are in fact behind that unbelievable investment offer, just about everyone we contact has been appreciative of our real life illustrations of the concept "if it sounds too good to be true, it is."

E. Public Libraries

In order to empower investors in communities across America, we are linking arms with a formidable ally — public libraries. No longer are public libraries hushed repositories of paper volumes. They are now vibrant centers of community activities, with children's programs, senior seminars and, of course, book clubs. Libraries have Internet access, and they are where many Americans who do not have computers at home go to e-mail their families and research their stocks. We are actively working to provide reference librarians with the resources they need to help their patrons effectively research their investment options. To that end, we have created and disseminated bookmarks and special brochures aimed at librarians seeking to better their stock researching skills.

III. Disclosure Initiatives

A. Mutual Fund Disclosure Initiative

There are times, of course, where more information might really be better for investors. The Commission recently proposed a rule change that would require brokers to tell customers whether they have conflicts of interest when selling mutual funds, variable annuities, 529 plans and various other investments. For many Americans, mutual funds, variable annuities, and 529 plans constitute the extent of their participation in our capital markets. It is therefore critical to make the fees and expenses associated with these investment vehicles transparent to all. It is not right to have a system where some investors, knowing the right questions to ask, are better equipped to make investment decisions than others who do not know the tricks of the trade. We want to make sure that all Americans are equally able to evaluate and select investments that are good for them, and not just financially beneficial to their financial professional.

The rule proposal included draft forms that might be used to communicate information on broker conflicts. These proposed draft forms might be used at two points in time: first, at the "point of sale" before the transaction is consummated, and second, in the form of a confirmation. Our Office has launched a major initiative to seek out investor comments on whether these draft forms are understandable and whether they convey information relevant to investment decisions. My staff has shipped thousands of copies of the draft forms to individuals all over the country, and they are of course available on our website as well. To make it easy for investors to give us their comments, we inaugurated a new "click to comment" feature on our website. While this method of commenting is now standard on all of our proposed rules, we made sure it was implemented on this rule to make it easier for ordinary Americans to participate in our rule comment process. We have been very pleased with the responses, many of which have been extremely thoughtful.

B. Global Analyst Settlement — Investor Education Entity

Our commitment to financial literacy does not stop with our own efforts. Last year, the Commission entered into a $1.4 billion global settlement of an action against ten leading investment firms over conflicts of interest between investment banking and research at those firms. At the Commission's request, the Judge overseeing that matter ordered that $80 million of the money paid by the firms will be spent on investor education. $27.5 million of that money will go to the state securities administrators, to be spent on investor education. $52.5 million will be paid into a new non-profit entity dedicated to promoting investor education.

Just last week the Judge ruled that Charley Ellis, author of the book Winning the Loser's Game, will be the new Chairman of the Board, and that George Daly, currently with the Stern School of Business, will be the Executive Director. The Judge also approved of the Commission's Plan for the new entity, which will be an ongoing organization able to receive additional funds in the future from sources other than the settling firms. The Judge's Order notes that the Court "has every confidence that once the Investor Education Entity is established, it will meet and surpass its laudable mandate."

The new Investor Education Entity will support programs designed to equip investors with the knowledge and skills necessary to make informed investment decisions. This entity will thus play a vital role in helping all Americans better understand the intricacies of the financial markets. As the Judge's Order states, "the contemplated Investor Education Entity will benefit the entire nation at a time when increasing numbers of American households are investing in the equity markets." The SEC is proud to have played an important role in its creation. Chairman William Donaldson has properly called the new investor education fund a "national treasure." We are especially appreciative of the contribution made by Commissioner Cynthia Glassman in the drafting of the Commission's plan and formulation of the education fund.

IV. Partnerships

While the federal government can play an important role in encouraging financial literacy for all Americans, we cannot do it all. That is why it is so important for us to work in partnership with other government agencies, localities and private sector entities that sponsor high-quality financial education. The SEC is a proud member of the Financial Literacy and Education Commission, which had its inaugural meeting earlier this year. The new Literacy and Education Commission is developing a national strategy aimed at educating consumers about their financial choices and options.

The SEC is a member of the Jump$tart Coalition for Financial Literacy and the American Savings Education Council. We are also a charter member of the Department of Defense's Financial Readiness Initiative. The DoD launched the Financial Readiness Campaign to give service members and their families a chance to learn more about personal finances and to encourage them to better manage their money. The effort is directed towards junior enlisted service members who are most at risk, and spouses of service members since they are less likely to have received the personal finance information that service members received as part of their training. We have pledged our support to the personnel at military installations who are responsible for providing financial education and financial counseling to service members and their families. We have led two Town Meeting programs in Norfolk, Virginia that were aimed at educating our servicemen and servicewomen. We continue to work with DoD to provide helpful financial information.

V. Conclusion

While many worthy and effective programs already exist to address the various aspects of the financial education challenge, coordination and partnering is critical to assuring that all Americans have the tools to manage their personal finances. We have worked with a large number of public and private organizations to tackle investor education needs jointly, and we will continue to do so in order to leverage all of our efforts to obtain the best results possible.

In closing, I would like to thank the Subcommittee for recognizing the importance of the Commission's role in empowering Americans to make informed financial decisions. I appreciate your inviting me to speak on behalf of the Commission, and I would be happy to answer any questions that you may have.



Modified: 03/31/2004