North Carolina Deputy Securities Administrator
President, North American Securities Administrators Association
September 28, 2010
NASAA 93rd Annual Conference
Good afternoon. I’m honored to speak to you as NASAA’s President.
I would like to recognize and thank my good friend from Texas, Denise Voigt Crawford, for her leadership during the past year as NASAA’s president.
Denny has served with distinction during a year of truly dramatic change in our nation’s financial history as the Dodd-Frank Wall Street Reform and Consumer Protection Act worked its way to the president’s desk.
Please join me in thanking Denny for fulfilling her pledge to, in her words, “use our good reputation in every way possible to influence the direction of financial regulatory reform so that it works for, not against, investors.”
I also want to thank Melanie Lubin of Maryland for all she’s done to make us feel at home here in Charm City as we’ve explored the key issues we all face under the new Wall Street reform legislation.
Now I want to introduce the NASAA leadership team for the coming year. Our new Board of Directors includes: Past President Denny Crawford; President-elect Jack Herstein of Nebraska; Secretary Rick Hancox of New Brunswick; Treasurer Fred Joseph of Colorado; and directors: Joe Borg of Alabama, Preston DuFauchard of California, Patricia Struck of Wisconsin, and Frank Widmann of Florida.
Subject to the board’s approval I plan to name the following people to serve as Section Chairs: Broker-Dealer, Ralph Lambiase of Connecticut; Corporation Finance, Heath Abshure of Arkansas; Enforcement, Matt Kitzi of Missouri; Investment Adviser, Linda Cena of Michigan; and Investor Education, Daphne Smith of Tennessee.
Finally, I will ask the Board’s approval of Matt Neubert of Arizona to serve as our ombudsman and Denny Crawford to be our new member advocate.
You know, I believe, and believe strongly, in the strength, determination and integrity of this association. These qualities come from our shared belief that our public service allows us to contribute to the common good – making a better society in which to live.
More so than any other kind of regulator, our work focuses on protecting “Mom and Pop” investors. Our primary goal has been and remains to advocate and act for the protection of investors, especially those who lack the expertise, experience and resources to protect their own interests. When you think about it, NASAA acts as an international network made up of local crime fighters working to protect investors.
History shows us that the best tips and information tend to flow from the ground up. So as the regulators closest to investors, state and provincial securities regulators serve a vital role as the best resource for investors to turn to for help when they have concerns about what appears to be an investment “opportunity.”
Our job is straightforward. It is to make sure investors get a fair deal based on full and accurate information. This has been true since the passage of the nation’s first blue sky law in 1911 in Kansas; and in Canada since 1912 when Manitoba became the first province to approve securities legislation.
Our strong history of responsiveness, aggressiveness and cooperation in the pursuit of investor protection is what defines us. During the coming year, NASAA will be recognizing our history of 100 years of investor protection. Our centennial celebration culminates at next year’s annual conference in Kansas, the birthplace of securities regulation.
And now, a brief history lesson.
One hundred years ago, Kansas Banking Commissioner Joseph Dolley had seen his fill of “wildcat” stock speculators peddling shares of sham companies to unsuspecting investors in his state.
Many of these scams targeted local farmers with wild investment schemes promoting nonexistent mines, Central American plantations and irrigation systems.
In April 1910, Commissioner Dolley notified Kansas newspapers of the creation of a new agency, the Investment Information Bureau, which would, in his words, “protect the people of Kansas from fakers with worthless stock to sell.”
Inquiries started pouring into this new bureau. Dolley began providing information to the public about these companies, but he quickly found that he had no legal authority to require a statement of any kind from the sellers and he had no power to stop the sale of bogus stock.
So in his 1910 report to the state legislature, Commissioner Dolley warned about these wildcat stock speculators running wild in Kansas, and he urged legislators to do something about it.
The legislature responded, and on March 10, 1911, the Kansas Blue Sky law went into effect. This new law was aimed at what a Kansas judge called “speculative schemes which have no more basis than so many feet of blue sky.”
And with that, state securities regulation was born. Within six months of the law’s passage, Commissioner Dolley had received about 550 applications to sell stocks or bonds in the state. He approved less than one in ten of these proposals.
After reviewing a stack of rejected applications, a Saturday Evening Post reporter of the time described what he saw. “They show more graphically than anything else I know of with what sublime assurance ingenious gentlemen go out after the money of suckers in exchange for stock engravings . . . Apparently some of the people engaged in it think they have an inalienable Constitutional right to sell worthless ‘securities’ and they resent any interference with their operations as an act of tyranny and oppression.”
Is anyone in the audience having a sense of déjà vu here?
As regulators, we are convinced that every investor deserves protection and an even break, and that the welfare of investors must not be sacrificed in the process of capital formation.
This year marks another significant milestone in our history. President Obama’s signature on the Dodd-Frank Wall Street Reform and Consumer Protection Act demonstrates the recognition by federal lawmakers of the strong investor protection role our members provide.
For example, after this conference, I will participate in the first meeting of the Financial Stability Oversight Council. I am honored to be a member of this council, which was created to identify and address systemic risks before they can again threaten our economic stability.
The regulatory reform legislation has given us other opportunities as well. In less than a year, states will be responsible for regulating approximately three out of every four IA firms. Investors will benefit from this change because it will enable our friends at the SEC to focus on the largest investment advisers, while mid-sized and smaller advisers will be subject to the strong state system of oversight and regulation. Most advisers will find the switch to be a smooth process. As you heard at yesterday’s IA Forum, the states are preparing for this increased responsibility.
All fifty states, plus the District of Columbia, have agreed also, through a formal memorandum of understanding, to work together and to share resources as needed to regulate investment advisers under their jurisdiction. And through NASAA, the states have the benefit of sophisticated training programs and technology to assist their licensing and examination staffs in fulfilling their responsibilities.
Dodd-Frank also creates an unprecedented opportunity for the SEC and NASAA to achieve our common goal of “putting investors first.”
For example, the SEC study and possible rulemaking on applying a fiduciary duty to all financial professionals who provide investment advice will have most significant impact on “mom and pop” investors.
My NASAA colleagues and I believe that financial professionals who provide investment advice ought to be held to the fiduciary duty currently applicable to investment advisers under the Investment Advisers Act of 1940.
When you think about the many concessions in the Dodd-Frank Act, arguments against this fiduciary standard ring hollow. A lot of these arguments focus on costs, but the focus should be on what is best for investors. Any increase in compliance costs, which we believe would be minimal, will be greatly outweighed by the direct benefits to investors. Investors who seek and receive advice about securities expect their interests to come first, and they deserve a fair deal.
In a recent survey of investors, 97 percent said that financial professionals who provide investment advice should put the investor’s interest first and disclose upfront any fees, commissions or conflicts of interest that may influence that advice. And 96 percent of investors agreed that the fiduciary duty should extend to insurance agents when they recommend investments such as variable annuities.
Not surprisingly, the strongest opposition to the fiduciary duty standard has come from life insurance agents. Expensive variable annuities, for example, would be a lot harder to sell if agents were required to disclose their commissions upfront. Broker-dealers who provide investment advice should be required to disclose similar conflicts of interest — for example, when they recommend a high-cost product that generates greater commissions for the salesman when a low-cost product would serve the investor just as well.
The investor has spoken, and we encourage the SEC to do the right thing and apply the fiduciary duty of the Investment Advisers Act to those who provide investment advice about securities.
Whether our goals will be reached will be determined in the coming months as the implementation phase of Dodd-Frank takes place. NASAA intends to seize every opportunity to provide input to the SEC throughout this process. We have 100 years of experience and expertise to contribute to a cohesive regulatory system, and we welcome the opportunity to work with other regulators to achieve our common investor protection goals.
To that end, we have formed a working group chaired by Missouri Securities Commissioner Matt Kitzi to ensure that we are an active participant in both the study and the rulemaking stages of the implementation process. I want to see that investors and state securities regulators emerge from the implementation process in a strong position. We want the rules developed during the implementation stage of Dodd-Frank to strengthen investor confidence and actually help investors.
This legislation clearly is going to restructure relationships among regulators. We have an opportunity to strengthen these relationships and to engage in productive discussions about how our shared responsibilities can better protect investors. We believe the state-federal partnership is the critical element in an effective investor protection regulatory structure. Collaboration between regulators is vitally important because we must leverage our collective resources to protect investors.
NASAA will take all necessary steps to preserve and strengthen the role of state and provincial securities regulators in an integrated structure of investment regulation. We must also recognize the interests of the investment industry as we focus on investor protection. This is critical to supporting and facilitating investment capital formation throughout North America. NASAA members are sensitive to the cost and complexity of regulatory compliance, and where possible, we will continue our efforts toward reducing both.
We want to work cooperatively with everybody to identify areas of common interest and opportunities for improvement. We may not agree on every issue, but we have to preserve effective lines of communication so that we can discuss our differences in a respectful and productive manner.
A man much wiser than I once observed that “the single biggest problem in communication is the illusion that it has taken place.” I want more than an illusion of communication. My door is open. I encourage you to contact me and contact our ombudsman, Matt Neubert, with your questions and concerns in the year ahead.
Now, I need to do a few “thank you’s.” I want to thank my fellow Board members, our Section and Project Group chairs, my staff back home in North Carolina and the NASAA staff in Washington for their support and encouragement.
The men and women in our NASAA community have faced some demanding times together in recent years. And we certainly will face more challenges ahead. Throughout these interesting times, you folks have all continued to do what you do best, and that is serving as the investor’s first line of defense.
Your commitment to investor protection is what has earned the recognition by Congress of the capabilities of NASAA members. Through your voluntary work with NASAA, you have given countless hours of your personal time to strengthen state and provincial securities regulation, to maintain the integrity of our financial markets and to provide much-needed investor education in our communities throughout North America.
I want to make sure that everyone has a meaningful opportunity to participate in the work and the direction of NASAA. I am going to do everything I can to make sure that your service on the frontlines of investor protection continues to be recognized and respected as we enter this new era of financial services regulation together.
Thank you for listening.
September 28, 2010