North Dakota Securities Commissioner
President, North American Securities Administrators Association
October 2, 2007
NASAA 90th Annual Conference
On behalf of NASAA, I thank you for joining us here in Seattle for our 90th annual conference. And I would also like to thank and congratulate Fred and Mike Stevenson for putting together another outstanding agenda.
It is indeed a privilege to address you today as NASAA’s incoming President. To my colleagues, you have bestowed upon me your trust and confidence. I am grateful, I am honored to serve, and will do my utmost to effectively carry out the charge, representing our members across North America each and every day of my term. Perhaps the fact that North Dakota is home to the geographic center of North America, will provide me with some advantage.
And speaking of advantage, for the past 12 months, I have had the very good fortune of serving as president-elect under the guidance of Joe Borg. Joe has worked tirelessly for the citizens of Alabama and for this organization over the last 13 years, twice serving as NASAA’s President. He is a champion of state securities regulation, and the critical and irreplaceable protections state regulators provide to our investor constituents. For his unwavering dedication to the individual investor, please join me in recognizing Joe Borg.
I also have the good fortune of working in the coming year with a team of my colleagues who will dedicate their time, talent, and expertise as members of NASAA’s Board of Directors: NASAA’s board for the coming year includes: (and would you please stand): President-elect Fred Joseph of Colorado; Past President Joe Borg; Chris Biggs of Kansas; Denny Crawford of Texas; Glenda Campbell of Alberta; Melanie Lubin of Maryland; David Massey of North Carolina, and Mike Stevenson of Washington.
I would also like to introduce the colleagues who I have asked, and who have graciously agreed to serve as NASAA’s section chairs in the coming year:
Matt Neubert of Arizona will return as chair of the Broker-Dealer Section; Mark Connolly of New Hampshire will chair the Corporation Finance Section; Frank Widmann of New Jersey will chair the Enforcement Section; Patty Struck of Wisconsin will chair the Investment Adviser Section; and Wayne Strumpfer of California will chair the Investor Education Section.
And I am also very pleased that Don Saxon of Florida will return as our Ombudsman.
On behalf of the membership, thank you for you willingness to serve.
Together we will face many complex and demanding issues in the year ahead. But our mission, of course, remains quite singular – protect the individual investor. They too, are facing increasing complexity in an ever-evolving world of financial products, services and providers. This afternoon, I would like to offer an overview and my perspective on significant issues confronting investors and regulators alike.
Respect for the Small Investor
I recently read an article about the challenges Wall Street firms will face in serving a growing segment of our population categorized as the “mass affluent.” The mass affluent are primarily baby boomers heading in the general direction of retirement who are in possession of somewhere between $500,000 and $2.5 million dollars of investible assets.
According to the author, the challenge for investment firms will be to find a way to serve this market segment, and still make money. The article emphasized that it would behoove the firms to figure out a way to meet this challenge, because the mass affluent investor, although now worth only $500,000 to $2.5 million, may actually grow into serious money someday.
So with Wall Street contemplating the desirability of serving the “mass affluent,” where does this leave the average individual or “retail” investor? I think the definition of “retail” itself articulates the business challenge for firms – not many businesses are interested in doing anything in small quantities – and this business challenge can, through product and service constraints, translate into significant disadvantages for the small investor.
Let’s consider some fundamentals that I think, for the most part, we can all agree upon. To the small or “retail” investor, the ability to invest at all, in any amount, may be a monumental achievement, a turning point in life, the link to a secure financial future for themselves and for their children.
Whether it is their first IRA contribution, or $50 dollars a month in dollar cost averaging for a child’s education, they are setting the cornerstone of the foundation upon which they hope to build financial security. For some, this is no small undertaking. Or perhaps they face the daunting decision, upon entering retirement, of how to manage the money they have accumulated over the course of their working years…this is not really a decision about money, but about something that represents their life’s work and a secure future.
Investors want to make good decisions about their money. When they seek professional assistance, they should have more available to them than a computerized voice at the other end of the telephone, a do-it-yourself-website, or a salesperson pushing a high-fee, high-commission product.
Investing should not be an assembly-line, one size fits most, process. The millions of individual investors throughout North America deserve better.
Individual investors face many obstacles in their attempts to achieve financial security. Longer life expectancies, but at a price. Higher health care and education costs, and the ongoing uncertainty that is our Social Security system. They may be pitched and sold unsuitable products by unscrupulous sales people, or conned by financial predators. They are often over-served by the credit card industry. They may be stretched between funding an education for children, retirement for themselves and care for aging parents.
They also may be victimized, in the category of unintended consequences, by the ever evolving frontier of financial engineering, as exotic alternative products and strategies, through the effects of contagion and uncertainty, drive market volatility and negatively impact traditional investments that are still the mainstay of the individual investor’s portfolio.
Given the number and often the convergence of obstacles challenging the retail investor, the work of investment firms and professionals on behalf of small investors has perhaps never been as important as it is today.
And, given these obstacles and challenges, state and provincial securities regulators must continually seek to strengthen and preserve the regulatory system these investors count on for protection. “Compromised regulatory structure” must not be added to the list of obstacles standing between an investor and their future financial security.
Strong regulation helps maintain investor confidence. And strong investor confidence is a necessary ingredient for a vibrant, and competitive, capital market.
Maintain Investor Confidence At All Times – Investor Protection Is Not Cyclical
NASAA members do not view the protection of investors as a cyclical endeavor. We have a mandate to protect our investor constituents in good times and in bad, and we are steady in our charge.
Inevitably, in good times – when markets are behaving, portfolios are performing and scandals have retreated to the back page of the newspaper – inevitably there will emerge the next unfortunate campaign to weaken the securities regulatory structure and the protections afforded individual investors.
This is by no means a revelation. I am confident everyone here today has seen variations of this formulaic episode over the course of your career. The most recent remake of this theme is encompassed in the trilogy of capital markets competitiveness reports.
Now it wasn’t that long ago – 2002, 2003 – that “restoring investor confidence” was on the mind of every regulator, industry executive, consumer advocate, and elected official. Everyone spoke of the need to restore investor confidence, claimed it as a policy priority, and declared that the future viability of our capital markets depended on it. Sarbanes Oxley passed into law on July 30, 2002.
Since then, equity markets have recovered, with the S&P 500 up 77 percent from the end of July 2002 through the end of August of this year, and interest rates, until quite recently, gradually increased. As the focus on restoring investor confidence subsided, committees were assembled, studies conducted, and the capital markets trilogy surfaced, seeking to compromise the regulatory reform and investor protections that had just been put in place.
The Trilogy reports represent that the number of foreign company Initial Public Offerings conducted in U.S. markets is a compendious barometer for measuring the competitive position of our domestic market system. And this number, according to the experts, is in an alarming decline – at least it was during the timeframe selected for the study. Over-burdensome regulation and excessive litigation, the reports claim, are the primary culprits.
Only with a skewed agenda and a finely-focused scope can robust investor protection be held responsible for what the competitiveness reports have assessed to be vulnerable and waning U.S. exchanges within a growing, increasingly competitive, truly global capital market.
An expert, it has been said, is a person who avoids small errors as he sweeps on to the grand fallacy. As many of you know, had the experts extended the relied upon research period two more months, to the end of 2006, the data would have revealed not an alarming decline, but in fact a historical record – an all time high in the number of foreign IPOs conducted in U.S. markets. And if this year’s pace continues, the number will surpass last year’s record. I am not aware that the conclusions and recommendations of the Trilogy reports have been amended to reflect this material change in data.
For the time being, it appears that this well-orchestrated effort to weaken important investor protections has been pushed from center stage, as the attentions of industry, Congress and other government officials have been diverted by the sub-prime mortgage crisis and related market volatility and fallout.
I’m certain the irony is not lost on you – investors should not have to rely on crisis, scandal and fraud to stave off the attacks launched against the regulatory structure designed to protect them from crisis, scandal and fraud. Investors deserve better.
As we have stated consistently in Congressional testimony, public forums and other venues, NASAA supports a strong and effective regulatory structure for our capital markets that deploys, collaboratively, the authority of state securities regulators, the SEC and self regulatory organizations. It takes all three components working in equal partnership to maintain, at all times, investor confidence in the world’s deepest and most transparent markets.
And NASAA will also continue to support the vital role of private remedies in sustaining investor confidence. The Supreme Court has repeatedly stated that the private cause of action is an “essential tool” for the effective enforcement of securities laws. Congress echoed the point when it declared that “private lawsuits promote public and global confidence in our capital markets and help to deter wrongdoing.”
In the mid-1990’s, the securities industry persuaded Congress to impose limits on the rights of investors to seek relief in court. The massive financial scandals over the last decade suggest that those restrictions went too far.
They leave no doubt that it would be a grave mistake for either Congress or the courts to impose any further limits on the ability of investors to hold those perpetrating fraud accountable for their actions.
Yesterday marked the beginning of the Fall term for the United States Supreme Court, and we will await with great anticipation the Court’s decision in the Stoneridge case. The Court has an opportunity to make clear that all of the principal actors in a fraudulent scheme — not just those who disseminate falsehoods — all must answer to their victims. Far from burdening our markets, a decision for the plaintiffs in Stoneridge will do much to rid our markets of fraud, for the benefit of investors and legitimate businesses alike.
Perhaps due in large part to the now ubiquitous nature of the financial media, the financial services industry has become effective in influencing everyday vocabulary through the creation and proliferation of “buzzwords.”
For example, I’m sure you all remember “New Paradigm” as the buzzword used to explain why in the late 90s, company earnings were no longer relevant. “Synergy” was the buzzword used to explain otherwise unexplainable mergers and acquisitions, and “visibility” or more specifically, lack thereof, was used to explain essentially everything from March of 2000 to 2003.
A new buzzword has recently emerged on the scene, this time with the assistance of the regulatory community. We have been hearing much about the need to “rationalize” securities regulation.
State securities laws were born in Kansas in 1911 out of a clear recognition that every investor needs and deserves protection. Federal laws followed initially in 1933 and 34, driven by an era of fraud and manipulation during which investors suffered devastating losses. One can’t help but wonder if the authors of the original body of securities law might take issue with the claim that it needs to be “freed from irrational expression.”
So why the call for “rationalization?” What has changed? Business models, products, services – absolutely. But the need for investor protection, and the obligation of regulators to deliver it, has not changed.
In fact, I would submit to you that the very innovations in this industry that are held up as the basis for the need to “rationalize,” have created complexities and confusions for investors that cannot be educated away.
I caution fellow regulators, industry and Congress that any attempt to “rationalize” regulation must not result in a structure that will compromise and marginalize investor protections or lead to even greater investor confusion.
Fiduciary Duty for All
A few weeks ago, the Senate Special Committee on Aging held a hearing to address senior specialist designations, free lunch seminars, annuity sales practices, and the clear link between these three issues, and abuse and misconduct targeting senior investors. This hearing was the latest step in an ongoing effort NASAA began more than four years ago to call national attention to the dangers facing senior investors.
During the hearing, Chairman Kohl of Wisconsin set forth a seemingly simple question to which there should be a clear answer: Who is qualified to give investment advice? There was, for a significant period of time post 1940, a clear answer to this question based in law, but the answer reaching investors today is based on advertising, driven by business model evolution, and is anything but clear.
A recently published industry research periodical effectively illustrates the extent of the confusion in regard to investment advice. The report explored the connection between mutual fund investors and the use of professional financial advisors.
To whom the title “professional financial advisor” applied wasn’t readily evident to me. The report referred numerous times to an “advisory relationship” between the financial advisor and client. The report identified things like ongoing portfolio reviews, financial planning services, retirement asset management as well as investment recommendations, as the services provided by the financial advisor through this advisory relationship. So I concluded (mistakenly) that financial advisor in this context must mean an Investment Advisor Representative.
Upon reading a footnote I stood corrected. According to this industry publication, Professional Financial Advisors maintaining advisory relationships with clients, were defined as full service brokers, independent financial planners, bank and savings institution representatives, insurance agents and accountants.
If a well-known industry organization defines insurance agents, bankers and brokers as having “advisory relationships” with their customers, it is easy to see how an investor could conclude that all of these professionals promise the same fiduciary standard of care as an investment advisor.
This confusion over “who provides what” needs to be eliminated.
We cannot expect broker-dealers to make a distinction by advertising that investors should see them for investment recommendations and accidental, unintended advice, solely incidental in nature. We cannot expect insurance agents to make a distinction by advertising that they are insurance agents, with limited licenses and limited products to offer.
The financial services industry today has morphed into advice-driven business models that promise comprehensive 360 degree, 24/7, 365 relationships with investors. But the financial services industry today continues to expose investors to vast differences in competency exam requirements, education requirements, product knowledge, regulatory structures and protections, and very importantly vast differences in the standard of care owed to the client.
Regulators must work collaboratively to eliminate regulatory arbitrage, and afford investors protection parity. This does not mean taking the path of least resistance to the lowest common denominator.
This means regulators must work collaboratively to elevate the standard of care obligation for anyone entrusted to make recommendations or give advice pertaining to the money of others. For all financial professionals, the interests of the client must come first at all times. Investors deserve no less.
North Dakota got its name from the Sioux Indian word meaning “allies.” NASAA is committed to working with our allies, including the SEC, FINRA, other state regulators, Congress, state and provincial lawmakers, an extensive network of consumer advocacy organizations, and industry professionals, to ensure that investors continue to prosper in a regulatory environment that fosters innovation while delivering the strongest investor protections.
North Dakota is perhaps the most rural of all American states, with farms and ranches covering more than 90 percent of our land. One particular ranch, the Elkhorn on the Little Missouri River, was owned by a gentleman named Theodore Roosevelt.
It has been said that the Elkhorn Ranch is the “cradle of conservation”, where the man who would become our 26th President, gazing out over the vistas from his small log cabin, conceived a conservation plan. This plan ultimately led to the permanent protection of 230 million acres of land during his two presidential terms – land that is now our national forests, parks, monuments and preserves.
Teddy Roosevelt was of course well known for speaking softly and carrying a big stick. He was many things – among them, husband, father, governor, president, historian, author, boxer and cowboy. He was also a passionate advocate for Main Street Americans, seeking for them equal opportunity to benefit from investment in this nations capital markets, and demanding that big business gave the people a “square deal”.
Teddy Roosevelt advised: “Let the watchwords of all our people be the old familiar watchwords of honesty, decency, fair-dealing and commonsense.”
So with those wise words as a guide for my Presidential term, let me conclude as I began. It is my honor to serve as NASAA’s president. I look forward to working with all of you in the coming year and to an open and engaging dialog to ensure that all investors – including seniors, those working toward retirement, and those just starting out – are treated fairly.
As we move forward together, I encourage NASAA members to build on the momentum of the past year. Our mission of investor protection cannot be fulfilled without the ongoing dedication of the men and women throughout the NASAA family.
You have volunteered your time and energy unselfishly to help promote and strengthen investor protection throughout North America. For this you have my deepest respect and continued admiration.
October 2, 2007