Administrator, Wisconsin Division of Securities
President, North American Securities Administrators Association
September 13, 2005
NASAA 88th Annual Conference
Good afternoon. I am pleased to speak to you today at our 88th annual conference and to serve investors throughout North America as NASAA’s president.
I’d like to begin by thanking our conference chair, North Dakota’s Karen Tyler, and everyone at NASAA for providing an outstanding program. I’d also like to recognize our host, Minnesota’s Scott Borchert
Here in Minnesota, it’s appropriate to follow the example of one of my favorite Minnesotans, Garrison Keillor, who describes his family: “[They] didn’t go in for small talk—[they were] taciturn people who could sit in silence for long stretches and not feel uncomfortable”.
With this in mind, I’ll briefly discuss the themes and issues upon which I intend to focus in the year ahead. But before I do, I’d like to thank my friend and colleague Frank Widmann of New Jersey for his leadership and commitment to upholding the role NASAA Members serve in protecting investors throughout North America. Please join me in a round of applause for Frank for a tremendous year of leadership as NASAA’s President.
I also want to introduce NASAA’s leadership for the coming year. NASAA’s new Board of Directors includes:
- President-elect Joseph Borg, of Alabama
- Past President, Frank Widmann
- Tanya Durkee, of Vermont
- Fred Joseph, of Colorado
- Donald Murray, of Manitoba
- James Nelson, of Mississippi
- James Ropp, of Delaware, and
- Karen Tyler, of North Dakota.
I have asked Christine Bruenn, of Maine, to serve as NASAA’s ombudsman, subject to the board’s approval.
I’d also like to introduce the members I’ve asked to serve as NASAA’s Section and CRD chairs, subject to the board’s approval:
- Tanya Solov, Illinois, Broker-Dealer
- Denise Voigt Crawford, Texas, Corporation Finance
- David Massey, North Carolina, Enforcement
- Theodore Miles, the District of Columbia, Investment Adviser
- Daphne Smith, Investor Education, and
- Melanie Lubin, CRD/IARD Steering.
I look forward to working with each Board member to build upon the strong foundation Frank has left for us. Finally, I want to extend a warm welcome to Deverita Sturdivant, representing NASAA’s newest member, the U.S. Virgin Islands Division of Banking and Insurance. I also want to welcome Ann LeDuc and Sharon Kelly, representing the Canadian Securities Administrators
As I look out across the room I’m glad to see many familiar faces – fellow regulators and policymakers, as well as industry and consumer representatives. No matter what side of the equation you represent, we all share a common denominator: the investor.
I want to share something I learned from my father. He was a member of the inaugural class of Chartered Financial Analysts in 1963, when 268 securities analysts passed the first CFA examinations to earn their charters. His was charter number 175. Since that first class, more than 64,000 investment professionals have earned their charters.
I learned from my father’s example that if we keep our focus on the investor, everything else falls into place. I challenge each of you to remember this as we approach the coming year.
I also ask that you to keep two practices in mind: “respect” and “collaboration.” These are the basic principles that will guide my presidency.
NASAA members understand that if you don’t respect the investor, you are not doing your job. When I speak of respect, I am addressing fellow regulators and industry representatives. We must share a high level of respect for investors and I urge each of us to respect one another as well.
For those of you in the securities business, compliance with securities laws is a reflection of your respect for investors and the systems in place for their protection. We expect you to play by the rules.
Most firms will say publicly that they have strong compliance programs in place. But too often that’s not apparent to us. We see delay or even refusal to respond to our reasonable requests for information. In these cases, we sense a lack of respect not only for regulators, but for investors as well. This has to change.
When a state or provincial securities regulator asks for a response from a broker-dealer or investment adviser, provide it–promptly. While you may not agree with our positions at times, I do expect you to respect our authority.
Over the next 12 months, I intend to step up NASAA’s collaboration with fellow regulators and securities professionals. Through this collaboration, NASAA will be able to respond to the special needs of our primary audiences – including fellow regulators and other policy makers, representatives of the financial services community; and, of course, our key constituents, the residents of our jurisdictions who turn to us to protect their financial hopes and dreams.
Through our licensing programs, we keep disreputable firms and brokers out of our jurisdictions and away from our investors. Through our enforcement programs, we put white-collar criminals in jail. Through our investor education programs, we help our residents protect themselves from fraud.
It is one thing for me to advocate the value added by state, provincial, and territorial securities regulation. You expect that from NASAA’s president.
But let’s hear from John Kurey, an attorney representing Wisconsin investors who lost money in an investment scheme pitched by Nathan Genrich, an accountant who befriended them through Bible and tax-preparation sessions. He eventually pled guilty to six counts of felony securities fraud in Waukesha County.
“As far as I can tell,” Kurey wrote, “there was absolutely no public entity whatsoever which had any inclination to put a stop to Mr. Genrich’s scam operation, other than the [Wisconsin Department of Financial Institutions].”
Or listen to John and Maureen Robertson, of Chippewa Falls, who were among the 14 victims of an investment scheme that produced no returns for investors but did lavishly furnish a 14,000-square-foot home for the scheme’s promoter, David Yeazel. Today and for the next 12 years, Yeazel makes his home in a prison cell in Duluth, Minnesota and he has been ordered to repay $3.55 million to his investors.
“We now are aware that if it were not for [DFI investigator] Mark [Dorman] and the years [he] pursued this investigation, Yeazel would still be stringing people into his web of deceit,” the Robertsons wrote.
While these cases may not make national headlines, they are typical of the work being done by NASAA members throughout North America ever since Kansas adopted the first “Blue Sky” Law in 1911 to launch the modern era of state securities regulation.
An Era of Expansion & Change
While the securities markets may be headquartered in New York, Toronto, and Mexico City, stocks, bonds and other securities are sold in our neighborhoods and homes in Appleton, Wisconsin; Medicine Hat, Alberta, Canada; and Monterrey, Nuevo Leon, Mexico.
Today’s world of financial services is much different even from the bank in Milwaukee where I began my career. The 6 years since passage of the Gramm-Leach-Bliley Act have brought profound changes to how banking, securities, and insurance firms provide their services and products.
For example, in the years leading up to the Act’s enactment in 1999, we all heard about the benefits consumers would see from “tearing down the walls” between banks, securities firms, and insurance companies.
As a consumer, I really appreciate the convenience that we’ve experienced as a result. Still, as banks and insurance companies venture into the securities business, they are developing new “hybrid products” that blend traditional insurance or bank offerings while exposing the customer to risks associated with the stock market. Customers are not generally accustomed to risk exposure when dealing with banking or insurance products.
While years ago, our investors knew that banks sold CD’s, insurance companies sold insurance, and broker-dealers sold investment securities, that’s no longer true.
Insurance agents now sell certificates of deposit, some insured by the FDIC, and others that are not fully insured. Investors who buy non-FDIC insured deposit products, including those with variable rates, are entitled to the protection of securities laws and the oversight that state securities regulators provide.
However, one large insurance company has taken the position that agents who sell even non-FDIC insured securities should be exempt from state securities regulation.
The insurance company based its position on an opinion letter from the federal Office of Thrift Supervision (OTS), which regulates federally chartered savings banks.
This attempt to use an opinion letter from a bank regulator to undermine the investor protection that state securities laws provide is contrary to the Gramm-Leach-Bliley Act and bad for investors.
This is why NASAA is working with members of Congress to attempt to preserve state securities oversight when non-traditional and non-FDIC insured depository products are sold to residents of our states.
NASAA supports Congressional efforts to make our financial services sector even more efficient so long as that efficiency does not undermine the system of investor protection that has made our markets the fairest in the world. We must remain vigilant to any proposals that would weaken our regulatory authority.
Congress has recognized that state securities regulators are essential partners to federal regulators in protecting investors.
For example, members of the House Financial Services Committee recently inserted language in the Military Personnel Financial Services Protection Act (H.R. 458), to clarify that state securities regulators have unquestionable regulatory authority on military installations.
As the nation’s “front-line” securities regulators, we believe that the men and women of our military and their families deserve to know that the jurisdiction of the agencies best equipped to take swift enforcement action remain explicitly intact.
On the Front Lines
During the coming year, NASAA will be engaged on several fronts in our efforts to protect investors. As most of you know, one of the ways we make a statement about the areas that are the most important to us is the formation of NASAA committees called “project groups” to study issues and develop responses to address them. I’d like to highlight three of these important areas: variable annuities, investment advice, and arbitration.
Do all of you receive e-mail messages every morning from services offering to help you sell more annuities? I do. One recent offer featured “six steps to help you and other top producers to increase your income.” If annuity promoters are identifying me as a top producer, I wonder about their compliance programs. The offers remind me of a case my office handled – involving an elderly widow in a Green Bay trailer park who tied up all her money with a salesman pitching variable annuities.
A variable annuity is a legitimate product issued by an insurance company under the regulation of state insurance commissioners, the NASD, and the SEC. But just because a product is properly registered and issued by a reputable company does not necessarily make it suitable for everyone.
Those selling these products may not even understand what they are selling and for whom they are suitable. NASAA members are particularly concerned about the sale of variable products to seniors.
Turning to investment adviser issues, NASAA is evaluating the effects of the SEC’s recent rule to exempt certain broker-dealers offering investment advice to clients from registration under the Investment Advisers Act.
While the SEC rule may have cleared up some of the confusion surrounding when a broker dealer is subject to regulation as an investment adviser, the Commission in its release on the rule acknowledges that it has raised other important issues.
As a result, Commission staff has been directed to prepare a report on ways to address these other issues. The report is to include recommendations for a study and to identify appropriate persons to be involved in the study.
In keeping with my theme of collaboration, I offer NASAA as a necessary participant in the study. It’s evident that we have more work to do before investors are assured of receiving enough information from their financial adviser that they understand just what kind of obligations their adviser has to them. I look forward to working with the SEC to develop the right answers.
The Wall Street scandals of recent years have prompted a record number of investors throughout the United States to seek relief through arbitration. Last year, NASAA focused attention on arbitration issues during a public forum in Washington, D.C. This year, we intend to urge the NASD to make several improvements in the arbitration process.
We recognize that the NASD has adopted a number of changes in recent years in an effort to upgrade the arbitration system. These developments are encouraging, but also troubling; encouraging because they offer incremental improvements in the arbitration process, but troubling because they reveal flaws in the system that have endured for too long and need to be corrected.
In particular, NASAA believes that the NASD should compile and disseminate more meaningful and accurate statistics concerning arbitration outcomes, and should achieve balance in the composition of arbitration panels. We also believe that the NASD should consider ways to make arbitration truly voluntary.
While these issues will take a lot of attention, I also intend to focus on internal issues to help NASAA serve our membership.
I will work toward enhancing communications among NASAA members in order to foster the development of additional NASAA resources for sharing our experiences and concerns within our jurisdictions involving best practices, investor education, enforcement and regulatory issues.
There is so much that we can learn from our fellow NASAA members. I will also encourage more active involvement by all of our member jurisdictions, including our Canadian members and our newest member, the U.S. Virgin Islands.
In closing, I want you to know that it is my honor to serve as your President. I have had the privilege of working with you on committees, task forces, project groups, and most recently as President-elect.
As the legendary Green Bay Packer coach Vince Lombardi said,: “Individual commitment to a group effort – that is what makes a team work, a company work, a society work, a civilization work.”
I’d like to thank my fellow Board members, Section and Project Group chairs, my staff in Wisconsin, and the NASAA Corporate Office staff for your professionalism, integrity, and your individual commitment to our group effort.
Together, we help safeguard investors from all walks of life who have entrusted us to ensure that they are treated fairly and honestly when making investments to secure a dignified retirement, the college education of their children, or other long-term financial goals.
We could want no higher calling.
September 13, 2005