Director, Connecticut Division of Securities
President, North American Securities Administrators Associaion
April 30, 2004
NASAA 2004 CRD/IARD Training
Good morning. I’d like to thank CRD/IARD Steering Committee Chair Maryland Securities Commissioner Melanie Lubin and Project Group co-chairs Pam Epting and Kelvin Blake for inviting me to speak with you today. Looking around the room, I see many friends. Some I’ve known for more than 20 years; and many who will represent the next generation of investor protection.
On behalf of NASAA, I’d like to thank you for everything you do to ensure that investors in your states are protected from investment fraud and abuse. I’m also pleased to see many familiar faces from NASD. We have a close working relationship with the NASD and the New York Stock Exchange in a number of areas. Besides being a partner with NASD in development, use and maintenance of the Central Registration Depository (CRD), NASAA – along with the SEC – relies on NASD as the vendor to operate the Investment Adviser Registration Depository (IARD).
I’ve been asked to outline NASAA’s accomplishments over the past year and our current goals. Before I do, however, I’d like to spend a few minutes talking about the important role CRD and IARD play in helping protect investors in your states. The number of firms and individuals holding themselves out as investment professionals has grown significantly in the past two decades. It is critical that full information about individuals and firms be readily accessible to regulators, industry, and the investing public. Two of the more notable success stories in accomplishing this accessibility have been the CRD and IARD systems.
Developed by NASAA and NASD and implemented in 1981, CRD consolidated a multiple paper-based state licensing and regulatory process into a single, national computer system. Today, the CRD is arguably the best licensing system in existence, in part because of the outstanding contributions on behalf of many of you here today. Its computerized database contains the licensing and disciplinary histories on more than 650,000 securities professionals and 5,200 securities firms.
While CRD has evolved over the years to the point where it is an essential registration and enforcement resource, it cannot remain static. Securities industry business practices have changed significantly over the past decade. The CRD system must be able to accommodate these changes. For example, advances in technology also have expanded the opportunities for working arrangements at other-than-traditional branch locations, including home offices. For this reason, states had sought adoption of an updated and uniform definition of “branch office” that can be delivered and monitored through CRD. This change would facilitate the continued effectiveness of the uniform system of registration that has evolved over the past 20-plus years and lower industry costs.
State regulators also need to be able to track the branch locations and agents for supervision, compliance/exams, and enforcement. I’d like to take a few minutes to discuss the NASD’s new expungement rule, which took effect earlier this month. The rule requires the NASD to send to state securities regulators notices of orders to expunge disciplinary information from a CRD record issued by arbitration panels in cases initiated after April 12, 2004. This process is new. As with all new processes, there will be challenges. We encourage you to provide feedback on how well the system is operating. There will be those who will attempt to abuse the rule by coercing investors as a condition to settlement to sign affidavits attesting that the initial complaint was filed in error, so the record will be expunged. You should be vigilant about monitoring this and other loopholes that may surface. I want you to know that we’re working with the NASD to establish procedures for implementing the rule.
The IARD, developed jointly by NASAA and the SEC, is our newest licensing, registration and enforcement system and is to investment advisers what the CRD is to broker-dealers. Its database helps promote uniformity, through use of common forms, and a paperless environment. It streamlines procedures, promotes consistency and helps investors research the employment and disciplinary histories of more than 11,000 investment adviser firms and 173,000 individual investment advisers.
IARD and CRD give you powerful tools to weed out any “bad apples” seeking licenses to do business with your state’s investors.
NASAA Accomplishments and Goals
I’d like to focus my remarks now on the accomplishments of NASAA and our current initiatives and goals. Since becoming NASAA’s president last September, I’ve had an opportunity to talk with many of you at various seminars, trainings sessions and conferences. Your unselfish dedication to investor protection clearly demonstrates that “putting investors first” is more than just a slogan. It is what we do for our citizens on a daily basis. Accomplishments The past year has been significant for state securities regulators and NASAA.
One year ago this week, NASAA, along with the SEC, NASD, the New York Stock Exchange and the New York Attorney General, announced the historic $1.4 billion global settlement of enforcement actions against 10 major Wall Street firms for providing investment research sometimes tainted by the desire to promote investment banking. Then, in July, securities regulators in Massachusetts launched the first of what would become a series of investigations by other states, the SEC and SROs into the nation’s $7.4 trillion mutual fund industry. These investigations and subsequent enforcement continue to demonstrate the tremendous value of having more, not fewer cops on the securities beat.
While these events have made headlines the world over, I’d like to take a few minutes to spotlight other significant NASAA initiatives in five key areas, including:
- our continued commitment to the preservation of state regulatory authority;
- organizational enhancements and strategic planning at NASAA;
- the steps we’ve taken to strengthen member training;
- our emphasis on investor protection through education; and, finally,
- the association’s efforts to reach out to the international financial services community.
Preserving State Authority. The first area I’d like to discuss this morning is one that affects each of us. I’m talking about preserving the authority of individual states to regulate at the state and local level and to bring enforcement actions with appropriate remedies against those firms that violate securities laws in our jurisdictions.
Earlier this year, Congress recognized that state securities regulators are essential partners to federal regulators in protecting investors when it removed federal preemptive provisions from H.R. 2179. But as Senator Paul Sarbanes, the Ranking Member on the Senate Banking Committee, told us two weeks ago, we must remain vigilant and prepared to face a broad push by “special interests” to preempt state laws. He also suggested that the states make sure our message is being heard. Part of what these special interests are trying to do is to knock out state regulators who are aggressively protecting investors.
These special interests will continue to complain about the “patchwork quilt” they think they see whenever they look out across the country. What they should see is a blanket of 50 state agencies working collaboratively to keep the industry free of wrongdoing and instilling consumer confidence in the marketplace. It is not regulation that keeps investors away from the marketplace — it is greed and wrongdoing that goes unchecked that keeps them away.
We’ve all heard industry make an issue about the cost of regulatory compliance. I remind you that despite all of the publicized problems, 2003 was one of the most profitable years ever for Wall Street. According to the Securities Industry Association, profits in the securities industry were $15 billion last year, nearly double those of 2002 and the third best year ever for Wall Street. Complaining about regulatory costs isn’t justified.
We’ve all heard industry say, “trust us.” Just last year, the president of the mutual fund industry’s trade association, praised industry executives for “your unshakeable commitment to putting mutual fund shareholder interests first.” Three months later, state regulators launched the first of several investigations into the $7.4 trillion mutual fund industry for, in essence, putting its own interests ahead of those of its shareholders.
Our securities markets may operate on Wall Street, but stocks, bonds and other securities are sold on Main Street, in our neighborhoods and even over our kitchen tables. When it comes to investigation and enforcement of Wall Street wrongdoing – Investors are calling for more cops on the beat, not fewer. That’s why I believe there must be continued cooperation and shared efforts among state, federal, and industry regulators. Protecting investors against fraud and punishing those who would commit fraud are fundamental roles of government, be it federal, state, local or in the case of our neighbors to the north, provincial. We should not compromise on the right of a state or province to protect its citizens in the manner its elected officials deem appropriate.
Organizational Enhancements/Strategic Planning at NASAA. NASAA’s mission is two-fold. We have a proud history of strong leadership in protecting investors and advancing their interests. And we have an equally proud history of responding to our membership to ensure that your needs are being met. Toward that end, we will be holding a strategic planning session in June to ensure that we are meeting our goals in a productive and efficient manner. We have some 240 member representatives from the states and the Canadian provinces working on various Board, Sections and Project Groups.
We reorganized several NASAA committees and project groups; eliminating those that no longer supported the organization’s mission and creating new groups to address the evolving challenges of state securities regulation. NASAA’s Board approved the creation of several new project groups within our association. Among the new groups are the Corporation Finance Section’s Shareholder Rights Project Group, the Broker-Dealer Section’s Arbitration Project Group, the Investor Education Section’s Senior Outreach Project Group, the Enforcement Section’s Special Projects Group, and Regulatory Policy Committees in the Corporation Finance, Broker-Dealer and Investment Adviser sections. And, in order to ensure that the interests of our Canadian members are fully represented, in addition to Canadians who serve on our Board, Section Committees and Project Groups, we have named a Canadian liaison for each of our sections. We’ve also taken several steps to enhance the capabilities of NASAA’s Washington office.
Improving Member Training. Today’s seminar serves as a reminder that training our members is a vital part of NASAA’s mission. One of the Board’s priorities this year has been to determine how to improve our training and make it even more effective.
NASAA wants to make sure that you are getting the training you need to better protect investors. Therefore, we created a Board-level Training Project Group, chaired by Fred Joseph of Colorado, to conduct an in-depth review of NASAA’s training needs going forward. This year NASAA is hosting 12 training seminars — an average of one per month — including the first-ever training session with insurance regulators with the goal of sharing information about laws and enforcement practices that can be put to practical use in combating securities fraud committed by insurance agents.
Investor Education. The best defense against investment fraud is knowledge. State and provincial securities regulators have a long tradition of protecting investors through education. Several years ago, recognizing the importance of financial literacy to the prevention of fraud and abuse, NASAA’s Board created an Investor Education Section to develop and support financial literacy and education programs to be delivered at the state level.
Last fall, under the guidance of the section’s Senior Outreach Project Group, NASAA initiated a major education campaign aimed at senior investors. NASAA held a news conference in September to call attention to the growing problem of senior investment fraud and launched an online Senior Investor Resource Center on the NASAA website to give senior investors the tools they need to reduce their risk of being a victim of fraud. Last month, NASAA, through Tanya Solov, Illinois Securities Director and Broker-Dealer Section Chair provided testimony before the Senate Special Committee on Aging, about the success of this initiative and the risks seniors still face. As part of a continuing effort to improve the level of youth financial literacy in our jurisdictions, the Investor Education Section’s Youth Outreach Project Group recently has developed a Teacher Training Event blueprint. This resource provides a comprehensive, step-by-step system for developing and delivering a teacher training event that provides our teachers – K through 12 – with the knowledge, resources, and tools they need to efficiently and effectively integrate personal finance education into their classroom curriculums.
Globalization/International Outreach. As you know, investment fraud knows no borders. Through NASAA, state securities agencies have joined in cooperative enforcement agreements in the international arena. NASAA plays an active role in the International Organization of Securities Commissioners (IOSCO) and the Council of Securities Regulators of the Americas (COSRA). Last month, NASAA Enforcement Section Chair and Alabama Securities Commissioner Joe Borg briefed the United Nations Commission on International Trade Law on the need to develop cooperative information sharing programs, policies and laws to move toward greater enforcement and protection from fraud. To facilitate this effort, NASAA’s Board last fall created an International Project Group. We also are exploring the feasibility of expanding NASAA’s membership to include a number of other North American jurisdictions.
Goals Moving Forward. Looking ahead, NASAA will continue to work with the SEC and the SROs to collectively use our resources to protect investors. State securities regulators welcome the opportunity to work more closely with each other. I also look forward to the continued progress of our ongoing series of discussions with the SEC as part of the joint initiative we launched last September to explore ways to improve coordination and communication between state and federal securities regulators. I had asked NASAA’s Broker-Dealer Section to thoroughly examine the issue of arbitration. Since our nation’s investors are compelled to seek arbitration to resolve disputes with Wall Street, states need to make sure that investors are treated fairly. Plans now are underway for the first “NASAA Listens” public forum, which will explore a host
of issues related to arbitration. Look for more information about this event and others soon on the NASAA website.
Closing Remarks. In closing, I’d like to remind you that you truly are an investor’s first line of defense against investment fraud. And by standing together, you protect more than 100 million North American investors. NASAA’s leadership is proud of the important work you do on a daily basis for the investors – and you should be as well. It is indeed an honor and my privilege to serve as your President. Thank you.
April 30, 2004