Director, Connecticut Division of Securities
President, North American Securities Administrators Associaion
September 16, 2003
NASAA 86th ANNUAL CONFERENCE
Good afternoon. It is my honor to address you today at our 86h annual conference. I’d like to thank Tanya Solov, Conference Chair, and everyone within the NASAA family for providing an outstanding program. I know these conferences are challenging to bring together. I also appreciate the fact that putting on conferences is not the only pressing matter on your agendas. Thanks to all for pitching in. That’s the NASAA way and I’m proud to be a part of it.
On behalf of NASAA I would like to express our appreciation to our friend and colleague, Chris Bruenn for guiding NASAA through a landmark year in our history. Chris’ tenacity, diplomacy and vision have served us well as she guided NASAA through the historic global settlement that serves as a model of state and federal cooperation. Please join me in a welldeserved recognition of Chris.
I know I have a tough act to follow and I look forward to representing the interests of more than 100 million Main Street investors throughout the United States, Canada, Mexico and Puerto Rico. I am honored by NASAA’s confidence.
Before I begin, I would first like to take this opportunity to introduce the NASAA leadership as we move forward:
BOARD OF DIRECTORS:
- Past President, Chris Bruenn, Maine
- President-Elect, Franklin L. Widmann, New Jersey
- Treasurer, Craig A. Goettsch, Iowa
- Secretary, Guy Lemoine, Quebec
- Director, Scott P. Borchert, Minnesota
- Director, Deborah R. Bortner, Washington
- Director, Daphne D. Smith, Tennessee
- Director, S. Anthony Taggart, Utah
I’m planning on naming the following members as Section Chairs, subject to Board approval:
- Broker-Dealer, Tanya Solov, Illinois
- Corporate Finance, Denise Voigt Crawford, Texas
- Enforcement, Joseph P. Borg, Alabama
- Investment Adviser, Patricia D. Struck, Wisconsin
- Investor Education, Karen Tyler, North Dakota
I also plan on naming, Robert M. Lam, of Pennsylvania as our Ombudsman, also subject to Board approval.
Franklin Roosevelt had a great rule for public speaking. He said, “Be sincere; be direct; be seated.” With this in mind, I’ll keep my comments brief. In a few minutes I’ll outline my plans for the coming year, but before I do I want to talk about values. The values in today’s industry; the value-added benefit of state securities regulation; and the value of our complementary and
cooperative regulatory system.
Thirty-five years ago when I began working in a securities firm, the times were different and the values were different. Recently, I had a meeting with a senior executive at a large Wall Street firm. He said to me, “Ralph, you know, you have to remember, we’re in the business to make money.” As I thought about that comment, I realized that when I had worked for a securities firm, so many years ago, we knew our firm’s mission – help our banking clients raise capital and to assist our investment clients to make sound financial decisions. We each had a part and were told that
if we did these two things well, profits would follow.
Today, I am concerned that some on Wall Street may have it backwards. For some, making money for the firm is Job No.1; to some taking care of customers and clients is an afterthought. Although the market has improved since our meeting last fall, it has yet to erase the memories of what for many investors were the most painful years since the Great Depression. The dot-com bust, followed quickly by Enron, WorldCom and revelations of a host of shoddy corporate accounting practices have undermined investor confidence.
When I started in the business some 35 years ago, my boss explained how to conduct myself. I still remember what he said: “Don’t do anything you would be embarrassed about reading in the newspaper tomorrow.” That’s a simple philosophy. However, in light of all that has surfaced recently about corporate corruption, perhaps all should heed that advice.
Market conditions may change, but our priorities must always remain the same – we are here to serve and protect investors. Last week, for example, NASAA issued an alert warning seniors to be on the lookout for investment fraud and abuse.
I firmly believe that tough and consistent regulatory oversight is the key to helping investors regain their confidence in the market. And just as strongly, I believe that hard-hitting and unfailing enforcement, coupled with straight-talking investor education are the keys to
I realize that not everyone fully understands the value added by state or provincial securities regulators. We focus on Main Street investors; we support and learn from our members in Canada and Mexico who have shared values; we’re an early warning system to alert the public, other regulators, and policy makers to problems and fraud; we conduct branch office exams in
our communities focusing on sales practice issues; and, we get money back for harmed investors. We receive thousands of complaints from investors and file administrative and criminal actions against those who would seek to defraud our residents.
Our job is straightforward. We protect the citizens in our states and provinces that invest. Pure and simple. Political winds won’t change our priorities. We don’t chase regulatory fads. Our sights are sharply and clearly focused on Main Street. 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. Today roughly half of all U.S. households rely on the securities markets to plan and prepare for their financial futures.
Because we are grass roots regulators, state and provincial securities regulators are often first to identify new investment scams and to bring enforcement actions to halt and remedy a wide variety of investment-related problems.
The states spoke up early and brought enforcement actions regarding problems with microcap fraud, the research analysts, online trading, and day trading. In the research analyst matters, after initial enforcement actions, we joined with the SEC, the NASD and the NYSE to contribute to rules overseen by the SEC for the national marketplace. States securities regulators
are committed to remedying problems found in our jurisdictions.
States are vigilant in enforcing the conduct of licensed broker-dealers and their agents. We investigate complaints and work closely with criminal prosecutors at the state and federal levels.
Often, states will reach out to a firm with an informal inquiry. Hopefully, this process will lead to a quick resolution of an investor’s concerns and remove the need for an enforcement action. In other cases, systemic problems must be dealt with through more formal enforcement proceedings and remedies.
The value-added benefits of state securities regulation is reflected in the fact that during the fiscal year 2001-2002 states received over 12,500 complaints from the public. As a result, more than 2,500 administrative actions were filed, of which over 800 alleged fraud. During the same time frame, states supported criminal prosecution, either state or federal, in 360 actions. The
number of defendants convicted of a securities-related felony exceeded 300 and some 1,600 years of incarceration were meted out as a result. State securities regulators also collectively obtained orders for more than $309 million in restitution for those who have been defrauded, and roughly $71 million was ordered in civil and administrative fines and penalties. That’s a ratio of $4 returned to the public for every dollar collected in fines and penalties.
In addition to restitution and monetary penalties, states have full authority to fashion remedies for a variety of problems depending upon the specific facts of each case. Where state securities regulators investigate and resolve enforcement cases using these remedies, their
judgment regarding appropriate outcomes must be respected and upheld.
Our state-federal system of regulation is collaborative and complementary, and above all, we all want what is best for investors. The research analyst case is a good example of the value of our complementary regulatory system and how it benefits our nation and the issuers that come to the marketplace to raise capital. The recent investigation of the Wall Street firms and its
resolution was a massive undertaking and involved the coordination of all jurisdictions. States provided the staff and resources to analyze and review millions of documents, depose and interview witnesses, and draft nine comprehensive settlement orders, all in coordination with our federal counterparts.
Chris Bruenn is fond of saying: “No good deed goes unpunished.” Before the ink dried on the announcement of the global settlement, surprisingly we began hearing rumblings of preemption. After exposing serious violations of the law by the firms, the state securities regulators were put on the defensive for doing the right thing. Some are convinced that the
solutions to all problems and the tools to meet all challenges rest in Washington. I disagree.
For nearly 100 years, state securities regulators have been protecting Main Street from fraud. Many investors understandably feel that their state or provincial securities regulator, the cop on the beat, is the logical place to start with a complaint. We are quick to respond, even to individual complaints that may not signal the type of widespread abuse that would interest
regulators at the federal or self-regulatory organizations.
Congress in 1933 and 1934, and the Supreme Court in subsequent cases, affirmed the shared jurisdiction of state and federal securities regulators. Ironically, many of the problems we are seeing today, such as Enron, WorldCom, accounting fraud, research analyst conflicts, and inadequate mutual fund disclosures – have all surfaced since Congress preempted some state powers, including the states’ ability to engage in rulemaking with a national impact by the enactment of the National Securities Markets Improvement Act of 1996 (“NSMIA”).
It is vitally important that Congress reject any further attempts to weaken state enforcement authority. I am deeply grateful to those members of Congress who have been champions for the rights and protection of investors. Congressional commitment to integrity in our financial markets, accountability in corporate governance, and full and fair disclosure has helped make our nation’s markets the best in the world. When investors have confidence in the markets, issuers have
access to needed capital and our economy prospers.
A major positive outcome of the passage of NSMIA was Congressional intent to foster a cooperative rulemaking process between state and federal securities regulators on an equal footing. The recently enacted SEC books and records rule is an example of this cooperative
Some continue to portray our state-federal regulatory system as duplicative. Our actions have been and will remain consistent with the intent of Congress. When it comes to investigation and enforcement of Wall Street wrongdoing – Investors are calling for more cops on the beat, not fewer. 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. There is one thing I will not compromise on, and that is the right of a state or province to protect its citizens in the manner its elected officials deem appropriate.
Collectively, we can all work together, government, self-regulators and industry to achieve positive results. To be successful, we must work in an environment of mutual respect. Several positive examples come to mind.
Continuing Education – Now in its eighth year. Through this collaborative effort securities firms are providing continuing education for their agents in both the area of product knowledge and best practices. The SEC, states, SROs and industry all participate and the public benefits.
Investor Education – The states have partnered with the SEC, self-regulators and the investor education arm of the Securities Industry Association (SIA) and the Investment Company Institute (ICI). More can be done as we go forward. An informed and educated public is the best defense against fraud.
Investment Adviser Registration Depository – The states and the SEC jointly developed this electronic system to streamline registration and provide online disclosure information for investment advisers.
The recent research analyst cases also carry a success story. States, the SEC and the SROs were able to form collaborative investigative teams. By combining resources the timeline to bring these cases to resolution was substantially reduced. This expedited process helped let the public know that we were working together to resolve the issues quickly and openly. I think it only fair to also acknowledge the desire on the part of the many of the firms involved in this matter to take self-corrective action. In many instances their reforms were implemented before the enactment of new and more stringent rules. I invite members of the SIA to reach out and maintain meaningful dialogue with our Board and Section Chairs. There is so much we can do together. Confidence in the markets should be our common goal.
Now, I’d like to turn to the year ahead. My foremost goal as your new President is 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, the SEC, NASD, NYSE, and state and federal prosecutors.
I will ask the Broker-Dealer Section to thoroughly examine the issue of arbitration and I invite the SEC, the SROs and others to join us in this effort. Since our nation’s investors are compelled to seek arbitration to resolve disputes with Wall Street we need to make sure that they are treated fairly.
The NASAA Board has tentatively approved the creation of several new project groups within the association. These groups include the new Shareholder Rights Project Group, Arbitration Project Group, Senior Outreach Project Group, and the Enforcement Special Projects Group. Through the dedicated efforts of our members we hope to achieve the following:
- Direct attention to the need for greater protection of corporate shareholders;
- Examine and recommend changes to the arbitration process to increase transparency and help ensure fairness to investors;
- Reach out to our senior citizens to help them recognize and avoid investment fraud that threatens the financial security they so well deserve; and
- Coordinate multi-state enforcement actions in a cooperative effort for the protection of all investors.
Finally, I intend to help focus the attention of the media and others back to what we do each and every day. While the analyst cases were hugely important, the publicity surrounding those cases tended to overshadow our daily job-conducting investigations of alleged fraudulent conduct; handling customer complaints; and, where appropriate, bringing enforcement action.
Investor protection must continue at the state level.
Most of you should know by now how I feel about the NASAA family – both in the United States, Canada, Mexico, Puerto Rico and our own Corporate Office in Washington. For most of my 25-year career as a state securities regulator, I have come to appreciate the dedication of our staffs at home as well as all NASAA volunteers who help foster investor protection.
I respect the ability of our members to put individual opinions aside for the best interests of investors. Through NASAA, we have a proud history of strong leadership in protecting investors and advancing their interests. The continued active participation of our members will enable NASAA to continue to speak with a single, united voice.
I pledge to work for unity and to ensure that we continue to represent the largest constituent group in our nation today – our neighbors and friends, our fellow citizens, who place their trust in us to safeguard their investments. State securities regulators are our citizens’ first line of defense against investment fraud.
We are the protectors of our citizens’ financial hopes and dreams – the hope of a comfortable and
dignified retirement; the dream of sending a child to college.
In closing, I would like to thank the NASAA staff, our Board members, the Section Chairs and all NASAA volunteers for their professionalism, integrity, support, and commitment to investor protection. It is indeed an honor and my privilege to serve as your President. Thank you for your attention and I look forward to working with you during the year ahead.
September 16, 2003