Peter C. Hildreth
New Hampshire Director of Securities Regulation
President, North American Securities Administrators Association
January 11, 1999
NASAA Winter Enforcement Conference
Thank you, Matt, for that introduction…and thanks for all your work as chair of this conference and the Enforcement Section. And thank you all for coming…
This year’s turnout is a record, I’m told. And it’s not just the Florida sun that drew you down here, I’m sure.
I want to talk briefly this afternoon about why these are the best of times and the worst of times for securities regulators and why, despite a lot of the challenges we face, I’m bullish about our future—in no small part because of technology, politics and demographics.
It’s easy to get frustrated…with rising caseloads, increasing regulatory burdens and stagnant budgets that haven’t kept pace with the phenomenal growth of the industry. As NASAA president, believe me, I hear the complaints… As a general rule, though, I tend to try to look at the glass as half full, not half empty. As
I look around today there’s good news and not so good news. First, the not so good news…
Our workload is only going to get heavier. The good times on Wall Street could well be masking a multitude of sins. It’s reasonable to expect complaints to rise if—I should say when– the market cools off. To digress a minute…I’m not a subscriber to the view that we’re living through a speculative bubble—except perhaps in the area of Internet stocks. The fundamentals are
We’re at peace. The end of the Cold War has left the U.S. as the pre-eminent world leader; inflation—the scourge of the Seventies and early Eighties—is at a quarter century low; and every day, it seems, new productivity enhancing technology comes to market.
Genetic engineering holds out the promise of ending hunger, curing diseases and even slowing the aging process….as a sci-fi and fantasy buff…this is no longer the stuff of science fiction…as the third millenium dawns, it’s increasingly science fact.
Even with these bullish fundamentals, however, the stock market simply can’t and won’t continue rising at its recent pace. And that will mean unhappy, angry and confused investors. Which will translate into more actions and more work for us. All this on top of what’s been characterized as “a bull market in fraud.” Meanwhile, many of us are still working to implement the changes brought about by the landmark 1996 federal securities law known as NSMIA, which changed the way many states regulate the industry.
Of course the crooks are as inventive as ever … .developing new scams or recycling tried, true and time-tested ways of separating gullible investors and their cash. On top of microcap fraud and an epidemic of boiler rooms we’re faced with the reemergence of prime bank fraud, a rash of foreign exchange scams, what looks like a lot of fraudulent activity on the Internet and questionable viatical type products.
Against this backdrop, we securities regulators don’t get as much respect as we deserve, or the money or the staff that we need to do our jobs better. Now for the good news. In short, I’m here to tell you that I’m bullish about what we do. More bullish than I’ve ever been, in fact. Why? Because the numbers are going our way.
What we do has never been more important.
Consider a few statistics. Today nearly half of American households are invested in the stock market, either directly or indirectly through mutual funds, 401k or other retirement plans.
Just a generation ago—in 1980—less than one in ten American households owned stock. Today that’s five in every ten households. In just a generation we’ve become a nation of stockholders…and that has profound implications for politics, business, labor and society. And the number of investors is only going to grow. If half of American households own stock that means half don’t. And that will change. There’s an emerging consensus—unthinkable only a few years ago—that Social Security reform should include some kind of investments in the stock market.
Regardless of what happens with Social Security today’s workers are taking more responsibility for their retirement planning.
Why is this bullish for us as securities regulators? Because investor protection—what we do day in and day out—is increasingly a Main Street issue.
I see a day, not too far in the future, when governors could brag that investors in their state are safer than investors living in the state next door. I know this from personal experience… When politicians see investor protection as a constituent service, which I believe it is—no less a constituent service than clean and safe streets—they will do what’s needed to allocate more resources for it.
I want to take a second to talk about technology and how it’s affecting the securities industry as well as the jobs we do. Technology is changing nearly everything in society. And for securities regulators, technology is the proverbial challenge and opportunity. On the challenge side of the ledger… the Internet presents us with a host of new challenges.
While it offers investors great new information, leveling the playing field between the investment pros on Wall Street and everyday investors on Main Street, it is also another distribution channel for scam artists and criminals. I see hard evidence of that in my email box nearly every day.
The day trading craze—glamorized by the media and yet one more outgrowth of technology—is another area of concern. Massachusetts recently has taken several highprofile actions, against Block Trading, Brite Trading and All-Tech Investment Group. And just last week Texas announced actions against two day trading firms.
As we’ve taken pains to explain to the press, our main concern is not with the technology or day trading per se. Instead, we want to make sure that day trading firms don’t sugar coat or soft peddle the real risks of day trading.
Other states–among them, Texas and Colorado—are looking at the day trading phenomenon. More actions are likely. And a NASAA Project Group is also looking into it.
Technological innovation in the securities industry has raised larger issues. Electronic brokerage is another challenge, raising as it does the issue of suitability. If a broker puts a 65-year-old customer into speculative over-the-counter stocks we know that’s a problem and we know what to do about it.
But what if the customer himself decides on his own to dabble in microcap stocks because of something he saw on the Internet and he places his orders through an on-line brokerage, never actually talking to a broker? Is that a problem? Or not a problem? If it’s
a problem, what can or should we do about it?
While technology presents us with challenges, the flip side is that technology presents us with opportunities to do our jobs even better.
A case in point is the new CRD system we’ve been working with NASD Regulation to design. Certainly the process—which we began back in the early Nineties—has been at times frustrating, even maddening.
As the former co-chair of the CRD steering committee I experienced the frustration first hand.
But I believe the new CRD, when it comes on line later this year, will be a quantum leap for us…allowing us to focus, like a laser beam, on bad brokers, and helping us to spot troubling trends early on.
NASAA is committed to making the system is as good as it possibly can be and to making sure our members are trained to get the most out of it. It will be a terrific tool, a great technological leap forward.
So…back to the larger question: how do we convince our legislatures, our governors, the Congress, our constituents—voters and investors (who are increasingly the same people)—of the value of what we do?
First, you can’t tell a story –or build a case–without good numbers to support it. That’s why I urge all of you to keep good numbers about enforcement actions, fill out the annual enforcement survey, and enter actions and investigations regularly into the SID database. Numbers build a case for more resources—more money, more manpower. I believe that as securities regulators we may not have a higher profile in our respective governments in part because our bosses, legislators, the media and our neighbors don’t see or appreciate the work we do. (My boss excepted of course!)
All this can and will change, I believe. Maybe it’s a bit simplistic but sometimes I think we need to reposition ourselves. We’re law enforcement. And like cops, what we do is important.
Another way to tell our story is to encourage our fellow state regulators to be more visible, by taking advantage of investor education opportunities and by cultivating media contacts.
The news media is hungry for good crime stories–and with a little imagination we can find them stories to write about.
NASAA remains absolutely committed to helping you improve your enforcement capabilities. This year—1999—we have allocated in our budget $150,000 for special enforcement projects. In addition we have another $40,000 earmarked for zone meetings to help you share information on a regional basis.
Another example of our commitment to you was the recent coordinated effort to support the SEC’s books and records rule proposal—the key provision of that rule being the definition of a branch office as consisting of two or more licensed individuals.
Thanks to your colleagues’ hard work, 42 states submitted comment letters to the SEC. That was a terrific response. And I’m optimistic the SEC will consider our views. Branch office inspections are vital tools in preventing or minimizing fraud.
Finally, a word about working together. I’m pleased to have enforcement officials from the SEC, the NASD, CFTC, NFIA, FTC and FBI attending this conference. We simply have to work more cooperatively with other law enforcement and regulatory agencies, especially in the area of enforcement cases.
At this point we’re all strapped for resources, so it makes perfect sense to leverage the resources we’ve got. Doing so will make for more efficient and effective regulation and increased investor protection, which is, after all, our mandate.
Criminal cases are important because they tell the crooks that fraud and theft are offenses deserving of jail time —the message: commit a white-collar crime and you run the risk of doing real time.
Sure, criminal cases are expensive, sometimes risky and they take time. But we need to do them, and do more of them.
So…to sum up: I’m bullish about what we do for a living…what we do has never been more important…we need to work smarter and work together more…we will (eventually) get additional money and manpower–as it dawns on voters and politicians that we are vital to protecting the financial futures of tens of millions of Americans.
Again, thank you for coming. I look forward to seeing you and even more of your colleagues next year. Enjoy the rest of the conference.
January 11, 1999