Peter C. Hildreth
New Hampshire Director of Securities Regulation
President, North American Securities Administrators Association
October 6, 1998
NASAA’S 81st Annual Conference
Thank you for that introduction, Brad. And, thanks for being my friend and advisor. We are going to make a great team going forward. Before discussing NASAA’s future, I want to say a few words about two people who play important roles in my NASAA activities.
When I became New Hampshire’s Director of Securities Regulation 6 years ago, a friend of mine told me that I could be NASAA President in a few years. I said, “Right. Why don’t I do this job before thinking about that.” Well, it is a few years later and New Hampshire Secretary of State Bill Gardner was right. Secretary Gardner has supported me and the members of my staff in all of our NASAA involvement. I would not be here today without his encouragement. In July, I was happy to be in Salt Lake City when he was installed as President of the National Association of Secretaries of State. I am extremely pleased that he was able to take time out from his busy schedule to be here today. Thank you for everything, Bill.
You know, when I first thought about running for President of NASAA, I talked it over with my wife, Holly. Even though it would mean a great deal of sacrifice for her, she agreed. She said, “If you want to run that’s okay with me but…if you get elected, don’t let it go to your head. She said, “remember whether your president or not, you’re still taking out the garbage.” And Holly’s right…we can’t let the pomp and circumstance of events like this at the Opryland Hotel in Nashville and the fun we all have – we can’t let this obscure what this is really all about: We’re securities
regulators—and not in some other, perhaps more lucrative line of work—because we truly care about people…young investors just starting out, older investors trying to build and protect their nest-eggs and everybody in between.
We care passionately that they’re treated fairly. We have zero tolerance for people who try to take
advantage of them or rip them off. The strength of NASAA is that together we’re more than the sum of our parts…more than our individual members. What NASAA does best is assist us all to help those individual investors. In everything we do, we should never lose sight of the truck driver in Pembroke, N.H. or the retired school teacher in Anaheim, Calif. Or the widow in Calgary, Alberta. With these people in mind…there are four things I want to talk about today:
One…the changes sweeping the securities industry…
Two…the challenges we face as regulators…
Three…the choices before us…
Four…the commitments we need to make…
First, change…On Wall Street from time to time, you hear the old saw, “This time it’s different.” It’s been my experience you hear this most often just before a major turn in the market. Having said that, on several levels I believe this time really IS different. Here’s why:
Never has technology changed so much so fast. Today, for example, an estimated five million Americans are investing on-line. Charles Schwab expects the vast majority of its new customers to trade via computer. The next generation, our kids, may trade on-line and think no more of it than we do when we use an ATM instead of going into a bank to deposit or withdraw money.
An even more profound change…never have so many Americans been invested in the stock market. Today roughly half of American households have money in the market, either directly, through stocks or mutual funds, or indirectly, through 401(k) or other pension plans. This is an incredible, historic shift. In less than a generation we’ve gone from a nation of savers to a nation of investors. The implications of this are huge—both socially and politically. Of course all this change means big challenges for regulators.
As the number of investors in the market goes up, the aggregate level of sophistication goes down. That’s bullish news for crooks. They’re coming out of the woodwork to fleece investors. As NASAA has been saying for some time now…the sad fact is that the bull market on Wall Street has spawned what some have called a bull market in fraud on Main Street, in both the United States and Canada and, in fact, around the world.
And as the market’s have become more volatile in recent months, the con artists are adapting by changing their spiels…to include foreign currency scams, supposedly high-yield but “safe” prime bank notes and the like. It reminds me of that game Whack-a-Mole…you smack one fraud here and another pops up over there….
Another challenge we face is…the Internet. The Net’s become the new Wild Wild West as we approach the millenium. Two years ago those of us on-line were bombarded with “spam” (or junk e-mail) for X-rated web sites…now it seems like the “X” has morphed into a dollar sign…it’s all business opportunities, pyramid schemes and pitches for microcap stocks.
With these challenges facing us, our choices, as state regulators, aren’t easy—our regulatory challenges have expanded while in most cases our budgets and human resources have not.
Thanks to the recent and long-running bull market, we have a record number of brokers licensed. And with NSMIA, Congress gave us regulatory authority over some 20,000 investment adviser firms and their
representatives. These are the smaller IA firms—with less than $25 million under management—and for
regulators, the most labor intensive and problematic.
Given all this, in my view, the choice of regulatory status quo is simply not an option. I believe we once again have to do more with our limited resources.
This brings us to the commitments we, as state regulators, need to make.
We are committed to working even more closely with all of our fellow regulators…NASD Regulation, the SEC, the FTC and the CFTC—as well as working closely with the different stock exchanges. The more we can work together and leverage our resources the more we’re going to be able to do for North America’s investors.
A model for this approach is our combined assault on microcap stock fraud. Several years ago we recognized microcap fraud was a serious and growing problem; over the past two years we’ve
conducted two enforcement sweeps. As a result, microcap fraud is now a top priority of the SEC and NASD Regulation.
In June, NASAA, the SEC and NASDR got together for three days of joint training and brainstorming on microcap stock fraud. It was a very constructive and useful meeting. We’ve got a lot of work to do—but we’re on the right track.
Competition among regulators can be healthy. But with fraud such a big and growing problem we need to stress cooperation over competition.
We are committed to taking the same cooperative approach to dealing with the challenges posed by the Internet. We will continue to work with the Federal Trade Commission on Web surf days — to monitor news groups, bulletin boards and chat rooms for potential frauds.
I want to make clear that the Internet has great promise for investors—both by democratizing information previously only available to a relative few, and by lowering trading costs. We are excited about finding ways to facilitate these trends. At the same time, however, the risks for fraud are great.
Given the size and growth of the Internet, regulators can’t do it alone—it’s like expecting one precinct to patrol all of New York City. We are committed to reaching out to investors and potential investors…to encourage them to become partners with us in the fight against securities fraud on the Internet. I envision a kind of Internet Neighborhood Watch, where investors look out for themselves and their neighbors on the Net and alert regulators when they see or hear something
suspicious. To make that easier, NASAA will soon have a special e-mail address for investors to report suspected Internet fraud. It will be firstname.lastname@example.org. When we get e-mail messages from investors, we will refer complaints to the proper state regulator, the SEC, NASD and the FTC, whichever is appropriate.
Next….we’re committed to efficient and effective regulation of investment advisers, the fastest growing segment of the financial services industry. We’re committed to finalizing and implementing an entry-level IA competency exam next year. We’re also committed, in partnership with the SEC, to begin building an IA database…to help us better track, regulate and discipline investment advisors just as we use the CRD database to track regulate and discipline brokers. In all we do in this area we will stress efficiency, cooperation and focus on the interests of Main Street investors.
What’s more, we as state regulators are committed to strong, effective, professional and fair regulation. The bottom line, as I see it: If we demand of industry its compliance with our laws and rules, we must demand of ourselves high standards of competency, judgement, responsiveness and professionalism. Now is a good time to mention changes in the NASAA structure. Some of those changes will be voted this afternoon and I am sure they will be public shortly thereafter. But, I want each of you to understand that any changes in NASAA will NOT change our commitment to investor protection. These changes are being made to make NASAA stronger, more efficient and more effective. And, I am committed as President to implementing these changes and making NASAA an even better organization to protect investors.
Training and education of our members is a vital part of what NASAA does— enforcement, franchise, broker-dealer, and investment adviser training programs take place year-round. As part of our strategic plan, we will form a committee to determine how to improve our training and make it even more effective. In addition, I will propose a continuing education program for securities administrators. Lawyers, CPAs and even securities brokers have continuing education programs. In this rapidly changing world, our members deserve no less.
Next…We’re committed to investor education. The best defenses against fraud are knowledge and skepticism. Fortunately both are teachable. We need to teach our kids to avoid the mistakes that too many of us have made. That’s why NASAA and its partners—the NASD and the non-profit Investor Protection Trust—are in the midst of rolling out Financial Literacy 2001. It’s an investor education curriculum designed to be taught to every high school senior in the country. It’s a longterm project that has been a big focus for Denny Crawford and I would like to have her spearhead this area in the coming year.
We’re committed to bringing more criminal cases for securities fraud. A few years ago, South Carolina and New Hampshire had a joint investigation of a small boiler room operation in Bedford NH. When charged in South Carolina, the principal of the firm paid a fine and said to the South Carolina administrator, “It’s all part of the cost of doing business.” Well, both NH and SC are small states with small securities staffs. But, though cooperation among the states, the SEC and the U.S. Attorney for New Hampshire, that principal was sentenced to federal prison. States have been stepping up criminal prosecutions of securities fraud. And we are committed to giving our members more tools. For example, we recently sent them model jury instructions for criminal securities cases and we will work with them to get these instructions into the hands of the appropriate prosecutors in their jurisdictions. We have to prove to con artists and crooks that crime not only doesn’t pay but that if they commit a crime there’s a good chance they’ll do time.
Finally, we’re committed to helping our members raise awareness of what they do to protect and educate investors. We can do this by stressing that what we do is law enforcement…no less important than making sure the streets are safe. We ARE the local cops on the securities beat. Wall Street, after all, is a street more and more Americans are taking to secure their financial futures. We need to raise awareness of what we do by helping our members reach out to the local news media. By teaching them how to package and present news stories to local print and broadcast reporters and by helping them to go on TV and radio with investor education tips. I can tell you that every time a story on a cease and desist order runs in the New Hampshire Sunday News, our enforcement attorney gets more calls reporting securities scams or asking questions about some questionable investment. The fact is , the more publicity we generate, the more we educate
To conclude, we’re facing change of unprecedented scope and speed. But I know we as state securities regulators are up to the challenges. Meeting these challenges will take hard work and cooperation. The will is there—and so is the commitment. We can never forget that truck driver, that teacher or that widow that I talked about earlier. They are the reason we’re securities regulators. Helping them and all of the other investors is what makes our jobs so rewarding and satisfying. Thank you all and I look forward to working with all of you during the next year.
October 6, 1998