2011 Presidential Speech, Jack Herstein, Assistant Director, Nebraska Department of Banking and Finance
Assistant Director, Nebraska Department of Banking & Finance
Bureau of Securities
President, North American Securities Administrators Association
September 13, 2011
NASAA 94th Annual Conference
Distinguished guests, fellow regulators, my colleagues in the United States, Canada, and Mexico, thank you for joining us in Wichita as we launch the next century of investor protection.
I appreciate the work of our conference chairs, Kansas Securities Commissioner Aaron Jack and Colorado Securities Commissioner Fred Joseph, and everyone at NASAA for helping put together this historic conference.
I want to give special thanks to David Massey for his counsel, leadership and good humor, all of which served NASAA well over the past year. Please join me in thanking Dave for a great year as NASAA’s President.
In Nebraska we tend to follow the advice of two of our most well-known citizens: Warren Buffett, the Oracle of Omaha, and Tom Osborne, who led my alma mater, the University of Nebraska, to three national football championships.
Asked about his management style Buffett once said: “It’s better to hang out with people better than you.” Along those lines, Coach Osborne said the key to his success was t “Work hard, stay focused and surround yourself with good people.”
With that in mind, I am pleased to introduce NASAA’s leadership team for the coming year. Our new Board of Directors includes: President-elect Preston DuFauchard of California; Past President David Massey; Rick Hancox of New Brunswick; Steven Irwin of Pennsylvania; Fred Joseph of Colorado; Andrea Seidt of Ohio; Patricia Struck of Wisconsin; and Frank Widmann of Florida. I have also appointed Matt Neubert of Arizona to continue as NASAA’s ombudsman and Ron Thomas as New Member Advocate..
I look forward to working with each Board member to build upon the strong foundation Dave has left for us. Please join me in a round of applause for our Board.
I am also pleased to announce that four of the five Section chairs for the upcoming year will be familiar to you: Heath Abshure of Arkansas remains as chair of Corporation Finance; Matt Kitzi of Missouri continues chairing the Enforcement Section; Linda Cena of Michigan will continue to lead the Investment Adviser Section; and Daphne Smith of Tennessee will again lead the Investor Education Section. John Cronin of Vermont has agreed to take on the chair of the Broker-Dealer Section.
I am confident that the Sections will thrive under the leadership of these committed Chairs. Please join me in a round of applause for our Section Chairs.
I have long subscribed to the philosophy of “surround yourself with good people.” I want to acknowledge a dedicated group that I have the pleasure of working with on a daily basis – the staff of the Nebraska Bureau of Securities. This table represents a combined 227 years of experience in securities regulation.
I would like to introduce to you: John Munn, Director of the Nebraska Department of Banking and Finance, in which the Bureau of Securities is housed; Patti Humlicek-Herstein, General Counsel for the Department, and my sister-in-law; Tom Sindelar, Investigation Supervisor; Sheila Cahill, Legal Counsel; Rod Griess, Registration and Compliance Supervisor; Karen Reynolds, Securities Analyst; Jackie Walter, Securities Examiner; Pam Burnham, Registrations Clerk; Mike Cameron, Exemptions Attorney; and Debbie Yost, Exemptions Assistant. I also want to acknowledge three staff members who had to stay in Lincoln to mind the store: Morgan Lorenzen, Securities Analyst; and Michelle Boerger and Lori Freeman, Staff Assistants.
Without their hard work and dedication, I would not be able to take the reins of the NASAA presidency. I ask you to join me in a round of applause for my Nebraska colleagues.
We’ve heard much discussion over the past few days about how the foundation of modern securities regulation began here in Kansas a century ago and soon spread throughout the nation and across our borders. Kansas has a special place in the hearts of state regulators, as evidenced by NASAA’s highest honor, the Blue Sky Cube, which represents one square foot of Kansas blue sky.
For the past 100 years, securities regulators in the states, provinces and territories of North America have delivered effective protection for investors and efficient regulation for industry. We have served a distinguished role in safeguarding the assets and maintaining the confidence of investors throughout North America.
I am proud to have been a part of this history for the past 34 years, after joining the Nebraska Bureau of Securities in 1977 as a Securities Examiner. Much has changed since then, and even more has changed since the first state securities law was enacted in 1911. But in many ways, life in 1911 or even 1977 is little different from life today. People went to work, saved what they could and dreamed of a better future for their children.
Over the past century, state and provincial securities regulators have developed a strong system to help protect that dream of a better financial future. In the United States, our efforts were supplemented through the enactment of the federal securities laws and the creation of the Securities and Exchange Commission. Today, the dual system of state and federal securities regulation continues to serve investors well. I look forward to working with the SEC in the year ahead. We have much in common and work well together in our shared responsibility to protect investors.
The SEC’s mission is “to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation.” To accomplish this mission, it is paramount that the SEC has adequate funding to enforce existing laws and regulations. There is a push in Congress and elsewhere to starve the SEC of its funding. This is not good for investors or for capital formation. Our securities markets are a role model for the rest of the world because of the work of the SEC. I urge everyone in this room to act as an advocate for providing adequate funding to the SEC to enable it to accomplish its mission on a nationwide basis.
I also look forward to continuing Dave Massey’s work to strengthen our relationship with self-regulatory organizations. This morning, a Congressional hearing examined the regulation and oversight of broker-dealers and investment advisers and whether investors would benefit from the creation of an SRO for investment advisers currently regulated by the SEC.
Regardless of the outcome, the states and the brokerage industry’s self regulator, FINRA, need to partner to ensure that industry puts the needs of their investor clients before their own.
NASAA has traditionally favored government regulation over industry self-regulation. Our historic concerns focus on the lack of accountability, transparency and independence associated with the SRO model of regulation. Until our concerns are addressed we continue to hold that governmental regulatory authority should not be diminished in favor of industry self-regulation.
However, as states we need to acknowledge that self-regulation is not going away and we need to enhance our relationship with FINRA. As is frequently the case, that which unites us is greater than that which divides us.
Securities and insurance regulators also have much in common. It is not uncommon for one state agency to regulate both industries. In Nebraska, we are proud of the strong working relationship between our Department and the Department of Insurance. We coordinate investigations and examinations where there is a shared interest, and meet to discuss common areas of concern and interest. I encourage each securities regulator to have similar meetings with your jurisdiction’s insurance regulator, and I intend to approach the National Association of Insurance Commissioners to discuss our common goals.
I will also reach out to industry associations, such as SIFMA. Collaboration between regulators and industry groups is especially important to leverage our resources for the protection of investors. I look forward to hearing from industry representatives in the coming year to enhance our already strong and positive working relationship.
While preparing my remarks, I had an opportunity to think about the changes I’ve seen since my days as a rookie securities examiner in Lincoln. One of the greatest changes has been how technology has transformed how we live and work. This year, the Central Registration Depository celebrates its 30th anniversary and stands as a testament to the ongoing legacy of NASAA members to use technology to better protect investors. The CRD system has served as a model for the IARD and the electronic filing of mutual funds.
Of course, not all change is for the better. With the passage of the National Securities Markets Improvement Act in 1996, state securities regulators were preempted from reviewing certain offerings before they were sold to the members of the public. Since then, a regulatory black hole has emerged to expose investors to high-risk investments offered by companies with little or no financial stability or regulatory scrutiny.
Fifteen years after NSMIA became law, it is clear that preemption of state review of offerings is a failed experiment. NASAA continues to urge Congress to restore the authority of state securities regulators to oversee these unregistered private offerings.
A similar mistake is currently taking place. HR 1070, which is pending before Congress, could wreak havoc on retail investors by providing an exemption from registration for public offerings up to $50 million. As currently drafted, the bill would preempt state statutory authority. Further, the SEC would not review these offerings. We must not create another black hole and let history repeat itself.
Something that hasn’t changed is our commitment to investor protection through education and strong enforcement of state securities laws. We are in the trenches every day, stepping up when and where others may be unlikely to act.
Last year alone, NASAA members conducted more than 7,000 investigations, which led to more than 3,500 enforcement actions, $14.1 billion ordered returned to investors and more than 1,100 years of jail time for securities law violators.
In addition, our grassroots investor education programs give each of us the opportunity to introduce ourselves to residents before they have a problem with an investment. As the “go-to” resource for our citizens, we frequently are able to identify problems before our federal counterparts and we often take the lead to correct areas of concern. I am proud of my colleagues around the United States for being at the forefront of regulating senior designations and free lunch seminars, as well as investigating questionable research practices and improper sales of auction rate securities.
States have also taken the lead in pressing for reform in the securities arbitration system. For several years, NASAA has voiced concern over apparent inequalities in the arbitration system. As NASAA president, I will continue to support a more level playing field for investors with legitimate claims against their brokers.
The Dodd-Frank Wall Street Reform and Consumer Protection Act recognized NASAA’s leadership and record of accountability and gave state securities regulators new authority to address the challenges facing 21st century investors.
For example, by mid-2012 states will see an increase of approximately 25 percent in the number of investment advisers subject to state regulation. This presents states with a unique regulatory challenge. Fortunately, states and NASAA have been preparing to meet this challenge for more than a year and are ready for the switch. These preparations will enable state regulators to implement intelligent, efficient and responsive regulation.
Henry Ford said: “You can’t build a reputation on what you are going to do.” Our reputation for strong investment adviser oversight is based on a proven track record.
Throughout the United States, more than 400 experienced state employees are dedicated to licensing and examination, including field examiners, auditors, accountants, and attorneys.
Even a highly skilled workforce cannot succeed without adequate resources. The need for additional resources is a natural consequence of increased responsibility. NASAA members are developing ways to maximize available resources. Each state has agreed to work together and share resources as needed to regulate the expanded state investment adviser population.
I am very pleased to announce a new NASAA initiative that enables regulators to review the applications of advisers required to register in four or more states in a coordinated manner as they switch from the SEC to state regulation. This initiative helps advisers by encouraging states to coordinate potential problems with applicants and avoid inconsistent deficiencies.
NASAA also is investing in new tools that will enable states to leverage their resources in the examination of investment advisers. We have developed uniform examination procedures to promote a consistent and high standard of examination at the state level and advanced risk-analysis software to allow states to rapidly review and rank their investment adviser registrants.
The investment adviser switch is just one of Dodd-Frank’s many meaningful and tangible reforms. But a number of key issues remain to be resolved.
For example, NASAA continues to encourage the SEC to develop a rule that applies a fiduciary standard of care and loyalty to all who provide investment advice, and to ensure that this standard is as strong as the existing fiduciary duty of the Investment Advisers Act. Despite calls for delaying a fiduciary duty rulemaking by some in Congress, SEC Chairman Mary Schapiro has said the SEC will proceed.
We will continue our efforts to ensure that Dodd-Frank is implemented to provide strong investor protections without posing unnecessary burdens on business or impeding legitimate capital formation efforts. The cost of compliance is a legitimate business concern. Yet when balanced against the economic consequences retail investors continue to suffer in what many economists consider to be the worst financial crisis since the Great Depression, I believe the benefits of Dodd-Frank far outweigh even the most pessimistic price tags of reform.
This year’s conference has focused on our past accomplishments, the challenges we face today and the promise of tomorrow. Of course, no one can accurately predict what the future holds. But I am confident that unlike mutual funds, in our case past performance is indicative of future performance.
Financial markets will continue to become more sophisticated, complex and global in their reach. The changing dynamics of our financial markets will require a similar regulatory evolution.
The future comes one day at a time. I want to leave you with guideposts to watch for in the months and years ahead that will signal whether we are on the right path to provide tomorrow’s investors with even better protection and financial service than those of today.
Over the next year, I will focus on ensuring that state regulatory authority is preserved. As we have seen since NSMIA, our authority has been under attack. We will continue to fight each attack and defend the regulatory authority of NASAA members. NASAA cannot do this alone; every state must be involved. I ask fellow regulators and everyone in this room to join us in resisting efforts to reduce investor protections by restricting or eliminating state regulatory authority.
Together, we can work toward a future where a culture of responsibility is shared among regulators, industry, and investors; where regulators never neglect their duty to protect investors; where financial innovation flourishes to benefit everyone and where the interests of investors always come first.
In closing, I want to thank the NASAA membership for entrusting me with your confidence. It is my privilege to lead our organization into the next century of investor protection. My father, a World War II veteran, taught me the honor of serving others. My presidency of NASAA is a tribute to his legacy as I serve both the NASAA membership and the investors of North America.
I thank my NASAA colleagues, my staff in Nebraska, and the NASAA Corporate Office staff for all you do to build on the foundation of professionalism and integrity of those who served before us. Together, we will set the standard for those who follow.