The Importance of Financial Literacy and Education in America

Testimony of Denise Voigt Crawford
Texas Securities Commissioner
Before the Committee on Banking, Housing and Urban Affairs, United States Senate

February 6, 2002

Chairman Sarbanes, Ranking Member Gramm, and members of the Committee:

I am Denise Voigt Crawford, the Commissioner of the Texas State Securities Board and Chair of the Investor Education Section of the North American Securities Administrators Association, Inc. (NASAA), a non-profit association of securities administrators from the fifty states, the District of Columbia, Puerto Rico, Canada, and Mexico. I am also a Trustee of the Investor Protection Trust (IPT), a non-profit trust devoted to investor education.

I am pleased to appear before you today to discuss the importance of financial literacy and education in America. Texas is a recognized leader in this area, and I am pleased to have the opportunity to share our experiences and suggestions with you.

Status of Financial Literacy and Education in the United States.
On average, the general public is financially illiterate. That may sound harsh, but unfortunately it is true. Despite numerous, well-intentioned efforts over the last few years to increase investor knowledge, recent surveys on financial literacy are finding nearly the same dismal results that were found in surveys five or more years earlier. Does this suggest that no amount of investor education will improve the situation? I think not. Instead, it demonstrates that we must be smarter about how we provide the information, motivate people to want to learn, collaborate, and coordinate our efforts.

As a nation, we have only recently recognized our financial literacy education shortcomings. In response, many groups have taken action, developed initiatives and programs, and offered their services to various segments of society. Governmental agencies have recognized that an important component of fraud prevention is investor education. State securities regulators, the “local cops on the beat,” are responsible for investor protection and education at the local level. Non-profit entities and public service organizations are finding an endless need for their services. Industry participants realize that educated investors are more savvy and less likely to be disappointed with their investment decisions. The need for a better educated populous becomes more apparent daily, and with this recognition there is a disturbing awareness of the multitudes of investors who are ill-equipped to make critical financial decisions for their lives.


The Texas Example:
From modest beginnings, Texas has grown to be a major market and is eagerly sought out by national and international securities issuers. The dollar volume of securities registrations and filings processed in Texas in fiscal year 2001 was approximately $330 billion. (This number does not include, for example, sales of exchange-listed securities and other securities sold pursuant to exemptions.) The dollar volume in the Texas securities market now exceeds the combined deposits of all banks, savings and loans, savings banks, and credit unions in Texas.

The Texas experience mirrors what has, to varying degrees, occurred throughout the United States. Over the last ten years, the United States has been transformed into a nation of investors. Over half of all Americans are now invested in the securities markets. Many individuals have become investors because they participate in employer-sponsored 401(k) programs. At year-end 2000, about 42 million American workers held 401(k) plan accounts with a total of $1.8 trillion in assets. As most Americans have become investors, attention has focused on making sure students are prepared for the credit card offers they will receive upon going to college, preventing investors from being defrauded, making sure that individuals are financially prepared for retirement, and ensuring that Americans have a basic understanding of the principles of saving and investing, as well as preserving their accumulated wealth.

We no longer have the comfort we experienced during the passbook-savings years of our childhoods. Our current standard of living and our plans for the future are increasingly tied to the ups and downs of the markets, and the variety and complexity of investment options can be overwhelming even to those with some degree of financial knowledge. In addition, the markets and investment products are constantly changing. Today, it takes knowledge of financial literacy basics just to keep up.

Importance of Financial Literacy and Education.

Without basic financial education, investors are less savvy in making important financial choices. For example, with an increasingly mobile workforce, many people will, upon changing employers, be asked whether they should roll over their retirement account into the retirement plan of their new employer or cash it out. To someone who is 30 years old and has built up several thousand dollars through automatic payroll deductions, the prospect of using this “nest egg” for travel, a new car, or even to purchase a home, might be a strong temptation. Without a fundamental understanding of the time value of money, the compounding factor in savings, tax penalties for early withdrawal of retirement funds, and an appreciation for what this nest egg will mean to his overall retirement plan, he may choose to cash it out. Unfortunately, this is a common mistake.

Take the example of a middle-aged married couple, with a working father and a stay-at-home mom. If the father becomes disabled on the job, then receives a significant settlement, in the absence of strong investment knowledge, the money might all be used for immediate needs, rather than assuring that an adequate amount is invested so that the family can live off of the income and still have retirement funds for their later years.

Another example is of a person who has worked all the way up to retirement, building a retirement account through her employer, then, at retirement, is offered a lump sum settlement. Like the first example, it may sound like a lot of money to her. She may want to spend some on home improvements, her children, etcetera. If she does not understand and appreciate that she will need income from the investment of her retirement funds, she may find herself over 65 years of age and unable to pay her bills.

There is one additional example you may have seen in the press lately: professional athletes. The U. S. Securities and Exchange Commission (SEC) has been investigating an investment adviser whose smooth-talking mannerisms engendered the trust of several sports figures who lost millions in a scam. Another scandal involves a former teammate-turned-investment counselor who swindled his friends by talking them into investing in his failed business, then using their funds for personal purposes. Such well-paid, high profile investors are seemingly easy targets because they often come from modest beginnings, they do not have the time to manage their own investments, and often are all too trusting of people they know through previous relationships.

In each of these examples, understanding the need to invest is only the first consideration. They should have knowledge of who to invest with, how to check out the background of their investment professional, and how to participate in their investments by reviewing account statements and changing investment goals and risk tolerances as their life situations evolve and change.


What follows is a compilation of examples from the records of the Texas State Securities Board, describing Main Street investors and how they lost their investments to investment fraud. These stories exemplify the importance of educating investors to help protect them from being defrauded.

Just last month, a Texas court convicted an unregistered agent who sold approximately $300,000 worth of viatical certificates in Texas. Her employer, a Florida-based company, sold over $115 million in viatical certificates. Ultimately, a Texas judge sentenced her to nine years in prison for selling securities without being registered as a securities dealer or agent, but there was no restitution — there rarely is in this type of case.

The financial literacy concept that was lacking here is the knowledge to call a securities regulator and check out the legitimacy of the promoter, the company, and the securities. Had investors done so, they would have found out that the company and agent were not registered and that should have been a red flag.

In another situation, investors were offered a “Prime bank/Debenture” deal, marketed as a “little known secret” ostensibly unavailable previously because of an “exclusive trading program” having to do with blocking and leveraging of funds. Over the past three years, state regulators have brought actions on behalf of more than 41,000 people nationwide who invested at least $470 million in prime bank scams.

A financial literacy concept that might have helped here is that there is no such thing as a “prime bank” and any investments offered by such a promoter are entirely fictitious.

In Texas we investigated another case in which investors pooled money to invest in speculative trading in “foreign currencies” that the promoter promised would capitalize on the momentum in the marketplace via minute-by-minute currency trading. The promoter also promised that the funds invested were protected against loss through “clever hedging” strategies. However, whenever investors tried to “cash-out” they were told the money was “lost.” The amount was approximately $50 million. The promoter was sentenced to a total of 84 months in prison but much of the investors’ money was lost.

The financial literacy concept that was lacking here is the need to review account statements carefully and consider them in light of actual market fluctuations.

With the volatility of the stock market in recent months, investors have looked for safer places to put their money. Elderly investors have been encouraged to buy higher yielding “callable” certificates of deposit (CDs). Investors are not always aware that these days not all CDs are created equally. A number of these “callable” CDs are callable only by the issuer. Cases across the nation demonstrate that investors in their 70s and 80s were sold CDs with 10- to 20-year maturities. One retiree was persuaded to invest more than $100,000 of her 97 year-old mother’s money in three callable CDs with 20-year maturities.

The financial literacy concept missing here is that buying a CD from a dealer is different from buying a CD at the issuing bank. Commissions, availability of FDIC insurance, ultimate ownership of the CD, and the age and risk tolerances of the investors are important factors to understand and consider before investing in brokered CDs.

If these investors had been educated on investing, they would not have been so vulnerable. In each of these cases, the investors could have contacted licensing and regulatory agencies to determine if the security they were offered and the brokerage firm and its agents were appropriately registered and, if the firm or agents had ever been registered, they could have had access to the disciplinary histories.

By simply visiting the Web site of a state or federal securities regulator, they would have learned about prime bank scams, callable CDs, and currency exchange schemes, and would have armed themselves with revealing questions to ask the program promoters.


In order to address the vast need for investor education, we must recognize the challenge of directing our efforts toward the varying audiences: (1) young people, who are finishing high school and headed toward their first job or to college; (2) young married couples, beginning their careers and planning to buy a home, and planning for their children’s education and for their own retirement; (3) middle-aged persons trying to meet their retirement goals in the limited number of work years ahead of them; (4) retirees who have built their nest eggs and are beginning to take active roles with their investments; and (5) surviving spouses, lawsuit award winners, lottery winners, “baby boomers” and others who are expected to inherit or otherwise come into significant funds and are ill-equipped to properly manage the funds for their future use.

Which group has the greatest need and how much effort should be directed toward each of them? We find ourselves with an overall financial literacy crisis in part because the learning curve is long, due to the absence of financial education at the primary level. These days, people have to manage their own money yet they often do not have the necessary background to do it wisely. We must act upon the realization that we will never overcome this deficiency without incorporating financial literacy into our education systems. We simply cannot leave Americans unable to save and invest wisely.

Recommendations for Improving Financial Literacy and Education.
State and federal legislative efforts.
The Texas State Legislature in 2001 added investor education as an official duty of the Securities Commissioner. New Section 43 of the Texas Securities Act expressly recognizes the importance of investor education initiatives to inform the public about the basics of investing in securities, with special emphasis placed on prevention and detection of securities fraud. The Legislature recognized the need to provide such education to Spanish-speaking individuals as well by requiring that materials developed and distributed in connection with investor education programs must be published in both English and Spanish.

It was recognized that this function would cost money, of course. Rather than providing tax payer funding to accomplish this objective, the Texas Legislature directed me to use my best efforts to collaborate with public or nonprofit entities with an interest in investor education. We hope that these collaborative efforts will result in greater investor awareness, as the Legislature intended.

Some other states have investor education provisions in their securities statutes and the number is rising. These statutes provide for various funding mechanisms, but all share a common goal of educating the public on personal finance and creating greater awareness of the dangers of securities fraud. Some, like Texas, were directed to establish public/private partnerships to carry out their programs. However, money needed to support these state investor education initiatives is still sorely lacking.

In Congress, the recent passage of H.R. 1, the No Child Left Behind Act of 2001, which provides authorization for a personal finance grant program, may be a source for assistance to states for investor education initiatives aimed at public schools. NASAA is currently reviewing this legislation to assist the states in assessing the opportunities created by this Act. We are appreciative of this legislation and of other efforts in Congress to address the problem.

NASAA, FL 2010 and the Investor Protection Trust.
State securities agencies, through the North American Securities Administrators Association (NASAA), have developed questions for investors to ask before committing capital to any investment; straightforward information about mutual funds; and a list of ways to spot fraudulent investments and con artists. In 1999, NASAA created a section that is co-equal with its enforcement, broker-dealer, and investment adviser sections, to focus on investor education. I have had the honor of chairing this section since its inception. Today, the NASAA Investor Education Section consists of the following Project Groups: Affinity Based Outreach, Ethnic Based Outreach, Financial Literacy 2010, Investor Education Coordination, and Online Trading Awareness. Members of these project groups are drawn from the staff of state securities agencies across the U.S.

NASAA promotes an Investor Education Month in April of each year. Events are planned to bring investing issues to the attention of the general public and the month is a kick-off for other such projects that go on throughout the year. A variety of activities such as presentations in public schools, senior centers, and retirement communities are conducted and Governors routinely issue proclamations to increase the public awareness of the events. President Bush issued several such proclamations as Governor of Texas and last year he issued a written statement from the White House commending participants in Saving and Investing Campaign Month and urging all Americans to take action to secure their financial futures. Due, in part, to such high-level support, we see a growing public interest each year and our goal is to establish these activities as part of everyday life in America, not just a series of events that happen once a year.

NASAA and its members joined forces with the Investor Protection Trust (IPT), a non-profit trust devoted to investor education, the National Association of Securities Dealers-Regulation, Inc. (NASD-R), and the National Institute for Consumer Education to launch an ambitious program, Financial Literacy 2010 (formerly, FL 2001), to teach the basics of finance to high school students across the country.

We know that the young people of today soon will begin making personal finance decisions that will affect the quality of the rest of their lives. They will be compelled to make critical decisions about earning, spending, saving, and investing their money. However, very few American teenagers today have the tools they need to make these important choices. FL 2010 was launched in 1998 to help combat the widespread financial illiteracy among the next generation of American savers and investors.

FL 2010 campaign features:

$ State-customized teaching guides that have been shipped to more than 40,000 high school teachers throughout the United States. The FL 2010 program includes two teaching guides, one geared toward general business or consumer education teachers and one focusing on the unique needs of high school economics teachers. Each of the two guides includes units that can be used together or on a stand-alone basis. State-customized information provides local and statewide information on investment education and protection.

$ Training sessions. Through the end of 2001, a network of more than 100 state securities agency officials and volunteers had conducted more than 350 training workshops at state and national education association conferences. In the first three years of FL 2010, an estimated 8,500 teachers took part in the training.

$ Teacher support through a Web site ( and newsletter published three times a year.

The project has been enormously successful. In Texas, we have distributed guides to more than 1000 high school teachers. Many states have had similar success. For the most part, high school teachers have worked financial education into the final semester for high school seniors, as they focus on issues such as financing a college education, choosing a job, getting married, and so on.

FL 2010 is but one example of a way to reach audiences where they are most reachable. The public schools provide us with a great opportunity, but we need to do more. More resources are needed and this is a ripe area for public/private partnerships.

Coordination of Investor Education Efforts.
Now that significant participants in the securities and financial industries have recognized the need for financial education, many efforts have been undertaken to develop more savvy investors. Similar to the programs described above, genuine efforts are being made by governmental bodies, by non-profits, and by private and public organizations. The states, individually and through NASAA, have multi-faceted education efforts. The SEC and NASDR have programs. The American Savings Education Council, the AARP, the National Council on Economic Education- -to mention only a few– all have on-going efforts to increase the public awareness of the need for financial planning and investor education programs.

Every investor can benefit from financial education. However, instead of every educational effort attempting to reach every need, perhaps a division into focus groups, similar to what has been done at NASAA, would be more successful overall. I envision an action plan for attacking the problem at deliberate points, with specific objectives that are quantifiable, toward the final goal of having an educated investing public.

The ability of investors to make wise, informed choices is a major assumption and is the cornerstone of a capitalistic economy. Investment fraud drains the economy of needed resources and can instill fear, not only in those defrauded, but in the millions of other Americans who learn about it. The ability of consumers to buy what they need throughout their lives provides markets for the goods we produce and the services we provide. A stifling debt load or uninformed planning can preclude that ability. Financial concepts touch every facet of every life in this great nation and the financial health of our families is a prerequisite to the health of our markets and our economy.

While financial education in the classroom is a necessity, that alone is insufficient. Financial professionals in the government arena, the securities, banking and insurance industries and in the accounting and legal professions must work tirelessly and together to make the knowledge we each have, from our unique perspectives, readily available to the public. We are on the right path, but the journey has been slower than we would like.

Elected officials have a unique perspective as well and can help. The scheduling of the hearings this week have already helped to raise public awareness. Individually, you and your staffs can participate in national saving and investing month activities and can encourage your own state to sponsor and/or fund such activities as well. As a Committee, you have access to numerous financial professionals who would be happy to participate in any activities you may choose to initiate.

Working together, we have the expertise needed to reach the goal of a financially literate populace. It is our hope that, working together, we can find creative ways to reach every American.

Thank you for the opportunity to testify before you today.

February 6, 2002

Print Friendly, PDF & Email
Issues & Advocacy, Legislative Activity, Testimony