Restoring investors' confidence in the markets

The president of the North American Securities Administrators Association discusses what the financial industry needs to do to rebuild client trust

May 11, 2014 @ 12:01 am

The following is an edited version of a speech delivered April 1 by Andrea Seidt, president of the North American Securities Administrators Association Inc., at the annual seminar of the Securities Industry and Financial Markets Association's Compliance and Legal Society.

While my day job is serving the securities industry and investors located in my home state of Ohio, I speak to you this morning wearing my NASAA hat. I was elected NASAA president this past fall right around my fifth anniversary as Ohio securities commissioner and the fifth-year anniversary of the most recent financial crisis. I'm sure it was a particularly challenging time for many of you, having to contend with firm closures, consolidations, mass transfers, and what probably seemed like constant motion in the broker workforce.

Many of you probably moved from one firm to another, from one position to another. But thankfully, five years later, you all are the survivors, still dedicated to the job of helping everyday investors preserve and grow their nest eggs. On behalf of NASAA and state and provincial securities regulators across North America, I want to thank you all for the important work you do serving our investors.

While things today are unquestionably better than they were five years ago, and heaven knows we have all taken many valuable lessons away from that experience, there are still many challenges that we face in the securities industry. Investors are still trying to rebuild their portfolios and remain wary of the stock market. According to a recent Reuters report, cash balances are at all-time highs in some of the largest brokerage firms. In a recent Wells Fargo & Co. survey, a full one-third of brokerage firm clients indicated they are still skeptical about investing in the stock market. A third of the Wells Fargo survey respondents also said that the 2008-09 financial crisis is still a factor in how much stock they are willing to own. Of those that remain wary, 21% don't plan to invest in stocks at all.


On the flip side, investors who are more willing to bear risk are increasingly turning away from Wall Street to the private capital markets to make up their losses. According to a July 2013 Securities and Exchange Commission report, the private market outpaced the public markets in capital raises in 2012 in terms of numbers and dollar volume, with $1.7 trillion raised through private offerings that year, compared with $1.2 trillion raised through registered offerings.

As the SEC report recognizes, the gap is likely much greater as private-offering amounts are understated due to the SEC's inability to observe all private capital activity. That fact may not come as much of a surprise to many people, especially those of you working at firms who are constantly and carefully monitoring the markets for dynamics like that.

What may surprise some of you (I must say it surprised me a little bit) is just how infrequently brokerage firms and other intermediaries are used in the private market. Are you aware that only 13% of all new private offerings sold since 2009 have used a registered intermediary such as a finder or broker-dealer? That is what the SEC report says, and the figure would be even lower if you excluded real estate deals that are more likely to use intermediaries. Most of these offerings have taken place in the Regulation D market, where, by design, the terms of the deals receive no substantive regulatory review.

Looking ahead, I anticipate the gap between the public and private markets to only widen further, at least in the short term, due to expansion of federal offering registration exemptions instituted as part of the JOBS Act. Regulation D deals are expected to increase under new Rule 506(c) with the SEC's recent removal of general-advertising and general-solicitation restrictions. Additional unregistered deals will be sold through crowd funding and possibly under new Regulation A+. While crowd-funding deals will require the use of a registered intermediary, there is no such requirement for the other offering exemptions where significantly greater sums of money can and likely will be raised. While some of the firms represented in the audience may plan on participating in these exempt-offering types, I have heard from many firms who have serious reservations about dabbling in these new, untested markets. If last year's SEC report reflects what we should expect to see in this area, the broker-dealer community will be handling a decreasing minority of the deals sold to American investors.


So what does all of this mean for the securities markets — for you in the industry, for us regulators, and for the investors we all work so hard to serve? I am sure it means many things that none of us will completely realize for a few years to come. But in the meantime, I do have a few takeaways as they pertain to our role, our partnership to serve as effective gatekeepers in the securities markets. For purposes of this discussion, I am using the word "gatekeeper" in the generic practical-policy sense and not the gatekeeper liability sense that many of you [chief compliance officers] sometimes frame the discussion.


My first takeaway is good news for all of you — there has never been a greater need for professional financial advice than there is right now. Investors, including our large retiring baby boomer population, are working hard to recoup their losses from the financial crisis. They are being bombarded with investment opportunities from every direction — in the papers, on the TV, radio, telephone, Internet, social media, you name it — and many do not know what to make of it. More often than not, it is our senior population that is targeted in these marketing efforts, because that is where most individual American wealth resides.

While it used to be that investors as a whole could take comfort in the fact that most investment opportunities were vetted in some fashion by a regulator before being shopped to the public, that is decreasingly the case. The SEC report I mentioned a minute ago is direct proof that regulatory screening and review is slowly becoming the exception rather than the rule. That report, in fact, may have marked the turning point where private deals have become the norm. Investors will need brokerage and investment advisory services to guide them to good, safe opportunities considering their age, liquidity needs and risk tolerance, among other things.

In Ohio, unregistered products sold by unlicensed individuals are a constant source of investor losses and, consequently, state enforcement action. In 2012, the division saw eight securities fraud cases result in a criminal indictment or conviction. Seven of those cases involved the sale of unregistered securities. In 2013, there were six cases resulting in criminal charges, indictment, or sentencing; five of those cases involved unregistered securities.

Of course, Ohio is not unique in this regard, as statistics from NASAA's annual enforcement reports bear out the same trend nationally. Of the 690 fraud cases prosecuted by state securities regulators in the last reporting year, 580, or 84%, involved unregistered products. Almost the same number and percentage of cases, 576 cases or 83%, involved an unlicensed promoter. For the past four consecutive years, unregistered Regulation D deals have topped the list as the single most common investment product or scheme involved in state enforcement actions.


Some of the more notable recent SEC actions involving fraud actions against seniors also involved unregistered securities. There was a $3 million Ponzi real estate scheme that targeted seniors, a $1.8 million promissory note scheme directed to seniors on Medicaid, and another $2.8 million scam focused on retirees seeking to invest in a Colorado hedge fund promising to invest in safe government bonds.

[The Financial Industry Regulatory Authority Inc.] has also experienced a steep increase in the number of enforcement actions it has taken against broker-dealers engaging in private placement sales gone awry — from approximately 20 cases per year, on average, in the 2005-10 time frame to 70 cases in 2011 and approximately 90 cases in 2012.

Brokerage firms also have found themselves victimized by Ponzi schemes and other scams orchestrated through unregistered securities. In the recent billion-dollar MedCap private-placement fraud, for example, dozens of independent-broker-dealer firms went out of business following investor lawsuits seeking to regain money lost in the fraud. When the money is gone, investors quickly move past the defunct issuer to the intermediary middleman for relief. It is critical that firms do as much due diligence on these deals as possible to protect both themselves and their clients from fraud and financial loss.

My second take-away this morning is this: Investors need to understand the benefit of professional financial advice and know they can trust the professionals giving them advice. For whatever reason, more and more deals are being done without a licensed, professional intermediary — nearly nine out of 10 private deals, as noted above. Some of these investors are sophisticated entities or individuals who can "fend for themselves" and do not need or see a benefit to those services. Others simply may not have a relationship with an adviser they feel they can trust. In that sense, investor trust and confidence in the industry remains critically important.


There is a lot we can do to bolster investor trust and confidence in the securities industry, and the folks sitting in this room often are one of the first lines of defense. Firm registration managers, for example, directly control the flow of brokers from firm to firm. I spoke a month ago at the Association of Registration Managers conference on this topic. As I urged them, I urge all of you to keep careful watch — talk to each other and ask tough questions when you are faced with a questionable firm-hopping broker, especially where the broker has numerous customer complaints or an employment history that includes more than one expelled firm. And please don't get too testy when your friendly state securities regulator has a few questions for you on a broker like that at the registration or examination stage; we are just trying to fulfill our gatekeeping function, too.

For its part, Finra has announced that it will be focusing on high-risk brokers this year in order to cut down on "cockroaching" practices. State regulators understand that this practice refers to a very small percentage of brokers, but the bad acts of a few can really take a toll on the reputation of the industry as a whole. Investors will not seek professional financial advice if they do not trust industry professionals to protect their hard-earned money.

Another easy way to boost investor trust is for the SEC to raise all securities professionals' standard of care to a single fiduciary-duty standard in which the client's best interests come first. NASAA has long been a proponent of the fiduciary-duty standard and, while some of the details still need to be ironed out, industry stakeholders like [the Securities Industry and Financial Markets Association] have also come on board.

SEC Chairman Mary Jo White, who is making short work of remaining Dodd-Frank and JOBS Act related rule makings, recently announced that the fiduciary duty issue is one of the commission's top regulatory priorities for 2014. It is great to see growing consensus on this issue. Retail mom-and-pop investors will respond favorably to the change knowing their interests will come first no matter what their financial adviser is wearing at the moment the advice is rendered.

The final thought and take-away I have for all of you this morning is to continue the strong partnership you have with regulators at the SEC, Finra, and the states through NASAA. Our markets function most effectively when industry and regulators work together to protect and serve investors.

For better or worse, we are all in this together. The best way for us to restore integrity to our markets is to restore investor confidence in us (as regulators) and you (as an industry). We need to be seen as part of the solution to what ails our markets, not the cause. This requires constructive, sometimes difficult, discussions on how we can bring back trust and certainty to the markets without suffocating investment opportunity.

I really wish investors could see us working together as we do here at conferences like this. All too often, they see or hear commentary on the issues that divide us. By showing a united front where we can, on issues like those you have heard about here at this conference, investors will know that we are all working hard to protect their money and build their wealth.


What do you think?

View comments

Recommended for you

Sponsored financial news

Upcoming Event

Apr 30


Retirement Income Summit

Join InvestmentNews at the 12th annual Retirement Income Summit - the industry's premier retirement planning conference.Much has changed - and much remains to be learned. Attend and discuss how the future is full of opportunity for ... Learn more

Featured video


Why some retirement plan advisers think Fidelity is invading their turf

InvestmentNews editor Frederick P. Gabriel Jr. and reporter Greg Iacurci talk about this week's cover story that looks at whether Fidelity Investments is stepping on the toes of retirement plan advisers.

Latest news & opinion

Galvin's DOL fiduciary rule enforcement triggers industry plea for court decision

Plaintiffs warned the Fifth Circuit that Massachusetts' move against Scottrade signaled that the partially implemented regulation can raise costs for financial firms.

Social Security underpaid 82% of dually entitled widows and widowers

Agency failed to tell survivors that they could switch to a higher retirement benefit later.

Is Fidelity competing with retirement plan advisers?

As the Boston-based mutual fund giant expands the products and services it brings to the retirement market, some financial advisers say the firm is encroaching on their turf.

Gun violence hits investment strategies, sparks political debates with advisers

Screening out weapons companies has limited downside.

Whistleblower said to collect $30 million in JPMorgan case

The bank did not properly disclose that it was steering asset-management customers into investments that would be profitable for JPMorgan Chase.


Hi! Glad you're here and we hope you like all the great work we do here at InvestmentNews. But what we do is expensive and is funded in part by our sponsors. So won't you show our sponsors a little love by whitelisting It'll help us continue to serve you.

Yes, show me how to whitelist

Ad blocker detected. Please whitelist us or give premium a try.


Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print