finra

Remarks by Elisse B. Walter
Senior Executive Vice President

Financial Services Institute Third Annual Public Policy Day
September 13, 2006

 

Good morning and thank you so much for inviting me to speak today. I'm always pleased to speak with NASD member firms, but I'm particularly happy to be invited to attend a gathering of independent broker-dealers. In most cases, we are the sole SRO for independent firms, and you have been an important voice on NASD initiatives. There are now 28 FSI members serving on NASD District Committees and District Nominating Committees and we are delighted that more and more of your members are volunteering their valuable time to help NASD do its job well.

September is a time of new beginnings - vacations are over, the kids head back to school, Congress is back in session, there's a hint of fall in the air.

This September marks a very special beginning for us at NASD. Bob Glauber, who served as our Chairman and CEO for nearly six years, retired on August 31 to become a professor at Harvard Law School. Bob's tenure was one of tremendous accomplishment for NASD, and we will miss him.

Effective September 1, Mary Schapiro became Chairman and CEO. Mary, as you all know, served as Vice Chairman and President of NASD Regulatory Policy and Oversight before becoming Chairman. I myself have worked with Mary for over a decade, not only at NASD but also at the Commodity Futures Trading Commission as her General Counsel. My colleagues and I look forward eagerly to what we're sure will be a highly productive, effective and constructive period under Mary's leadership.

In anticipation of her new role, Mary embarked on a listening tour earlier this year — one-on-one meetings with CEOs from firms around the country, representing every size and business model, to hear their perspectives on NASD and regulation, and their views on our best opportunities for together ensuring the highest levels of integrity in the industry. These meetings were extremely valuable.

As Mary begins her tenure as CEO, NASD is uniquely positioned to work with the industry to improve the quality of the overall market. Earlier this year, we sold all of our interest in NASDAQ—and we've been fully divested of Amex since 2004. This allows us to be solely focused on regulation and support the industry's efforts to comply with rules and regulations. This also makes us the only major SRO that is does not have a profit-seeking arm.

Our primary responsibility is to protect investors and the integrity of the markets, and that will never change. The SEC closely oversees every aspect of NASD's operations and they are watching us to make sure we are fulfilling our mandate to protect investors. That said, we do not underestimate the burdens that we place upon you, and we know that regulation must allow business to innovate, grow and flourish.

One of the most important things for us to do is to reach out to firms and ensure that we have an open and honest dialogue about issues affecting them and the industry.

That is the reason we encourage industry input on potential rule proposals. That is why we create Task Forces to tackle the most vexing industry-wide problems. That is why the senior management of NASD spends thousands of hours a year with our standing committees and at programs like this.

This morning, I would like to talk about two of our highest priorities - compliance support and investor education.

First, compliance support.

Mary has instructed all of us to establish, as one of our highest goals, the development of ways to help your compliance efforts. We want to work with you to prevent problems before they happen.

For example, you may have heard about NASD's new Liaison Program, which assigns a dedicated point of contact for each firm. Liaisons are full-time employees of NASD District Offices. They are available to address your questions on topics such as NASD rules and policies, filing deadlines and compliance resources. If your Liaison cannot answer a question, he or she will put you in touch with someone who can.

Before rolling out the Liaison Program nationally, we ran a pilot program with about 900 firms in five districts. An independent, third party survey of participants in the pilot found that ninety-four percent of those who used the program said their Liaison was helpful. If you are a member firm, we hope you will reach out to your Liaison with compliance questions. Contact your local district office if you don't know who your assigned Liaison is. And speaking of our district offices, let me remind you that they host opportunities throughout the year to highlight current regulatory issues and encourage dialogue between firms and NASD District Office staff.

We are also working on making our communications more effective. One way is by making ourselves more accessible - even portable. We have recently added compliance podcasts to our list of resources in order to help you stay up-to-date on the latest regulatory issues at your own convenience.

Our compliance podcasts - which are short audio programs — cover some of the issues firms find most challenging, such as anti-money laundering, branch office registration, equity indexed annuities, and supervisory controls. Beginning in May, we also began releasing monthly update podcasts. These recap regulatory deadlines, Notices to Members, press releases and other updates from the previous month.

To answer one frequently asked question - you do not need an iPod to listen to podcasts. You can listen to them online, download them to your computer, or put them on your iPod or other mp3 player. Check out our website for information on accessing podcasts or look for us on iTunes, where you can sign up for a free subscription to receive new podcasts automatically.

We recently introduced a new series of free, on-demand video webcasts for compliance professionals. They are designed to help take the mystery out of some of our key regulatory processes and make your interactions with us more productive and effective. We call this the What to Expect webcast series.

The first installment in this series is What to Expect: Preparing for a NASD Routine Exam. This webcast focuses on what firms can expect before, during and after an NASD examination, and offers practical tips for making the process go smoothly. I think that all NASD members would benefit from viewing this webcast, but it may be of particular interest to firms on a four-year inspection cycle whose exams are coming up soon, given all of the significant regulatory changes in recent years. The examination those firms will undergo will be quite different from their last exam.

I should point out that this webcast is accompanied by an informational guide, and also is available in an audio-only podcast format. The next webcast in this series, to be released next month, will cover what to expect when filing communications for review with NASD's Advertising Regulation team. Other potential topics for this series are enforcement investigations and U5 and U4 disclosures.

We would love to hear what topics would be most helpful to you. To view the webcast on routine exams, or to provide input on future topics, visit our website.

No description of our compliance support services for members would be complete without a description of our online learning opportunities. These tools give you and your staff an easy way to get ongoing education. These programs are available in two formats - webcasts and e-learning courses.

In addition to the What to Expect webcasts that I just mentioned, we also produce webcasts designed for our members' frontline staff. These are on-demand streaming video presentations that take less than ten minutes to watch, cover timely industry issues, and are available - like the What to Expect series -- free of charge. We currently have about twelve of these webcasts available, covering topics ranging from 529 savings plans to customer data protection to fee-based brokerage accounts. And, we are continually adding more. Right now, webcasts covering customer suitability considerations and margin accounts are in the works.

Our e-learning courses go deeper than our webcasts. The typical e-learning course is about 25 to 30 minutes long and features decision-based learning scenarios, optional post-course assessments and real-time completion tracking. These are available for a nominal fee to NASD members. We have about ten courses available, with plans to roll out six more in the next year. These courses range from e-learning for the novice - such as a primer on US securities regulation - to training for seasoned veterans and front line staff, covering topics including supervisory responsibilities, anti-money laundering, and variable annuities.

Another service that we offer to help members with their compliance efforts is the NASD Report Center, which provides firms with secure access to data and reports designed to support their compliance activities. This information is intended to aid firms in the early detection of reporting problems, and to help them identify areas for improvement.

Let me give you an example. The TRACE report card, published on a monthly basis, shows the number of trades that a member firm reported late to the Trade Reporting and Compliance Engine or TRACE. The report that you receive will include the performance of the industry overall and of peer groups, so that you can see how your firm is doing in comparison with others.

We also offer a host of Equity Report Cards. For example, the best execution report card details the number of transactions in which your firm participated that were executed away from the inside market in apparent violation of the NASD's best execution rule. The short sale bid test report card provides a monthly count of the number of potential executions of short sales in violation of Rule 3350, as well as the percentage of potential short sales to total trades reported.

Before I leave the topic of our compliance support services, there are a few other new items that I want to mention. This month, we piloted a new training program - the NASD Compliance Boot Camp. The Boot Camp is designed to help people master the basics and hit the ground running in a new compliance role. Participants in the program complete about eight to ten hours of self-directed study, including online learning, followed by two days in the classroom. We are excited about the Boot Camp, which should prove to be a great option for firms when they have new compliance staff.

As you all know, NASD offers a wide range of conferences throughout each year. Following a successful debut last year, we once again will host the Face to Face with NASD Conference this October in New York. The conference involves lots of interaction between NASD staff and firm representatives and covers current topics, such as gifts and gratuities and retiree considerations. We also will host our 15th annual Fall Securities Conference in Los Angeles in November, with a pre-conference program on advertising regulation issues, and two days of workshops on timely issues, plus a keynote address from Mary Schapiro.

I'd like to turn now to investor education. This is a passion of mine and of our new Chairman.

Now, you may ask yourself how investor education is a service to NASD members. To be sure, it directly helps investors, and that's how it should be. But, if you stop and think about it, educated and informed investors are key to your success. And strong investor education materials and tools help you deal with your clients. This brings out the best in our industry.

One of the challenges of investor education is finding distribution channels that put good information into the hands of as many investors as possible. You represent a powerful channel — and I encourage you to point your clients to the many investor education resources NASD has on its website—or link to those resources from your own website.

If you have investors who would benefit from a basic understanding of bond investing, send them to our Smart Bond Investing Center. Our 401(k) Learning Center contains valuable information about withdrawals from that essential retirement-funding vehicle — and whether you're just married or just retired, our College Savings Center offers information on everything from 529 plans to savings bonds. And, your clients may benefit from our Investor Alerts, which warn of the latest scams or risky products. Several focus on products we often see targeted for sale to seniors, such as equity-indexed annuities and variable annuities.

If you have any clients who are in the military, by all means send them to a new site created by the NASD Investor Education Foundation specifically for members of the military and their families called Saveandinvest.org.

One additional resource I think your older clients in particular will appreciate is our Professional Designations Database. It's the only tool available that helps investors to decode professional designations and better understand what education and experience requirements are necessary for any given designation, including those that suggest special expertise in the needs of senior citizens.

NASD also provides—via the internet or toll free telephone call—a service called BrokerCheck, which allows investors to quickly access information about the disciplinary history, professional background, business practices, and conduct of the brokerage firms and individual brokers with whom they invest.

The NASD Investor Education Foundation, established in 2003, supports innovative research and educational projects that give investors the tools they need to better understand the markets and the basic principles of financial planning. The Foundation has awarded millions to organizations for educational programs and research projects targeting underserved segments of the population.

One of those grants funded the development of an interactive, game-based educational program to provide education on retirement planning, primarily for 45 to 60 year old women. The new game is called Get Rich Slow, and it's available free on the web site of the Center for Retirement Research at Boston College.

Before we can devise workable solutions to senior investment fraud, we must, as with any complex problem, first determine how and why the problem occurs. What motivates seniors to succumb to the persuasion tactics of a stranger? Whom do seniors trust? And where do those seniors who are most vulnerable to aggressive sales pitches get their information? How can we best reach them? How can we best equip them to avoid fraud?

The Foundation decided to fund research to begin to answer these questions. In July, the NASD Foundation released a study, conducted by WISE Senior Services and the AARP Foundation, that looks at why certain elderly investors are more susceptible to investment fraud than others, exposes the various tactics used by criminals to exploit seniors and offers strategies to help seniors avoid becoming victims. This research is a critical step in helping all of us—regulators, educators, and senior advocates alike—to understand senior investment fraud and develop practical messages to increase awareness among seniors.

Some of the survey results are quite surprising. Some key findings include:

  • Investment fraud victims are more financially literate than non-victims;

  • Investment fraud criminals use a wide array of different influence tactics—from friendship to fear and intimidation tactics—to defraud the victim;

  • Fraud pitches are tailored to match the psychological needs of the victim;

  • Investment fraud victims are more likely to listen to sales pitches;
     
  • Investment fraud victims are more likely to rely on their own experience and knowledge when making investment decisions;
     
  • Fraud victims experience more difficulties from negative life events than non-victims;
     
  • Investment fraud victims are more optimistic about the future;

  • Investment fraud and lottery victims dramatically under-report fraud.

One of the key points that we should take away from this study is that it's not enough to teach investors the nuts and bolts of investing. The Report recommends expanding financial literacy and fraud prevention programs to include information about how persuasion tactics work. Other recommendations include encouraging seniors to report such crimes to securities regulators, conducting more research to test the efficacy of persuasion education and further studying resistance to persuasion in the context of "free seminar" settings where aggressive salespeople so often make their pitches.

One thing is certain—we need to get a better handle on the senior investor. To that end, the NASD Foundation Board authorized a comprehensive investor survey of senior citizens. The survey will identify basic market knowledge and financial literacy levels for seniors. It will also shed light on their savings and investment habits, which investment products and services they purchase and why, what marketing messages resonate with them, which information sources they use and trust, and where they turn for help. This should be of value to regulators, investors, and our members.

This morning, I've tried to give you an idea of some of the ways in which we support our members' efforts. I know how important it is for you to know with some certainty what you can expect from us. It is equally valuable to us to hear your comments, concerns, suggestions and complaints about our operations - current and planned. I thank you for listening and invite your questions and comments.