Inside the senate chambers

The SEC’s examination program conducts on-site compliance examinations of securities firms to foster compliance with the federal securities laws. Our Office of Compliance, Inspections and Examinations (OCIE) uses risk-based techniques to focus on activities that pose the greatest compliance risk to investors and the integrity of the markets. Last year, as part of our new initiative to help protect senior investors, OCIE joined with state securities regulators in Florida, California, Arizona, Texas, North Carolina, South Carolina, and Alabama, as well as with the NASD and NYSE, in a coordinated series of examinations of financial firms that sponsor “free lunch” sales seminars, often at local restaurants and hotels.

Final and complete results of the OCIE examinations will be released by the SEC, NASAA, and the Financial Industry Regulatory Authority (FINRA) at the second annual SEC “Seniors Summit” next week, and will also be posted on the SEC’s website. But even at this point it is clear that we were right to identify these “free lunch” sales seminars as posing serious risks to senior investors. Many of the advertisements and mailers used to solicit seniors to attend these events were confusing or misleading about the intent of the event. Our examinations have found that, despite being advertised as “educational” or touting “nothing will be sold,” the purpose of these seminars is to convince attendees to open new accounts with the sponsoring firm – and ultimately, to sell financial products to seniors.

While we can look forward to seeing the full results of these examinations next week, this work is already helping regulators understand how sales seminars are used to target seniors, and how we can better help protect seniors from being victims of unsuitable sales of securities. Our “free lunch” examinations are also a terrific example of what can be achieved when the SEC partners with others, and we thank our partners at NASAA and FINRA for working collaboratively on this important project.

Aggressive Enforcement

Over the past two years alone, the SEC’s Division of Enforcement has brought at least 40 enforcement actions involving fraud on seniors. Many of these actions were coordinated with state authorities. In one notable case, SEC v. D.W. Heath and Associates, the Commission worked with the Riverside County District Attorney’s Office to crack down on a $144.8 million Ponzi scheme that lured elderly victims in southern California to workshops with the promise of free food – and then bilked them out of their retirement money by purporting to sell them safe, guaranteed notes.

In just the past two months we have brought three significant enforcement actions targeting seniors – two of which were emergency actions to halt ongoing activities. First, in July we filed an emergency action against AmeriFirst Funding, Inc., AmeriFirst Acceptance Corporation, and their principals alleging that they defrauded investors of approximately $55 million through the fraudulent offer and sale of so-called Secured Debt Obligations (SDOs). The Commission’s complaint alleges that AmeriFirst sales agents lured elderly investors, and others saving for retirement, with advertisements for relatively high-yielding FDIC-insured certificates of deposit, then convinced the investors to purchase the SDOs instead. The complaint further alleges that the defendants misrepresented the safety of the SDOs by falsely asserting, among other claims, that the investment had little or no risk because accounts were guaranteed by a commercial bank, protected by many layers of insurance coverage, and fully secured by collateral. In other words, rather than promising outlandish returns – a common ploy of Ponzi operators – the defendants allegedly played on the conservative nature of retirees and near retirees with low risk thresholds. Defendants also touted the credentials of one of the principals of AmeriFirst, while failing to disclose his long history of financial irresponsibility and securities-related sanctions, including personal bankruptcies and a permanent bar from associating with any broker-dealer. In the AmeriFirst action, we secured preliminary injunctions and asset freezes, but as in too many such cases, much of the money appears to have been spent before we got there.

In another notable case, SEC v. Earthly Mineral Solutions, et al., this July we sued two Nevada companies and their officers for allegedly perpetrating a $20 million Ponzi scheme involving mining interests. Like AmeriFirst, the defendants in Earthly Mineral Solutions allegedly played on the tendency of senior investors to be more conservative and “guaranteed” investors a fairly modest 7 percent to 9 percent annual return on their investments. The Commission’s complaint alleges that the defendant’s actions convinced a number of investors saving for retirement to liquidate personal IRAs to invest in the purportedly safe mining interests.

Finally, just weeks ago, in SEC v. Secure Investment Services, et al., we took emergency action to shut down an alleged $25 million Ponzi scheme that targeted hundreds of senior and other investors nationwide who bought fractional ownership interests in life insurance policies. The Commission’s complaint alleges that the father/daughter team that operated Secured Investment Services falsely promised investors safe, secure, and profitable interests in life insurance policies known as “viaticals” while failing to disclose the dire financial condition of the investment venture. The defendants allegedly pocketed $700,000 of investor funds for their personal use while the venture was on the verge of collapse.

The SEC’s enforcement staff will continue to aggressively investigate and file actions against those who prey upon senior citizens. In particular, the SEC will continue to bring emergency actions to shut down ongoing offering frauds, with the goal of preventing further investor harm.

Fighting Unethical Sales Practices

In addition to coordinating and improving efforts in our current three-pronged approach for protecting seniors against investment fraud, one goal for this year’s Seniors Summit is to identify new areas of focus for protecting the financial interests of seniors. One possibility is improving broker-dealer sales practices by identifying principles of conduct to help firms and their personnel establish and maintain high standards in their interactions with investors.

Broker-dealers are already subject to numerous specific sales practice obligations. These obligations are primarily spelled out in the rules of the self-regulatory organizations, particularly FINRA. The rules establish strong baseline standards for sales practices, but good business practices should inevitably lead a firm to even higher standards of conduct in dealing with their customers. The Commission, as well as the self-regulatory organizations and the securities industry, can help firms in this regard as they work to develop principles of conduct with respect to the sale of securities to seniors and with respect to the many other special issues that surround senior investors.

Another important Commission initiative is to consider whether the different regulatory structures applicable to the two main types of securities intermediaries that we regulate – broker-dealers and investment advisers – are confusing to senior investors, and whether they continue to make sense in light of how the securities business has evolved. In 2006, the Commission awarded a contract to the RAND Corporation to conduct factual research and analysis for a major study comparing the levels of protection afforded retail customers of broker-dealers and investment advisers. The study is well underway, and a final report is due at the end of this year. We expect to use the findings of the study as an empirical foundation for evaluating the current legal and regulatory environment for the provision of financial products, accounts, programs, and services to senior investors by broker-dealers and investment advisers.

One particular source of potential investor confusion is the use of “senior” professional designations by brokers, investment advisers, and others – an issue you are rightly highlighting in this hearing. I commend the Committee for raising awareness regarding the use and abuse of senior professional designations. We need to do everything we can to ensure that seniors are well informed about the experience, background, and expertise of financial professionals they use. We also want to ensure that seniors are treated fairly and appropriately by brokers and others throughout the securities industry.

As you know, some financial professionals use designations that imply that they are experts at helping seniors with financial issues. Many seniors, however – and many investors of all ages – don’t understand the alphabet soup of initials that may follow the names of these financial professionals. Titles such as “senior specialist” or “retirement advisor” often bespeak nothing but a clever attempt to lure senior investors to purchase questionable investment services.

The education, experience, and other requirements for receiving and maintaining a “senior” designation vary greatly from mere self description to mandatory completion of rigorous exams and work in a designated field for several years. In many cases, even state-approved designations may be relatively easy to obtain in terms of time and effort, even for an individual with no relevant experience.

The SEC does not endorse any particular designation, but we do encourage investors to do their homework with respect to professional designations, and we are looking into whether we, our counterpart regulators in the states, or state legislators and the Congress should do more. In the SEC’s online brochure on senior designations (available at www.sec.gov/investor/pubs/senior-profdes.htm ), we refer investors to “Understanding Investment Professional Designations” on FINRA’s website, which provides the education and experience requirements for many professional designations. Our investor education materials also remind investors that understanding a financial professional’s designation is just one step investors should take when they evaluate his or her credentials.

Conclusion

Before I conclude, I would like to share a personal story. As I briefly mentioned, my mother passed away several years ago. As hard as it was to accept my mother’s death, it was harder still to see my father so vulnerable. So it was nice that it seemed to help both of us to spend some time going through old pictures and mementos in Mom and Dad’s apartment.

And in that enjoyable scavenger hunt, I came across a small framed check, made out to my grandfather. It was for $3.36 – representing 56/1,000 of 1% of the hard-earned savings he’d earnestly entrusted, in 1929, to the debentures of Insull Utility Investments. That was the eventually notorious holding company of Samuel Insull, the Ken Lay of his day – who combined scores of power utilities to create a corporate pyramid.

It all came crashing down in 1932, and hundreds of thousands of investors, including my grandfather, lost their savings as a result. The Insull abuses, which FDR railed against in the 1932 campaign, helped give birth to the Securities and Exchange Commission in 1934.

I have hung that small frame with my grandfather’s check on my office wall. It serves as a reminder that being the investor’s advocate means standing up for the little guy. It means never forgetting that the cost of securities fraud is measured not just in accounting losses and diminished stock prices, but in people’s lives – in their dashed hopes, and their squandered savings; in retirement dreams that might never materialize, or doctor bills that can’t be paid.

As Chairman of the Securities and Exchange Commission, I have had the opportunity to devote myself to the cause of the ordinary investor. I look forward to continue working with this Committee and our many state and federal partners to protect and educate our nation’s senior investors.

Thank you again for this opportunity to appear before the Committee. I would be happy to answer any questions you may have.

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