[Senate Hearing 108-884]
[From the U.S. Government Publishing Office]



                                                        S. Hrg. 108-884

 
                      THE ROLE OF STATE SECURITIES
                   REGULATORS IN PROTECTING INVESTORS

=======================================================================

                                HEARING

                               before the

                              COMMITTEE ON
                   BANKING,HOUSING,AND URBAN AFFAIRS
                          UNITED STATES SENATE

                      ONE HUNDRED EIGHTH CONGRESS

                             SECOND SESSION

                                   ON

EFFORTS TO ENFORCE SECURITIES LAWS, INVESTMENT ADVISER REGISTRATION AND 
 LICENSING, STATE INVESTIGATIONS INTO MUTUAL FUND INDUSTRY ABUSES, AND 
                      INVESTOR EDUCATION PROGRAMS

                               __________

                              JUNE 2, 2004

                               __________

  Printed for the use of the Committee on Banking, Housing, and Urban 
                                Affairs


      Available at: http: //www.access.gpo.gov /congress /senate/
                            senate05sh.html


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            COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS

                  RICHARD C. SHELBY, Alabama, Chairman

ROBERT F. BENNETT, Utah              PAUL S. SARBANES, Maryland
WAYNE ALLARD, Colorado               CHRISTOPHER J. DODD, Connecticut
MICHAEL B. ENZI, Wyoming             TIM JOHNSON, South Dakota
CHUCK HAGEL, Nebraska                JACK REED, Rhode Island
RICK SANTORUM, Pennsylvania          CHARLES E. SCHUMER, New York
JIM BUNNING, Kentucky                EVAN BAYH, Indiana
MIKE CRAPO, Idaho                    ZELL MILLER, Georgia
JOHN E. SUNUNU, New Hampshire        THOMAS R. CARPER, Delaware
ELIZABETH DOLE, North Carolina       DEBBIE STABENOW, Michigan
LINCOLN D. CHAFEE, Rhode Island      JON S. CORZINE, New Jersey

             Kathleen L. Casey, Staff Director and Counsel

     Steven B. Harris, Democratic Staff Director and Chief Counsel

                       Bryan N. Corbett, Counsel

                 Dean V. Shahinian, Democratic Counsel

   Joseph R. Kolinski, Chief Clerk and Computer Systems Administrator

                       George E. Whittle, Editor

                                  (ii)
?

                            C O N T E N T S

                              ----------                              

                        WEDNESDAY, JUNE 2, 2004

                                                                   Page

Opening statement of Chairman Shelby.............................     1

Opening statements, comments, or prepared statements of:
    Senator Sarbanes.............................................     2
    Senator Corzine..............................................     4
    Senator Dodd.................................................    20

                               WITNESSES

Peter C. Harvey, Attorney General, State of New Jersey...........     5
    Prepared statement...........................................    31
Ralph A. Lambiase, President, North American Securities 
  Administrators Association, Inc. and Director, Division of 
  Securities, Connecticut Department of Banking..................     8
    Prepared statement...........................................    33
    Response to a written question of Senator Miller.............    51
Joseph P. Borg, Director, Alabama Securities Commission and 
  Chairman, Enforcement Section, North American Securities 
  Administrators Association, Inc................................    10
    Prepared statement...........................................    38
    Response to a written question of Senator Miller.............    52
Charles Leven, Vice President, Board Governace and Chair, Board 
  of Directors, AARP.............................................    12
    Prepared statement...........................................    48
Juanita Periman, of Butte, Montana...............................    14

                                 (iii)


    THE ROLE OF STATE SECURITIES REGULATORS IN PROTECTING INVESTORS

                              ----------                              


                        WEDNESDAY, JUNE 2, 2004

                                       U.S. Senate,
          Committee on Banking, Housing, and Urban Affairs,
                                                    Washington, DC.

    The Committee met at 10:10 a.m., in room SD-538, Dirksen 
Senate Office Building, Senator Richard C. Shelby (Chairman of 
the Committee) presiding.

        OPENING STATEMENT OF CHAIRMAN RICHARD C. SHELBY

    Chairman Shelby. The hearing shall come to order.
    During this past year, this Committee has examined a range 
of issues confronting the securities industry. Much of the 
Committee's attention has been focused on the so-called Global 
Settlement of Wall Street analysts' conflicts of interest and 
the revelations of wrongdoing in the mutual fund industry. 
These scandals had much in common: They both involved egregious 
conflicts of interest, widespread misconduct, and inadequate 
disclosure to investors.
    There was another common theme underlying these scandals: 
State securities regulators initiated both investigations. 
Although the SEC is the primary securities market regulator, 
time and again we have seen the need for vigorous State 
regulators to pursue investigations and enforcement actions.
    Much of the misconduct at the root of the Global Settlement 
and mutual fund scandal was long-standing industry practice--
``open secrets'' on Wall Street but unknown to ordinary 
investors. State regulators were the first to initiate 
enforcement actions against these ingrained and questionable 
industry practices. State regulators are the local cops on the 
beat, and their proximity to investors enables them to serve as 
an early detection system for growing frauds and scams.
    Recent enforcement cases demonstrate the benefits of a dual 
regulatory structure in which both State and Federal regulators 
protect investors' interests. Although Federal and State 
regulators have distinct roles to play in our securities 
markets, they share the same goal of stopping misconduct and 
assuring a fair deal for the ordinary investor. Successful 
State and Federal collaboration is essential to ensure vigilant 
protection of our securities markets.
    State regulators have a mandate to protect investors that 
extends beyond enforcement actions and coordination with 
Federal regulators. Many States have proactively launched 
initiatives designed to preempt future frauds by educating 
investors as to how they can protect their assets and to 
identify signs of wrongdoing. An educated investor is a better 
investor and the first line of defense against securities 
fraud.
    I look forward to hearing more about State-sponsored 
investor education programs and the centralized broker-dealer 
and investment adviser registration systems that States have 
created. This morning, the Committee will hear from several 
regulators who are at the forefront of investor protection.
    First, we have Peter Harvey, the Attorney General of the 
State of New Jersey. We welcome you, sir.
    Mr. Harvey. Thank you, Mr. Chairman.
    Chairman Shelby. Mr. Ralph Lambiase is the Director of the 
Securities and Business Investment Division at the Connecticut 
Department of Banking and President of the North American 
Securities Administrators Association. We welcome you, too.
    Mr. Lambiase. Thank you, sir.
    Chairman Shelby. Mr. Joseph Borg is the Director of the 
Alabama Securities Commission and Chairman of the Enforcement 
Section Committee of the North American Securities 
Administrators Association. Mr. Borg, we welcome you, too.
    Mr. Borg. Thank you, Mr. Chairman.
    Chairman Shelby. I look forward to hearing the regulators 
discuss current enforcement actions, Federal and State 
coordination, and other initiatives designed to protect 
investors. This morning, we will also hear from two witnesses 
who can address the day-to-day activities of State regulators 
that are critical to ensure investor confidence and integrity 
in our markets.
    Mr. Charles Leven is the Chairman of the Board of Directors 
of the American Association of Retired People and Vice 
President for Board Governance. Older Americans have long been 
targets of securities fraud, and Mr. Leven will address how the 
AARP works with State regulators to educate investors and to 
reduce their risk of being a victim of fraud.
    Finally, the Committee will hear from Ms. Juanita Periman. 
Ms. Periman is a resident of Montana and has traveled a long 
way to be with us today. Several years ago, Ms. Periman was 
victimized by a securities fraud in which her broker made 
unauthorized trades and liquidations in her accounts. Ms. 
Periman contacted the Montana Securities Department and has 
worked with the regulators to pursue the wrongdoer and to 
obtain restitution. I thank Ms. Periman for traveling to 
Washington in order to share her story with us and the rest of 
the Senate.
    I thank each of you for coming, and we look forward to 
hearing your testimony.
    Senator Sarbanes.

             STATEMENT OF SENATOR PAUL S. SARBANES

    Senator Sarbanes. Thank you very much, Chairman Shelby, and 
I want to commend you for holding today's hearing.
    The protection of securities investors has always been a 
high priority for this Committee and an issue on which I have 
placed a great deal of emphasis. It is my own view that State 
securities regulators perform an essential role in promoting 
the goal of investor protection. Their work is particularly 
important for protecting retail investors from those brokers 
and financial advisers that engage in improper or fraudulent 
practices. And through registration, examination, and 
enforcement, and by various programs to educate the public, I 
think they render a very important service.
    We regularly see instances of how important their work is. 
Let me give just a couple of examples, some of which will echo 
what the Chairman had to say.
    In April 2002, New York State officials--the Attorney 
General, the Securities Bureau Chief, and others--led a 
settlement with major brokerage firms regarding misleading 
stock research recommendations. This led to a major enforcement 
effort in which State regulators joined forces with Federal 
regulators to negotiate a Global Settlement with 10 major 
securities firms.
    In September 2003, the Massachusetts Secretary of the 
Commonwealth and Deputy Secretary for Securities found 
instances of late trading and improper market timing of mutual 
funds. This led to a comprehensive investigation of the mutual 
fund industry by Federal and State authorities, which is 
resulting in enhanced oversight and enforcement as well as in 
regulatory reforms.
    In my own State of Maryland, Melanie Lubin, the Securities 
Commissioner, has been active in enforcing securities laws to 
protect citizens, as well as in promoting financial education 
to reduce the potential for investor abuse, working closely 
with the Maryland Coalition for Financial Literacy. Ms. Lubin 
has served as Securities Commissioner for 6 years, has worked 
with Maryland's Attorney General Joseph Curran for 18 years, 
and is doing a very good job.
    Mr. Chairman, I think the State regulators have particular 
strengths that enable them to be effective and, as has often 
been said, ``to be the first line of defense against investor 
fraud.'' They are geographically close to investors, have 
offices located in many instances throughout their States. Many 
investors find State regulators easily accessible and call them 
first about a securities problem. They are familiar with the 
securities activities taking place in their local areas and 
with the local brokers and dealers. And they can act quickly in 
response to phone calls or letters.
    Recently, some have advanced the view that the authority of 
the States should be curtailed because of the presence of 
Federal securities regulation. It is my view that such 
preemption of State authority would not serve the public 
interest. Recent history, some of which I have just recounted, 
provides ample evidence of the value of State securities 
regulators in protecting the investing public.
    Furthermore, State securities regulators have been in the 
forefront of investor education. A decade ago, they had the 
foresight to establish the Investor Protection Trust, which is 
designed to fund projects that educate investors. So, I look 
forward to hearing the testimony of the witnesses here this 
morning and hearing Ms. Periman, who will underscore exactly 
what they are trying to address. And as we continue to work 
with the States to protect securities investors, I am 
interested in any new initiatives they have undertaken, current 
trends in securities misconduct, the extent of cooperation with 
the SEC, the extent to which we are all working together for a 
common purpose.
    Thank you very much, Mr. Chairman.
    Chairman Shelby. Senator Corzine.

              STATEMENT OF SENATOR JON S. CORZINE

    Senator Corzine. Thank you, Mr. Chairman, and I appreciate 
very much your holding this hearing. Investor protection is 
something that all of us find at the top of our agenda with 
regard to oversight of the securities markets, and I no doubt 
believe that the cooperation that we need to see between State 
and Federal regulators is absolutely essential. So making sure 
that we have effectively functioning national markets with good 
checks and balances from both Federal regulators, obviously, 
but the underpinning role that our State regulators play is 
extraordinarily important, and finding the right balance there 
is what I hope that this hearing and other discussions about 
this will take us. The whole effort of registration, 
examination, enforcement, and education are things that I truly 
believe the State regulators have a role to play in, but making 
sure that we have deep and broad markets is also something that 
is important to encourage. And so some synergy across the 
national markets I think is absolutely essential.
    I am also here because I have a very good friend and 
someone who I trust his judgment as much as anyone both in the 
legal world but in politics and public service, and that is New 
Jersey's State Attorney General Peter Harvey, who, by the way, 
was born and raised in Tuskegee, Alabama, so he has plenty of 
positive ingredients that you might identify with.
    Chairman Shelby. I knew you had a lot of redeeming features 
before you came today.
    [Laughter.]
    Senator Sarbanes. And went to college at Morgan State 
University in Baltimore, Maryland.
    [Laughter.]
    Senator Corzine. Good Lord, you wouldn't even let me get it 
out.
    [Laughter.]
    I thought I was really going to butter up to both the 
Ranking Member and the Chairman here quite effectively.
    Let me just tell you that there is not a finer lawyer, 
there is not a finer public servant in New Jersey than Peter 
Harvey. He has had all kinds of accolades, just named Lawyer of 
the Year by the New Jersey Law Journal and was very active 
before he came into public service in all kinds of supporting 
roles. And I am really pleased to introduce him.
    I also would just say that he has very practically just 
been involved in the PIMCO affiliate settlement that has been 
very much in the press, I think dealing with the kinds of 
trading abuses and investment protection issues that we are so 
interested in. I welcome him and all of the other witnesses and 
look forward to hearing your comments.
    Chairman Shelby. Thank you.
    All of your written testimony has been made part of the 
record. We have that, if you will briefly sum up your best 
points that you want to make.
    Mr. Harvey, we will start with you.

                  STATEMENT OF PETER C. HARVEY

             ATTORNEY GENERAL, STATE OF NEW JERSEY

    Mr. Harvey. Thank you. Chairman Shelby, Ranking Member 
Sarbanes, and Members of the Committee, I am Peter Harvey, 
Attorney General of the State of New Jersey, and thank you for 
inviting me here to testify today on the issue of State 
regulation and enforcement of securities laws.
    As you know, the States play a critical role in regulating 
securities. By highlighting what we are doing in New Jersey, I 
hope to illustrate clearly why the States are a crucial 
component of investor protection in this Nation. I want to 
acknowledge and thank Senator Jon Corzine, who has been a wise 
and experienced leader in the investment industry and community 
and now devotes his wisdom and leadership in service of the 
Nation and New Jersey. I want to thank him particularly for 
being a strong advocate of investor education and protections.
    Let me just give you some idea of State regulatory 
oversight in New Jersey. Many middle-class Americans seek to 
build their assets for retirement, as well as their children's 
college education by investing in stocks and bonds. These days, 
most of the money that Americans invest is not in banks. It is 
invested in securities, predominantly through pension plans, 
private retirement plans, including 401(k), Keough, IRA plans, 
and major mutual funds, and also through broker-dealers. Thirty 
years ago, only a small fraction of U.S. citizens ventured into 
the securities market. We now have nearly 100 million 
investors. That is certainly a lot of people and a lot of 
money.
    Unfortunately, there are plenty of modern-day Willie 
Suttons--armed with a sales pitch instead of a gun--who know 
where the money is and have learned that many investors are 
easy marks for a scam. Those investors are spread over 50 
States, which is really too much territory to cover without 
State securities regulators.
    In New Jersey, the Bureau of Securities acts on behalf of 
the Attorney General. New Jersey is one of only five States to 
place such an agency directly under the control of the Attorney 
General. As Attorney General, I have both criminal and civil 
authority to prosecute securities fraud.
    The bureau has a staff of about 60 people to enforce New 
Jersey's Uniform Securities Law. The bureau is funded through 
fees paid by the regulated community, as well as fines and 
other sums collected in enforcement actions. The bureau 
regulates the sale or offer of any security sold into or from 
New Jersey, as well as firms and persons engaged in the 
securities business in our State. The primary mechanisms for 
regulation are: One, registration of securities, firms, and 
agents; and, two, enforcement actions against those who fail to 
comply with registration or engage in fraud.
    Since becoming Attorney General last year, I have dedicated 
increased staff and resources to the Bureau of Securities in 
order to handle the enormous workload. I will highlight a few 
facts and cases that illustrate the scope of the securities 
fraud problem we face in New Jersey alone.
    New Jersey has a large amount of investment activity. It 
ranks fourth in the United States in total firms and agents 
registered, behind only California, New York, and Florida. The 
Bureau of securities registers approximately 2,700 broker-
dealer firms, 155,000 agents, more than 2,000 investment 
advisers, and 12,200 investment adviser representatives.
    Registration is important to States as it permits State 
regulators to weed out bad actors and fraudulent or suspect 
securities offerings.
    Another critical component of the bureau's work is investor 
education. Bureau representatives regularly conduct seminars 
for senior citizens, a particularly vulnerable group, and 
community groups on avoiding securities fraud. State Attorneys 
General and securities regulators would welcome Federal 
assistance in the investor education area, whether in the form 
of national ad campaigns or grants for State programs.
    Let me turn now to discuss briefly our enforcement efforts.
    New Jersey has about 200 enforcement cases in the 
investigative stage at any given time and more than 40 in 
active litigation. New Jersey is no stranger to major 
securities fraud cases. A good example is Robert Brennan, the 
penny stock king who defrauded investors of millions of 
dollars. The high-profile bankruptcy fraud trial which led to 
Brennan's imprisonment in 2001 was a result of a cooperative 
effort involving the Bureau of Securities in New Jersey, the 
Securities and Exchange Commission, the FBI, and the U.S. 
Attorney's Office for the District of New Jersey. It was a 
direct outgrowth of two separate civil matters brought by the 
Bureau of Securities and the SEC. We have secured a $55 million 
claim in bankruptcy court against Mr. Brennan and a $45 million 
judgment, yet to be collected, but we are still working on it. 
I want to focus, however, on more recent activities.
    New Jersey played a major role in the landmark multi-State 
settlement announced last year between securities regulators 
and 10 top Wall Street firms regarding stock analyst practices. 
New Jersey also was lead State for the investigation of Bear, 
Stearns, & Company. The case, as you know, brought major 
reforms to the industry to ensure that stock analysts are not 
subjected to pressure to report favorably on stocks and bonds 
of investment banking clients of their firms.
    Just yesterday, I announced another major settlement with 
significant implications for the industry. New Jersey reached 
an $18 million settlement with Allianz Dresdner Asset 
Management and two affiliated companies regarding allegations 
of a fraudulent arrangement that permitted a large investor to 
market-time more than $4 billion in transactions in their 
mutual funds, in violation of fund policies and to the 
detriment of long-term investors. The settlement requires the 
defendants to implement corporate governance changes to ensure 
that portfolio managers for their mutual funds function 
independently of business managers and that the funds comply 
with their own policies barring market timing.
    In between these milestones, New Jersey has filed eight 
major securities fraud cases involving, in the aggregate, more 
than 1,000 investors and more than $160 million in investments.
    In February 2004, we filed suit against three men and their 
companies, including Clover Management Group, Inc., of Fort 
Lee, New Jersey, that engaged in an elaborate scheme to swindle 
investors in the United Kingdom out of more than $55 million. 
The defendants falsely claimed to offer investments in the 
defense industry that would provide strong returns while 
supporting the British and United States war effort in Iraq and 
the worldwide war on terrorism. New Jersey has seized the 
assets of the defendants, including a $2 million yacht, bank 
accounts, luxury cars, and a painting by renowned artist 
Eduardo Arranz-Bravo. The seizures followed cooperative 
investigations by our Bureau of Securities, Federal 
authorities, and New Scotland Yard. The defendants duped 
sophisticated investors out of huge sums through slick 
marketing, which included touring investors around a defense 
industry plant and claiming to be advised by renowned military 
leaders and financiers.
    As mentioned above, as Attorney General I also have the 
authority to criminally prosecute securities fraud. In June 
2003, we simultaneously filed criminal and civil actions 
against more than a dozen New Jersey companies and their 
principles for allegedly stealing more than $80 million from 
investors. The scheme's principle architect was Thomas 
Giacomaro, who pleaded guilty to money laundering charges 
brought by the Division of Criminal Justice in the Attorney 
General's Office and Federal charges of mail fraud and tax 
evasion. Among the parties who lost money in this scheme was 
best-selling novelist Mary Higgins Clark.
    Many of these cases have involved cooperation between State 
and Federal authorities, including the Brennan case, the Wall 
Street stock analyst settlement, the Clover case, and the 
Giacomaro case. State securities regulators and the SEC can 
accomplish a lot by working together, as our representatives in 
the North American Securities Administrators Association have 
been emphasizing in their ongoing discussions with the SEC and 
their cooperative initiatives. However, another point should 
not be lost. States also can be extremely effective on their 
own, as we have demonstrated in the Allianz Dresdner case. In a 
4-month period, we filed and settled a case that addressed a 
serious industry problem and led to reimbursement of the 
affected funds. We secured needed reforms, but resolved the 
case quickly to avoid a lingering cloud that might harm the 
funds. Several other States have also shown their effectiveness 
on this front.
    Although I have discussed high-profile cases that in some 
instances did catch the attention of Federal authorities, many 
of our securities fraud cases--both civil and criminal--would 
not be pursued by Federal regulators, leaving investors without 
recourse. There are simply too many cases out there, and 
sometimes the dollar amount of the fraud is not large enough to 
interest Federal securities regulators given their limited 
resources.
    The bottom line is the task of protecting investors is too 
large to be handled by a single Federal agency, the SEC. 
Investors need the protection of State securities bureaus. We 
hope you will maintain, if not enhance, the authority of State 
securities regulators.
    Thank you again for the opportunity to testify. I share 
your concern about this vital issue and stand ready to work 
with you to examine what areas need to be addressed in the 
future, and I look forward to working with you and other 
Members of the Committee with respect to this task.
    Chairman Shelby. Thank you, Mr. Harvey.
    Mr. Lambiase.

                 STATEMENT OF RALPH A. LAMBIASE

              PRESIDENT, NORTH AMERICAN SECURITIES

             ADMINISTRATORS ASSOCIATION, INC., AND

               DIRECTOR, DIVISION OF SECURITIES,

               CONNECTICUT DEPARTMENT OF BANKING

    Mr. Lambiase. Thank you. Chairman Shelby, Ranking Member 
Sarbanes, and Members of the Committee, I am Ralph Lambiase, 
Connecticut Securities Director and President of the North 
American Securities Administrators Association, referred to as 
NASAA. I would like to thank you for this opportunity to 
present an overview on the many ways that State securities 
regulators serve and protect more than 100 million investors in 
North America. I also want to take this occasion to thank 
Connecticut's senior Senator, Christopher Dodd, for continuing 
to serve as a strong advocate for investor protection and 
listening to the concerns of the Connecticut Department of 
Banking, which includes the Securities Division.
    Our securities markets may operate on Wall Street, but 
stocks, bonds, and securities are sold on Main Street, in our 
neighborhoods and even over our kitchen tables, from nearly 
96,000 branch offices nationally. States have protected its 
residents from fraud for nearly a 100 years. We bring civil and 
administrative actions to penalize or to seek restitution from 
those who have violated our laws. We work with criminal 
authorities to prosecute those who would commit securities 
fraud. Ten of my colleagues are appointed by the Secretaries of 
State; five come under the jurisdiction of their States' 
Attorneys General; and some, like me, fall within their States' 
banking, commerce, and similar departments or commissions. No 
matter where we are located within our governmental structure, 
State securities administrators share a common passion for 
protecting their citizens from investment fraud and abuse.
    While some of our high-profile enforcement actions make 
national headlines, I would like to focus today on our other 
equally important regulatory responsibilities. In addition to 
enforcing our securities laws, we license stockbrokers and 
investment firms; we investigate complaints and allegations of 
investment fraud; we examine broker-dealers and investment 
advisers to ensure compliance with securities laws and the 
maintenance of accurate records of client accounts; we assist 
small businesses in raising capital, and we review certain 
local offerings not covered by Federal law; we educate 
investors by providing tools and the knowledge they need to 
make informed investment decisions; and we advocate the passage 
of strong but sensible and consistent State securities laws and 
regulations.
    State regulators are generally recognized as investors' 
first line of defense, and States have long been acknowledged 
as laboratories of innovation. Both of these characterizations 
are on point. As grass-roots regulators, we are accessible and 
accountable. Our ability to adapt successful programs initiated 
in one State and expanded to others benefits both the public 
and the industry.
    States have a long tradition of protecting investors by 
helping them build financial knowledge and security through 
education. Our financial education professionals work in 
classrooms, the workplace, and senior centers, delivering 
financial education to constituents of all ages.
    Last year, through NASAA, we launched a multifaceted 
education campaign to assist senior investors. We focused 
particular attention to the problem of Internet investment 
fraud directed at seniors.
    To improve the level of youth financial literacy, we have 
developed a system for delivering training events that offer K-
12 teachers the knowledge, resources, and tools that they will 
need to bring effective personal finance education into their 
curriculums.
    I would also like to highlight a few other key points. The 
first is our sincere interest in working with our counterparts 
at the SEC and the SRO's, as well as regulators abroad, to 
collectively use our limited resources to protect investors. As 
the number of Americans who rely on the securities markets has 
grown, so, too, has the number of firms and individuals serving 
as investment professionals. Today, more than 5,200 firms offer 
and sell securities. Some 90 percent of these firms have fewer 
than 100 employees. Investing is clearly a local business. 
While we hear a lot about the globalization of our markets, 
virtually all of the Nation's 650,000 securities agents sell in 
our neighborhoods. Protecting investors is a significant 
challenge, and no single regulatory agency can go it alone.
    We look forward to the continued progress of our 
discussions with the SEC to improve coordination and 
communication as part of a joint initiative launched last 
September. The research analyst cases of 2002 and 2003 and the 
more recent investigations of the mutual fund industry are good 
examples of the importance of our complementary State and 
Federal regulatory system. Now, as the SEC and the SRO's move 
forward in their rulemaking process, we stand ready to provide 
insight from our unique grass-roots perspective. These 
collaborative efforts have and continue to restore investor 
confidence in our financial markets.
    Earlier this year, Congress removed Federal preemptive 
provisions from H.R. 2179, the Securities Fraud Deterrence and 
Investor Restitution Act of 2004. It is vitally important that 
Congress reject attempts to weaken State regulatory authority. 
When investors have confidence in the markets, issuers have 
access to needed capital, and our economy prospers. Greed and 
wrongdoing that goes unchecked undermines investor confidence. 
When it comes to investigation and enforcement of securities 
wrongdoing, investors are demanding more cops, not fewer.
    Protecting investors against fraud and punishing those who 
would commit fraud are fundamental roles of Government, be it 
Federal or State, or provincial in the case of our neighbors to 
the north. We at home are deeply grateful to those Members of 
Congress who have been champions of investor protection. 
Congressional commitment to the integrity of our financial 
markets, accountability in corporate governance, and full and 
fair disclosure has helped make our Nation's markets the best 
in the world.
    I pledge to you the continued support of the NASAA 
membership to work with the Committee to provide any additional 
assistance the panel may need. And I would like to thank you 
for the opportunity to testify here on the role of State 
securities regulators.
    Chairman Shelby. Thank you very much.
    Mr. Borg, I just want to say again we are happy to have you 
here. Of course, Mr. Borg is the Director of the Alabama 
Securities Commission and he is Chairman of the Enforcement 
Section Committee, the North American Securities Administrators 
Association.

                  STATEMENT OF JOSEPH P. BORG

          DIRECTOR, ALABAMA SECURITIES COMMISSION AND

         CHAIRMAN, ENFORCEMENT SECTION, NORTH AMERICAN

          SECURITIES ADMINISTRATORS ASSOCIATION, INC.

    Mr. Borg. Thank you again, Mr. Chairman. Chairman Shelby, 
Ranking Member Sarbanes, Senator Corzine, I am Joe Borg, 
Director of the Alabama Securities Commission and Chairman of 
the Enforcement Section for NASAA.
    It is a particular honor for me to be here and have the 
opportunity to publicly thank my Senator, Richard Shelby, for 
his thorough and thoughtful approach to restoring investor 
confidence in our markets.
    Today, I am delighted to have the chance to share with you 
some of the highlights from States' enforcement activity. 
Certainly, two of the most high profile enforcement matters to 
date have been the research analyst cases and the mutual fund 
cases. This Committee is familiar with the analyst conflict of 
interest global settlement. All 50 States, the District of 
Columbia, and Puerto Rico, in conjunction with the SEC, the New 
York Stock Exchange, and the NASD agreed to settle with the 10 
firms involved. The level of State, Federal, and SRO 
cooperation was unparalleled, but I would like to stress, not 
unprecedented.
    Those settlements achieved a number of very important 
objectives and resulted in much-needed change in the way the 
firms conduct their business. A rigorous separation between 
research and banking was affected by the settlement. 
Independent research will provide investors at the 10 firms 
with research procured by independent consultants and a total 
of $80 million will be directed for investor education purposes 
over a 5-year period.
    With respect to the mutual fund scandals I would like to 
commend this Committee for its complete and deliberative 
examination of the trading abuses in the industry, and I can 
assure you that the States will continue to actively pursue 
inquiries into mutual fund improprieties, and we are committed 
to aggressively addressing mutual fund complaints raised by 
investors in our jurisdictions. But these high profile national 
cases are rare, and they should not obscure the more routine 
caseload that represents the bulk of States' enforcement work. 
State securities regulators are vigorously pursuing sales 
practice abuses and a variety of scams and frauds against 
unsuspecting investors. We often initiate investigations as a 
result of complaints from investors in your States who feel 
they have been wronged by a broker/dealer, securities 
professional, or those claiming to be securities or investment 
professionals.
    Many investors understandably feel that the logical place 
to start with a grievance is their local State securities 
regulator, and as Chairman Shelby noted earlier, we are the 
local cop on the securities beat. Our offices are close to the 
investing public. We are responsive, and we can take immediate 
action without the time needed to obtain formal agency orders.
    Now, this is evident from the States' impressive record in 
bringing enforcement cases, including criminal prosecutions. 
The chart before you illustrates State enforcement statistics 
for the reporting period 2002 to 2003 with over 70 percent of 
the 52 jurisdictions responding. The States filed almost 3,000 
administrative, civil, and criminal enforcement actions, 
assessed over $822 million of monetary fines and penalties, and 
procured more than $660 million in restitution, rescission, and 
disgorgement, and sentenced criminals to over 717 years of 
incarceration. NASAA sent out a recent survey to obtain this 
latest data, and I will be pleased to follow up with the 
Committee in a few weeks with more complete information.
    For the past several years, NASAA has released its list of 
top 10 investment scams, schemes, and scandals to alert 
investors to increasingly complex and confusing investment 
frauds. The problem areas that we are pursuing with enforcement 
cases include unlicensed securities sellers who are pitching 
securities that are unregistered. Scam artist use high 
commissions to entice some insurance agents, investment 
advisers, and even accountants and lawyers into selling 
investments that they may know little about, such as bogus 
limited partnerships or promissory notes, all offering supposed 
high returns with little or no risk.
    Prime bank schemes are a perennial favorite of con artists 
who promise investors access to secret high-yield instruments 
made through trades among the world's top or what they call 
``prime banks.'' Promoters falsely claim the investment is 
guaranteed or secured by some kind of collateral or insurance. 
The investors ultimately find out that prime banks simply do 
not exist.
    Sales of variable annuities have increased dramatically 
over the last decade, and as sales have risen, so too have 
complaints from investors. We are concerned that investors are 
not being told about high surrender charges and the steep sales 
commissions agents often earn when they move investors into 
variable annuities. Often pitched to seniors through investment 
seminars, these products are unsuitable for many retirees.
    Risky viatical settlement contracts, now expanded to life 
settlement contracts, are products that have been on our radar 
screens and subject to State securities enforcement actions for 
the past several years. In a typical transaction, the person 
who is terminally ill sells his policy to a third-party broker 
in return for a portion of the death benefit. State regulators 
are seeing deceptive marketing practices, numerous instances of 
fraud, and claims that viaticals offer safe, guaranteed returns 
like bank certificates of deposit.
    Just last month the SEC and State regulators stepped in to 
shut down and revoke the license of Mutual Benefits 
Corporation. In addition, Florida regulators charged the 
company with racketeering and 15 counts of investor fraud, 
saying that the company lured tens of thousands of investors 
into an elaborate Ponzi scheme that raised more than one 
billion dollars.
    In affinity fraud cases, scammers often use their victims' 
religious, social, or ethnic identity to gain their trust and 
then steal their life savings. So, many fall prey to affinity 
group fraud in which a con artist is or seems to be a member of 
the same ethnic, religious, career, or community-based group. 
For example, my office recently completed a criminal 
investigation into a religious affinity fraud case that 
resulted in six defendants being convicted. The case involved 
nonexistent church bonds, money laundering, and securities 
fraud that absolutely destroyed the Daystar Assembly of God 
Church located in Prattville, Alabama. Losses exceeded $3 
million, and as a result, the congregation lost its church. 
Almost all those convicted were church members, and the ring 
leader received a 31-year prison sentence.
    Even with the funding increase that Congress has allocated 
for the SEC, the Commission just cannot go it alone. There must 
be greater cooperation and division of labor among State, 
industry, and Federal regulators. To that end, as Mr. Lambiase 
mentioned earlier, representatives of NASAA and the SEC have 
been meeting on a regular basis as part of a joint initiative 
to study ways to improve Federal and State cooperation. I am a 
member of this working group, and I can assure you that 
discussions have been educational, thorough, and constructive.
    In addition, along this line, we have formed a NASAA/NAIC 
enforcement subgroup to improve coordination and focus on the 
persistent problem of insurance agents engaged in the unlawful 
sale of various securities investments.
    Mr. Chairman, State securities regulators are dedicated to 
pursuing those who have violated the trust of our citizens. We 
will fight to ensure that State securities regulators maintain 
the authority to regulate, at the local level, and bring 
enforcement actions with appropriate remedies against those 
firms and individuals who violate securities laws in our 
jurisdictions. State securities regulators wish to work with 
you and your Committee to provide you with any additional 
information or assistance you may need.
    Thank you again for inviting me to speak on behalf of the 
States to discuss our efforts in protecting the investing 
public, and I will be happy to answer questions at the 
appropriate time.
    Chairman Shelby. Thank you, Mr. Borg.
    Mr. Leven.

                   STATEMENT OF CHARLES LEVEN

              VICE PRESIDENT, BOARD GOVERNANCE AND

                CHAIR, BOARD OF DIRECTORS, AARP

    Mr. Leven. Good morning, Chairman Shelby, Ranking Member 
Sarbanes, and Members of the Committee. My name is Charles 
Leven. I am AARP Vice President for Board Governance and Chair 
of the Board of Directors.
    I appreciate this opportunity to testify on a matter of 
keen interest to us, investor protection. My testimony today 
focuses on the role that State securities regulation and 
regulators play in securing essential marketplace conditions on 
fair play and practice.
    The rapid growth in investment activity over the past 
decade has severely taxed the resources of Federal and State 
securities commissions. According to the North American 
Securities Administrators Association, there are at least 
20,000 investment adviser firms in the United States, 
approximately only 8,000 of whom are large firms that register 
with the Securities and Exchange Commission. The remaining 
smaller firms are registered with the States.
    NASAA also estimates that 150,000 to 175,000 individuals 
hold State licenses to act as investment adviser 
representatives. The need for complementary Federal and State 
investor protection efforts has never been more evident.
    According to the 2001 Federal Reserve Survey of Consumer 
Finances, the percentage of households that own stocks, either 
directly or indirectly, increased from 32 percent in 1989 to 52 
percent in 2001. This growth in investment has occurred even 
though in recent years the stock markets have weathered a 
sluggish economy, experienced steep market declines, trade 
deficits, and reports of numerous scandals ranging from illegal 
corporate accounting practices to insider trading. These shocks 
to the securities marketplace have resulted in serious 
consequences for ordinary saver/investors.
    A 2004 survey of investors by AARP confirms a reduced 
confidence in financial service professionals, continuing 
concerns about the fairness of stock market conditions, and the 
desire for stronger regulation of the securities industry. We 
are reminded by recent market history just how vital the State 
securities commissions are in our dual system of market 
regulation and investor protection.
    For AARP, the goal of providing American investors with 
market conditions of fair play and practice is advanced by 
promoting harmonization within our concurrent Federal/State 
system of securities regulation. Surely State securities 
regulatory commissions must and are playing an essential role. 
State securities regulators are responsible for the licensing 
of firms and investment professionals, registration of some 
securities offerings, branch office sales practice audits, 
investor education, and most importantly, the enforcement of 
State securities laws.
    One of the principal virtues of our concurrent system of 
securities regulation is State authority to investigate and 
bring enforcement action with respect to fraud or deceit or 
unlawful conduct in connection with securities transactions. 
State securities administrators are frequently the first point 
of contact when an investor has a securities transaction-
related complaint. State regulators often work very closely 
with criminal prosecutors at the Federal, State, and local 
levels to punish those who violate our securities law.
    The New York State criminal case against research analysts, 
settled in 2003, is a useful illustration of the significant 
role that State securities regulators can play. Precisely 
because the States also had investigatory and enforcement 
powers, one State was able to take the initiative in what 
became a $1.4 billion settlement with 10 leading broker-dealer 
firms with funds set aside for investor education programs. 
Ultimately, NASAA, the State of New York, and Federal 
regulators worked cooperatively on the global research analyst 
settlement.
    Also, in 2003, the regulators in Massachusetts began what 
would become a series of investigations by other State and 
Federal regulators into the Nation's $7.6 trillion mutual fund 
industry. Clearly, these examples serve to validate the 
rationale for maintaining a well-balanced and concurrent 
securities regulation system.
    Further, State regulators have been active in coordinating 
reviews of filings, developing uniform registration statement 
for offerings that are exempt at the Federal level, and in 
crafting policy statements on the number of review issues that 
strengthen uniformity of review in the States.
    For example, in 2002, a new version of the Uniform 
Securities Act was adopted by the National Conference of 
Commissioners on Uniform State Laws. The Uniform Securities Act 
has been the model for nearly 40 States' securities laws.
    AARP has been impressed by State efforts in the area of 
investor education. For example, the Investor Protection Trust, 
whose trustees are chosen from among State regulators, is 
chartered to provide objective, noncommercial investor 
information. The IPT uses funds collected in settlements 
against investment companies that have been charged with 
violating securities laws. Last year, complementing its 
existing investor education section, NASAA initiated a major 
investor education campaign aimed at older investors by 
launching an online senior investor research center.
    In closing, we believe there are demonstrated benefits to 
the dual system of securities regulation and to the role and 
value that State securities regulators play in that system. I 
will be happy to answer any questions when appropriate.
    Chairman Shelby. Thank you, Mr. Leven.
    Ms. Periman.

                  STATEMENT OF JUANITA PERIMAN

                       OF BUTTE, MONTANA

    Ms. Periman. Good morning. My name is Juanita Periman of 
Butte, Montana. I want you to know what an honor and privilege 
it is for me to appear before you this morning.
    I am here to tell you how much I appreciate the help I got 
from my State's securities regulators. I am not alone. I was 
among over 30 people, including 7 widows, 21 retired 
individuals or couples, and 3 in assisted living facilities, 
who fell victim to what turned out to be one of the State of 
Montana's largest securities cases.
    My story began following the death of my husband in 1998, 
when I opened an IRA through a broker named Tom O'Neill at the 
local office of Piper Jaffrey in Butte. I also transferred the 
proceeds of my husband's IRA and other retirement savings to my 
new IRA. I had no previous investment experience, and my only 
investment objectives were income, safety, and growth. I was at 
a vulnerable point in my life, and Tom was a long-time family 
friend and former business associate of my husband.
    To cope with the loss of my husband I traveled a lot with 
the Christian Youth Ministries and also visited family. After 
returning home from one of these extended trips I found my 
mailbox filled with letters from my broker's office. 
Regrettably, I did not pay much attention to these letters.
    When I finally opened them I saw that they were 
confirmation notices of trade in my account. I knew something 
was not right because I had not authorized these trades.
    At first, I questioned my broker, but he told me not to 
worry. He even made me feel stupid and guilty for questioning 
him.
    The more I thought about it, the more I realized I was in 
trouble. At least half of my account has been wiped out and I 
really did not know where to turn for help. My sister suggested 
I contact the Montana Securities Department, and I did that in 
December 2000. I explained my situation. They listened and told 
me to immediately close my account.
    The Securities Department investigated my complaint and 
found that it appeared that my broker was illegally trading in 
my account. As they dug deeper into my case, the Department 
found 38 other people that might also be victims. Montana 
securities regulators suspended the broker in March 2001, 
putting a halt to any further illegal activity, and they also 
took action against his firm.
    Through a negotiated settlement we got our money back and 
the stockbroker was banned from the securities industry for 
life. The State also negotiated for changed business practices 
on the part of the firm so that other people will never have to 
be victimized in that way.
    My case demonstrates the quick response and effectiveness 
of State securities regulators in protecting investors. Five 
weeks after I first contacted my State securities regulators, 
the State had concluded its investigation.
    I really believe that being close to the investing public 
is an advantage for State regulators. The person I first spoke 
to was the same person that conducted the investigation. 
Calling someone who could immediately investigate the case and 
who could come to Butte and talk to me was really important. 
They are the first responders, and I felt a real connection to 
the State staffers who were available to help me throughout the 
entire case.
    It is really scary being a victim of fraud, but the staff 
in Montana helped me to understand it was not my fault and that 
I did the right thing when I called them for help. These are 
local people helping their neighbors. They are local heroes. I 
am glad my State had the authority and the regulatory tools to 
pursue my case to a successful conclusion.
    If I do nothing else this morning, I want to get the 
message across that no one has to be a victim of investment 
fraud, especially seniors.
    Common sense tells you that if something sounds too good to 
be true, it almost always is. But you do not have to rely on 
common sense alone. If you have the slightest suspicion of what 
is going on, contact your State securities regulator. They will 
know when something is not right. They can tell you whether the 
investment product is licensed for sale in your State, and 
whether the salesperson has a history of wrongdoing.
    I am very grateful that my State securities regulators 
responded so quickly and successfully to my call. I only wish 
that I had contacted them sooner.
    Thank you again for the opportunity to tell my story.
    Chairman Shelby. Ms. Periman, I want to thank you for 
coming all the way from Montana here today. You have a great 
story and I think it reinforces the roles of the State 
regulators. So we thank you very much.
    Ms. Periman. Thank you, Mr. Chairman.
    Chairman Shelby. Much of the focus on State securities 
regulation is centered on the headline grabbing investigations 
such as mutual fund investigations and the Global Settlement. 
We will start with Mr. Harvey. Would you describe the day-to-
day investigations and enforcement actions generally that 
comprise the bulk of your enforcement cases, and how do you 
determine when a routine State enforcement action should be 
shared with the Federal regulators?
    Mr. Harvey. I think Ms. Periman's case----
    Chairman Shelby. It is a good illustration, is it not?
    Mr. Harvey. Very much so, and it is quite appropriate for 
this Committee's consideration. This is the kind of complaint 
that State regulators get all the time and we certainly get in 
New Jersey. I have often said--and I continue to believe--that 
the investor about whom I am most concerned and about whom I am 
most fearful, is the senior citizen because broker-dealers will 
frighten senior citizens into believing that they are going to 
run out of money, that there is a race against time between 
their death and their assets. They prey upon their fear to get 
them to invest in all kinds of ridiculous schemes.
    Some of them have been outlined for you by Mr. Borg, these 
promissory note schemes, investments in nonexistent 
partnerships. These are the kinds of complaints we get on an 
ordinary basis. We investigate them and find out that these 
broker-dealers are engaging in transactions that are not 
authorized, contrary to their own printed material, that they 
are selling unregistered, unlicensed securities. In some 
instance the brokers themselves are unlicensed. They are 
essentially nothing short of swindlers.
    What happens to a senior citizen is their entire life 
savings are wiped out for good. They are embarrassed to go and 
tell their children that this has happened to them, and they 
are very fearful that they are going to become destitute, and 
worst of all, be put in a nursing home and left to die.
    So these are the types of cases that we encounter on a 
daily basis, and we investigate them. They are much too great 
in number for any one agency to investigate. Many times they 
spread across multiple States. We have found that the same 
investment scheme that we have investigated in New Jersey, New 
York may be investigating it, Connecticut may be investigating 
it, Florida may be investigating it, because the same conduct 
is occurring.
    With respect to cooperation, I think that there has been 
better cooperation between the Securities and Exchange 
Commission and the States, and we are still looking for ways 
that we can collaborate more efficiently and effectively. I am 
optimistic about it. I think that Federal authorities sometimes 
can be of great value to State regulators, but I do not think 
that by any stretch of the imagination they should supplant 
State regulators.
    Chairman Shelby. Mr. Lambiase, could you briefly give us 
your view on why the Global Settlement was seemingly such a 
success?
    Mr. Lambiase. I think it was a success, because it took a 
limited number of resources and it took the expertise of both 
the States and at the Federal level and the SRO's, and was 
divided up in such a manner as to be able to address all 
issues. Each party to the settlement brought a particular 
expertise. The rulemaking, as you know, was looked at by the 
SRO's and the SEC. The States focused on enforcement and a lot 
of the conduct that was going on at the local level.
    I would like to point out another issue about State 
regulation and our ability to look at issues which really stems 
from customer complaints we receive, the Ms. Perimans that call 
us, written complaints and sales practice activity we uncover 
during our branch examination procedures. This is what will 
ultimately trigger States to pursue further inquiry, and I 
would like to point that up.
    Chairman Shelby. Mr. Borg, would you just touch for a few 
minutes on why it is important not to have Federal preemption 
here? I think it is obvious, but I would like for you----
    Mr. Borg. Mr. Chairman, I could go on all day on that 
issue. But let me point out----
    Chairman Shelby. That is an important issue here.
    Mr. Borg. It certainly is. The scams that we see on a local 
level vary. I could give you examples of catfish farm 
investments in Tuskegee. I can give you foreign currency with 
Swiss bank accounts out of Montgomery, Alabama. I can give you 
examples of local cases that do not involve publicly traded 
companies or registered broker-dealers, which generally is not 
the purview of the SEC. These are local frauds, regional 
frauds, unlicensed, unregistered, that go into the billions of 
dollars. The type of cases we see will be phony gold mines, 
oil, and gas scams.
    During the anthrax scare we were seeing things along the 
Internet that said, ``We have the cure for anthrax.'' These are 
things that happen maybe in a small community. I can think of 
one case which you are familiar with in Phoenix City, where 
here a little operator, in 90 days, got 33,000 participants in 
a program and never took out a single ad, all through the 
Internet. That is the purview of the State securities 
regulators. We are on the spot. We are there quickly.
    Chairman Shelby. That is why we do not need preemption, is 
it not?
    Mr. Borg. That is exactly so.
    Chairman Shelby. Thank you.
    Mr. Leven, you are here on behalf of, I guess, everybody 
but a lot of us that are older Americans.
    Mr. Leven. Well, some of us a bit older than others.
    [Laughter.]
    Chairman Shelby. Absolutely. But we all know that older 
Americans have been, for a long time, targets of fraud, but it 
seems today even maybe more so, especially in the securities 
field. Elaborate, if you would for a minute, on how the State 
regulators coordinate with your group, AARP, to better protect 
and educate the older Americans as far as investments.
    Mr. Leven. We have a very close relationship with them and 
a great deal of respect for them. They are primarily very 
active for us, both as a first line of defense for our people 
50 and older--remember, the people 50 and older is where the 
disposable income is, and so, the sharks move into that 
direction as quickly as they can. And these people are our 
first line of defense, both in terms of helping us in 
prosecuting and getting recoveries and probably even more 
important, educating the investor, which is a very important 
part of what they do, and we certainly appreciate that.
    Chairman Shelby. Thank you.
    Senator Sarbanes.
    Senator Sarbanes. Thank you very much, Mr. Chairman.
    Ms. Periman, I want to thank you for your testimony. I know 
it is sometimes difficult to tell that story, but I hope you 
appreciate how important it is for us to have on the record 
specific cases that actually occurred. It is enormously helpful 
in setting out what the problem is.
    I am interested in increasing the resources, if at all 
possible, and then maximizing them to try to deal with these 
various securities frauds. I want to ask some questions in that 
regard to the administrators.
    I am interested in the extent of the Federal and State 
cooperation amongst the regulators. For example, when a State 
securities regulator pursues an enforcement case, does the 
regulator inform the SEC? When the SEC is pursuing an 
enforcement case in a State, does the State regulator receive 
information about this from the SEC? That is just one example. 
You may have others in mind. What is your take on the state of 
interplay between the State regulators and the Federal 
regulators?
    Mr. Harvey. Senator, here is one of the enduring tensions 
with regulators, and it does not matter whether they have 
enforcement authority or not. Everybody wants to look good at a 
certain point.
    Senator Sarbanes. Yes, politicians suffer from the same 
thing.
    [Laughter.]
    Mr. Harvey. So you have occasions where we are not 
communicating as well as we should be, so investigations may be 
commenced in a State and States are not advised of them. There 
are times that States will undertake their own investigations 
and not advise the SEC. We are working to improve that 
communication.
    I think we need better coordination because it avoids 
duplication of effort, and there are some cases that are better 
handled through a multi-State effort, the brokerage cases that 
we have all discussed earlier today.
    Where I think that we need additional resources is not 
necessarily in enforcement--that helps--but in investor 
education. Part of what is happening to our senior citizens and 
to ordinary Americans is that they are getting pieces of data 
about the stock market and the growth of the equity markets and 
why their investments are better put there than in certificates 
of deposit. All that is true. But unless you are a significant 
investor with a mutual fund company, you do not go to 
investment seminars. And we have to find a way to take that 
message to senior citizen centers, to planned retirement 
communities where we can go into these communities and explain 
to seniors what the scams are and how to go about the business 
of determining whether someone is legitimate or not.
    I think if we can find Federal resources to supplement what 
the States are doing as well as perhaps on the Federal level, 
that would be one of the most important things that I think 
this Committee and this Congress could do for ordinary 
Americans.
    Senator Sarbanes. Does anyone want to add to that?
    Mr. Lambiase. I would like to make an observation. The 
level of cooperation between the States and Federal is somewhat 
looked at within a regional context. Different regions within 
the country--the Northeast region has a different relationship 
with the SEC and the SRO's than you might see in another area. 
But I do think that the model that should be followed on 
cooperation is that which we have amongst our own States. There 
is a complete trust and cooperation among State regulators. We 
will share information. We will share resources together. We 
will work jointly. We have a complete trust and respect for 
each other. And it is that trust and respect for each other 
that allows us to work effectively as well as we do. I would 
like to see that model a little bit more extended to the 
Federal and State side.
    Mr. Borg. Senator Sarbanes, if I may, certainly Mr. 
Lambiase is correct. There are some regional differences, and I 
would like to speak strictly to the Southeastern region. We 
have a very good effort of cooperative participation with the 
SEC. For example, just last month, not only did we bring a case 
together, but we also do joint press releases together. This 
was on the Heyman International case. The SEC, when we met with 
them, realized we were looking at the same case from both ends. 
They took care of the asset freeze and the filing--we went to 
court with them--while we took care of the local agents with a 
cease and desist order. So we were able to cooperate and 
coordinate.
    This is the type of thing that will come out, I think, of 
the joint initiative between the SEC and NASAA over time. But 
there is an educational curve. We have to learn a little bit 
more about their procedures and their methodology. They have to 
learn a little bit more about our abilities and what we can do 
on a quick regional or State-level basis.
    This is not unusual. Most of the past work has been on an 
informal basis, and I can think of even public company cases in 
1995 that we brought with the SEC against the Comptronics 
Company, where they took a parallel track. They did the 
Federal; we did the State. We combined them at the proper 
moment. Everyone pled guilty.
    Chairman Shelby. How big a fraud was that, Mr. Borg?
    Mr. Borg. The stock losses to investors was $378 million, 
if my memory serves correct. As you may recall, it was the 
largest employer in the Guntersville area of north Alabama at 
the time. But that would be an example.
    I think as we continue doing regional meetings with the 
SEC, we are doing a lot more joint conferences and exchanging 
information and ideas, and I think the initiative will help 
bring about a more efficient method as opposed to starting it, 
because we have done cooperative efforts with the SEC for a 
long time.
    Senator Sarbanes. When we passed the Fair Credit Reporting 
Act at the end of last year, we included in it a title on 
financial literacy and it was strongly supported by Chairman 
Shelby, and strongly supported, actually, by all Members of 
this Committee in a very strong bipartisan effort. That, 
amongst other things, established a Federal coordinating 
committee to coordinate the efforts directed toward financial 
literacy on the part of the Federal departments and agencies. 
Many of them have various programs of one type or another 
directed toward financial literacy, but they have never tried 
to bring them all together and develop a concerted strategy.
    Part of the charge given to that coordinating commission, 
which is under the chairmanship of the Secretary of the 
Treasury, is to coordinate and work with State officials on 
financial literacy, which, of course, you all are very much 
engaged in.
    Have they reached out to you yet in order to try to 
establish such working relationships? We very much want them to 
do that, and I am just interested whether that has occurred or 
is in the process of occurring. Because if it is not, why, we 
need to prod and push the coordinating committee.
    Mr. Lambiase. I have some information on that. Karen Tyler, 
North Dakota Securities Commissioner and Chairman of the 
Investor Education Section for NASAA, made a public 
presentation at the most recent meeting of the Financial 
Literacy and Education Commission on behalf of NASAA. So we 
appreciate the follow-up on that, sir.
    Senator Sarbanes. Good. Well, I think you should keep an 
eye on that because it really could be quite productive if it 
is really done the way it is supposed to be done. And I think 
if you all keep pushing it and getting in there into that 
venue, it would be very helpful to your efforts and to an 
overall coordinated effort.
    Thank you, Mr. Chairman. I see my time has expired.
    Chairman Shelby. Senator Dodd.

            STATEMENT OF SENATOR CHRISTOPHER J. DODD

    Senator Dodd. Thank you, Mr. Chairman, and our witnesses.
    I will begin just by thanking you and Senator Sarbanes, Mr. 
Chairman, for doing this. This is--I do not know--maybe the 
fourth or fifth subject matter on which this Committee has held 
very worthwhile oversight hearings. This was not occurring with 
great frequency up here in the last number of years by 
Committees doing good oversight. There have been some stories 
written recently about the absence of good oversight, and that 
complaint I think has a great deal of legitimacy with regard to 
an awful lot of Committees. It is not true about this 
Committee, and it is a great tribute to the Chairman and the 
Ranking Member that we have just had a series of hearings on 
going back and reviewing legislation which this Committee has 
adopted or passed and determining whether or not it is working 
as well as we would like. I want to begin my brief comments by 
thanking both of you. It has been tremendously worthwhile, and 
I thank our witnesses.
    Ralph, it is wonderful to see you.
    Mr. Lambiase. Thank you, sir.
    Senator Dodd. I was not here to hear you say nice things 
about me, so I appreciate it on the record.
    [Laughter.]
    You have done a tremendous job. I do not know if the 
Committee Members are aware of this, but a long and 
distinguished record of service in Connecticut, and now as the 
national President of NASAA. So we are very proud of you. You 
have done a great job in our State, and it is an honor to have 
you before the Committee.
    Mr. Lambiase. Thank you, sir. It is an honor to be here.
    Senator Dodd. Just a couple of questions. Some of this you 
have already addressed, but picking up on the point that 
Senator Sarbanes was addressing, and that is the educational 
efforts. Under the Global Settlement, part of that $1.4 billion 
was to go back to State regulators for this education effort. I 
do not know how much of that $1.4 billion actually comes back 
to you. I do not know if you have an exact number. But I wonder 
if you could pick up on it.
    And then this subject was raised by the Chairman as well, 
and that is regarding the elderly, Mr. Leven, the perfect storm 
has occurred. You list your top 10 scams and schemes and 
scandals list, NASAA does each year. And this year it includes 
a new listing. It is called senior investment fraud, and it 
states--and I think this is very well put. It says, ``Volatile 
stock markets, low interest rates, rising health care costs, 
and increasing life expectancy combine to create a perfect 
storm for investment fraud against senior investors.'' And I 
think that says it well.
    I wonder if you might just pick up on the two questions; 
that is, the amount of money you are getting back for investor 
education, and then speak to me a bit about what is going on. 
What schemes are you seeing? You have addressed this a little 
bit already, Mr. Borg, and you did, Ralph, but give us a range 
of the kind of scams we are looking at that seniors should 
really be aware of. This is a hearing which is being covered, I 
think, by C-SPAN, and if it is, people watch these programs and 
we say to them all the time check with people, you know, when 
you are alone and you do not get many phone calls, you do not 
get a lot of mail, you are just ripe for being abused by people 
who take advantage of you.
    So share with us a bit more information about these scams 
that are out there.
    Mr. Lambiase. Yes, I would like to address the first 
question about the amount of funds which States will ultimately 
receive for purposes of investor education. I think that 
approximates $27 million in the aggregate of all the States 
which will be dedicated toward furthering investor education.
    The second question really is a question of time and what 
is going on in the marketplace. Nowadays, with interest rates 
being historically low in terms of the return that an investor 
would get, the scams that you see really are focused toward the 
elderly with the returns. You get a very minimal, a meager 
return from putting money in a savings account or in some kind 
of certificate of deposit, and, hence, you get into the prime 
bank notes, which my colleague Joe mentioned, offering greater 
returns.
    What people prey upon now is the elderly's inability to 
collect at this time an income stream which is sufficient to 
carry them through, so they look for greater returns. The best 
frauds are really the ones which say, well, we will give you or 
we will guarantee a 10-percent-a-month return or some kind of 
21-percent annual return, something which is outlandish to us 
but certainly would be something that a person on a limited or 
fixed income would need right now to survive.
    Senator Dodd. Those are like magic words, if you are out 
there, people start guaranteeing you a return on investment. 
The bells should start ringing.
    Mr. Lambiase. Absolutely.
    Mr. Borg. Absolutely, Senator. I might also add, when it 
comes to seniors, in the 1990's or before the market crash, it 
was a matter of preying on, ``Don't you want to make things 
better for your grandkids? Let's go ahead and find these great 
investments with these tremendous returns.''
    Now it is a fear factor. ``You are going to run out of 
money. You do not have enough money coming in from your bank 
CD's. You have to move out of them. You cannot trust the 
market. You have to go with me. I am the guy that is going to 
give you that 30-percent return, that 8-percent guaranteed 
because it is collateralized, it is insured by some insurance 
company. And look at this. We are going to put the money in a 
prime bank in Europe''--which doesn't exist, as I mentioned 
earlier. So now they are preying on the fears of seniors 
running out of money.
    The best frauds are ripped right out of the headlines. Gas 
prices are going up. ``Look, I can get you into this oil and 
gas venture where you are going to make a lot of money. How can 
you lose? Look at gas prices.''
    Technology. ``Well, you know, gee, we are at war. We have 
these new technology devices. The Government is going to buy 
them all. Here is where you should invest your money. It is a 
guaranteed return.''
    That is the type of tactic that is being used.
    Added to that, when it comes to seniors--and I am sure Mr. 
Leven will back me up on this--the slick operators talk to 
their customers, talk to their victims. They will make them 
comfortable. They will get to know them. They won't pressure 
them on the first call. They will make them feel like they are 
part of the family. And those seniors--my parents are very 
cordial. They would not think of hanging up on a person. And 
they will use that courtesy to sucker them into these 
investments.
    That is what we are fighting, and we have to get seniors to 
understand that if they are taken, it is not their fault. They 
have been conned.
    Senator Dodd. Does anyone else want to add anything? Mr. 
Harvey or Mr. Leven, do you want to add anything?
    Mr. Lambiase. I just would like to point out from the 
seniors' point of view, you know, we are in a very interesting 
position. We are on fixed incomes. We have low returns on 
pretty much any investment you would care to name. Taxes are 
going up consistently and constantly, at local levels, 
certainly, education, county taxes, whatever, you name it. And 
we are getting a constant drain on whether we can keep our 
homes.
    So when someone comes along and offers anything that is a 
little bit tantalizing or creates an opportunity, you can well 
understand the state of mind that would lead you to 
participate. And so we need help, and these people are, again, 
as I said before, the first line of giving us help. But it is 
education more than anything else. We need more and more 
financial education.
    Senator Dodd. Absolutely.
    Mr. Harvey, do you want to comment?
    Mr. Harvey. Yes. I would urge seniors to ask essentially 
three questions.
    One is: Is this particular broker-dealer or offeror 
licensed with a State securities entity? And ask for permission 
to get the license number and call the State Bureau of 
Securities. They should give you the number if they are 
legitimate.
    Second, are the securities registered with a State Bureau 
of Securities?
    Then, third, I would ask: Do I have to decide this today? 
Any dealer or purported dealer who says you have to get into 
this today or this week or you are going to lose it forever, 
you know it is phony. There is no such investment that you must 
invest in today or it will forever be lost in time. You have to 
assume that he gave that pitch 30 days ago and that he is going 
to give it 30 days in the future.
    So these are the kinds of questions. Slow it down. 
Remember, seniors have to keep in mind, this is your money and 
you do not have to give it to him if you do not wish to. Take 
your time, slow it down, and ask more questions. Because if you 
lose it, it is gone forever. Many of these individuals are 
judgment-proof. Even with the multimillionaire and, some 
argued, billionaire Robert Brennan, he had a lot of money. It 
is true that we signed a $45 million judgment and obtained a 
second $55 million judgment in bankruptcy. We have been chasing 
the money for the past several years because it has been hidden 
in Europe and elsewhere.
    Senator Dodd. Mr. Chairman, could I ask one more question?
    Chairman Shelby. You go right ahead.
    Senator Dodd. I appreciate this. Ms. Periman, thank you. 
Let me echo Senator Sarbanes' comments and the Chairman's 
comments.
    Ms. Periman. Thank you very much.
    Senator Dodd. Very special to have you here. It is a long 
way to come, and it is always painful to have to tell a story 
that sounds embarrassing because somehow--even in your voice, 
you almost said you did something--you did nothing wrong at 
all. You did everything right. There are an awful lot of people 
who would have done nothing and just taken this broker's 
admonitions that somehow you were at fault in all of this. But 
you did exactly the right thing, and the people out there 
watching, listening, or reading about this, we need more people 
like you because without you, it is hard for these people to do 
the job. You provide the evidence and the facts that make it 
possible for them to go after these people.
    Ms. Periman. Thank you for the opportunity. Unfortunately, 
in my instance, this was not a total stranger. This is someone 
that I had known for more than 20 years.
    Senator Dodd. I want to ask about the mutual fund issue, if 
I could just briefly, Mr. Chairman. In the past year, due to 
the hard work of State securities administrators and 
regulators, numerous mutual fund abuses have been brought to 
light. And, obviously, your colleague in New York, Attorney 
General Spitzer, has been very involved. My Attorney General, 
Dick Blumenthal, in Connecticut has been very involved, as 
Ralph knows.
    I wonder if you can describe the current feeling among 
investors toward mutual funds. And has the work of yourselves 
and the SEC helped to restore any confidence? What is your read 
out there on how investors are feeling about mutual funds 
today?
    Mr. Borg. My read, Senator, is that the mutual fund 
industry, although it has taken some hits because of these 
abuses that are out there, most Americans, I think, are sitting 
still. They are going to wait and see what happens.
    The difference between the mutual fund issues and, say, the 
research analysts or the theft cases is that there is not an 
immediate significant drop in the value of the underlying 
securities, because the losses to the investor on a per account 
basis are slight in reference to someone who steals your 
retirement savings account. So, I think there is a perception 
that things are being done to correct the abuses. Also, mutual 
funds have been the bulwark of middle-class America for a long 
time. They understand that there was risk in technology stocks 
and some things here, and maybe the analysts should have told 
the truth. But be that as it may, mutual funds still are the 
mainstream investment vehicle of choice. And I think there is 
some skittishness. There is some concern. But I do not believe 
there is panic. And that is an important factor. And the 
quicker the mutual fund issues are resolved and what Americans 
want is they want to know that it has been disclosed and 
cleaned up and things are in place. I do not think there has 
been a big panic in the mutual fund industry.
    Senator Dodd. Ralph.
    Mr. Lambiase. Yes, I would like to make a statement on 
that. I really think the public sees the role of this Committee 
and its oversight, and I think that has had a tremendous 
support structure for the public. Once they know that the 
Senate is looking at this--and, indeed, there were at least 
four different bills that were sponsored, even you yourself, 
sir, with the transparency on the mutual funds, the disclosure, 
the fees. I think once you get that visibility, the comfort 
level of the public is what was--I do not think it was simply 
us, but clearly, it was not the SEC alone. I think a tremendous 
amount is the guidance that this Committee does through its 
proposals and the guidance that it gives out to the rest of us 
on the industry side and the public.
    Senator Dodd. Anyone else? Well, any points here and 
comments on the legislation, you may want to submit, Mr. 
Chairman, some comments on these bills. You would have a pretty 
good idea. Are we going overboard? Obviously, as you point out, 
Mr. Borg, this has been a great wealth creator. Mutual funds 
have been a tremendous success, and I think we want to be 
careful I how we react to it. The Chairman, I think, has acted 
very responsibly, along with Senator Sarbanes. We have not 
pushed this overly aggressively, but at some point I would be 
very interested in whether or not you think we need to act or 
whether or not you think the SEC is acting sufficiently enough 
on its own through the regulatory process that our actions may 
not be necessary. But I would be very interested in how you 
would react to the current response to it and whether or not we 
should step up to the plate.
    Mr. Lambiase. To be honest with you, I think the 
introduction of the bills, the topic areas that were brought up 
and the subject matter, to see how the SEC or the Federal 
regulators will react is one thing, but I think clearly the 
message was sent to regulators that deal with this and Congress 
will not have to deal with this. But, clearly, you gave them 
adequate direction by identifying within the bills what the 
problems are, and I do think that waiting to see what rules 
come out that are necessary, but I think also in addition to 
rules, you also need aggressive enforcement of the current 
laws. And I think that is very important.
    I think the Committee has actually moved in a very 
deliberate and thoughtful process, and I truly compliment the 
Committee for this.
    Senator Dodd. Thank you.
    Thank you, Mr. Chairman.
    Chairman Shelby. Thank you. We appreciate your remarks. I 
think the message was to the SEC we are going to give you an 
opportunity to do your job, and I believe they are on the right 
track. But if you do not do your job, we are going to be here. 
We are going to be watching. Our oversight is important.
    Mr. Harvey and Mr. Borg, would you briefly address any 
investment schemes or products where you would expect to see 
increased enforcement activity? Are State regulators conducting 
any investigations of 529 plans or hedge funds?
    Mr. Harvey. I cannot tell you that we have any 
investigations going on of 529 funds. We are beginning to study 
them to determine whether or not there is inappropriate 
activity occurring. With hedge funds, we have been examining 
those funds for some time, and we intend to continue to do so.
    A lot of what is new is still old. A lot of the schemes 
that we see are packaged differently, but they are the same old 
schemes. And Mr. Borg has outlined them quite thoroughly and in 
detail. But with respect to the two areas that you have asked 
about, one we are going to begin to examine very carefully and 
the other we are examining on a regular basis.
    Chairman Shelby. What about payments to insurance brokers, 
illegal trading in variable annuities products, stuff like 
that? Are you all involved in some of that?
    Mr. Harvey. We are beginning to look at that activity. It 
is curious. We share responsibility for that as well with the 
Department of Banking and Insurance in the State of New Jersey, 
so we are going to take a closer look at it going forward.
    Chairman Shelby. Mr. Borg.
    Mr. Borg. Senator, with regard to the 529 plans, as you 
know, they are designed by States to provide a tax-advantaged 
means of saving for college. Because they are of that type, 
they fall into a type of municipal fund securities that is 
generally regulated by the MSRB. They are a unique class, this 
529, which is named after the Internal Revenue Code provision, 
of course. They are not subject to most Federal securities laws 
that, say, would be applicable to mutual funds. And that is 
because they are issued by State or local authorities.
    There is usually a component in the Uniform Securities Act, 
which means it applies to most States, where local or State-
sponsored funds, issued funds, are also exempt from 
registration and licensing. So there is a question about where 
the authority lies, if you will.
    One thing I am fairly convinced of is they are not exempt 
from antifraud authority, such as the 10(b)-5 used against, you 
know, artifice to defraud. But I think what States are starting 
to look at for the issues, if you will, in the 529's are that 
the disclosures are not sufficient or uniform; that the costs 
may vary from State to State on the various 529 plans. And I 
know there is concern, although I have not seen it, that high 
fees could actually overshadow the tax benefits.
    We have seen a push to sell more of these things, and I 
think they are doing that. There may be some evidence that 
there are higher fees being paid. So, I think the tax treatment 
may differ. An Alabama resident buys a 529 in Rhode Island 
there may be some differentials.
    I think there is a lot of confusion in this area right now. 
There is possibly a limit to what State securities regulators 
can do. We are studying the issue. We do have a group that is 
looking at it, and I understand there are other hearings going 
on, maybe concurrently, regarding 529 plans.
    Chairman Shelby. Thank you.
    Could you elaborate just briefly on the centralized 
registration databases for broker-dealers?
    Mr. Lambiase. Yes, sir.
    Chairman Shelby. How is it working?
    Mr. Lambiase. The Central Registration Depository system 
was created in 1981 with the NASD and the States, and really 
what it did was it took a system of manually filing an 
application in every State and established a central filing 
system, and ultimately you eliminated the State filings being 
made in every jurisdiction where someone wanted to conduct 
business.
    That system of CRD was ultimately emulated recently with 
the IARD, as Senator Sarbanes asked about. That is the 
Investment Adviser Registration Depository. It is modeled after 
the CRD, and that is the system where you have 11,000--that is 
done in conjunction with the SEC. They are paperless filings to 
people. You mark the license where you want to maintain it, in 
Connecticut and, say, multiple jurisdictions. You send one 
check in. It is reviewed on a screen. It provides to the public 
a tremendous database of information regarding disciplinary 
events and histories of individuals. It maintains that record.
    There are currently 660,000 people that are on the CRD 
database and 172,000, I believe, on the IARD database. And that 
is only the ones currently licensed, not including information 
on individuals that previously were licensed. And that is what 
has made this industry very effective in terms of licensing, 
uniformity, paperless environment.
    Chairman Shelby. Ms. Periman what would be your single, 
strongest message to deliver to other senior investors that are 
thinking about investing?
    Ms. Periman. If you have any questions at all, go to your 
State securities regulators.
    Chairman Shelby. Promptly.
    Ms. Periman. Promptly.
    Chairman Shelby. As you did. Thank you.
    Senator Sarbanes.
    Senator Sarbanes. Thank you very much, Mr. Chairman. First 
of all, let me say I think this has been an enormously helpful 
panel, and it only reinforces my view that there is a very 
critical and essential role to be played by the State 
securities regulators in terms of protecting the investors. 
That role need not be in conflict or inconsistent with the SEC 
role of setting national standards that apply in the securities 
industry or carrying out its responsibilities as well. In fact, 
the two working together can provide a strong protective 
environment for the investor.
    Let me ask you this question. I am interested in this. How 
much cooperation do you receive from the industry, from the 
broker-dealers and so forth? After all, their reputation, the 
reputation of the good people, and there are many good people 
in the industry, is tarnished and affected by the activity of 
these sharp operators. When you talk to the good people in the 
industry, they condemn these activities, but I am not clear how 
much they do or how forthcoming they are in trying to check 
this activity from happening, somehow excising these people out 
of their industry. Of course, they have their own self-
regulatory organizations, but what is your perception of the 
amount of support and cooperation you receive generally from 
those who are playing by the rules with respect to those that 
are playing outside the rules and causing the kinds of cases 
that we heard from Ms. Periman this morning?
    Mr. Harvey. Let me categorize cooperation in two forms. One 
is the firm that is not the subject of an investigation versus 
the firm that is the subject of an investigation. In the latter 
case we get a lot of cooperation for obvious reasons.
    With respect to firms that are not engaged by a securities 
enforcer, I think they would just as soon be left alone. 
Generally, you will find former employees who may come forward 
and give you information that leads to an investigation, but by 
and large, while we have conversations with a number of broker-
dealers in informational forums, it sometimes may lead to an 
investigation, sometimes not.
    In the latter case again, where you have a firm engaged in 
an investigation, we generally find that they have been very 
cooperative. And we in New Jersey almost insist upon a 
continuing cooperation provision in any settlement that we 
reach with the firm, because we have discovered that while we 
may have discovered one type of conduct with the firm, there 
may be other types of conduct that are going on, or there may 
be other parties about whom the firm has knowledge that they 
can share with you if you ask them. So when we resolve our 
differences with a firm, we almost always insist upon 
continuing cooperation.
    But in terms of a firm out of the blue volunteering 
cooperation to tell you about the ills of the industry, that is 
not a common occurrence.
    Senator Sarbanes. We have these self-regulatory 
organizations. What is your perception of how effective they 
are? What gaps do you see in terms of what they do, and how 
much help do you receive from the self-regulatory 
organizations?
    Mr. Lambiase. The self-regulatory organizations are not 
governmental bodies, so when we look at it, we look at it as 
individuals. It is a professional standard that they try to 
set, but they are also guided very much by what the standard 
practice is within the industry. When we look at cooperation, 
to go back to the Attorney General's comments on cooperation, 
we look at cooperation from the grass roots side with the local 
investor that has a problem. You can get more cooperation. When 
you start moving up into the cultural environment of the firm, 
what we call the compliance culture of a firm, that is really 
looked at more by the SRO and the overall SEC.
    And generally, you do not get cooperation because what you 
get is a statement that we are acting no differently than 
everyone else would in the industry and that is the standard 
that we all go by. So really we are not going to change our 
procedures, our way of doing business unless you get this broad 
range of reform that we see at your level. So, I think the 
SRO's serve an important role, but I do keep in mind that they 
are not governmental bodies, and I think that their focus is 
the member and the operational standards of their members, the 
financial capability. Ours is solely investor protection.
    Senator Sarbanes. Mr. Chairman, could I ask one final 
question?
    Chairman Shelby. Go ahead.
    Senator Sarbanes. I am curious, and it may be a little 
awkward, but I want to hear from the security administrators 
about this. If you had a ranking 1 to 10 of the effectiveness 
of the State securities administrator State-by-State, what 
would the profile of the State securities administrators look 
like? I do not want you to identify the States, but assuming 
that 9 or 10 is the best, and I would concede that to the 
people at the table just for the sake of this question. How 
effective are the State securities administrators across the 
country?
    Mr. Lambiase. At the grass roots level, sir, they are the 
best there is. We are not setting national policy. That is 
being handled by the SEC or the SRO's under the SEC oversight. 
I do not think that there is a finer group of people dedicated 
to protecting the citizens at home than State securities 
regulators, as you have heard from Mrs. Periman. But you can go 
across every State. They are all committed to protecting their 
constituents.
    Senator Sarbanes. How professional do you think the offices 
are? How well-trained and educated and how well-resourced are 
the State securities administrators State-by-State?
    Mr. Borg. Certainly with regard to resources that is an 
individual State decision.
    Senator Sarbanes. Mr. Leven, I think in your testimony you 
said not enough resources were being committed at the State 
level, as I understand it.
    Mr. Leven. I think that was related as much to the growing 
number of investors in the pool and the growing number of 
obvious things that are happening, so no matter how much these 
fellows strive, there is a limit on how much they can do with 
the monies they have today and the staffs they have today. I do 
not think we are recognizing the future here to that degree.
    Senator Sarbanes. What about the professionalism and the 
training, and how equipped are the State securities 
administrators?
    Mr. Borg. Through the NASAA organization, not only do we 
run conferences, but we also run regular training programs for 
each section, broker/dealer, enforcement, etc. There are 
coordinating conferences that NASAA itself funds for the States 
so that the States do not have to pick up the tab. At any given 
time, you have over 300 volunteers working from the State 
securities regulators with the NASAA committees and project 
groups, whether it is international, multi-State, investor 
education, broker/dealer, or CRD. Therefore, through the NASAA 
organization, we have been able to arrange training that does 
not tax the resources of the State securities regulators.
    Now, that being said, there is always room for improvement. 
We are always looking for opportunities. We are, as I mentioned 
earlier, now working with the NAIC on some joint training 
programs. We are trying to understand what they look at and how 
they examine. They are going to look at what we look at and 
examine it to help further coordinate. There is always room for 
improvement and we can always use more resources. Do I have 
enough resources? No, I do not.
    Senator Sarbanes. Is there pretty good continuity of 
personnel so you have really seasoned experienced people in 
these offices or is it constant turnover and a difficulty of 
holding on to good experienced people?
    Mr. Borg. On the staff level, I suffer more from 
retirements than I do from turnover. That being said, you have 
to remember that a number of State securities regulators are 
subject to appointment by governors or other elected officials, 
and they may change as the administration moves on. That is not 
the case in my State and a number of other States. I would say 
after the top level, the staff members generally do not change. 
You will have the usual turnover for other jobs, but I think 
you will find less of a turnover, and this is my opinion, less 
of a turnover in State securities regulators than you will find 
in most other areas.
    Mr. Lambiase. I would like to echo those comments, sir, and 
I would also like to point up that NASAA sponsors over 12 
training programs a year, everything from conducting 
examinations at broker-dealers, it does training on investment 
advisers, corporate finance issues, enforcement, how to 
prosecute cases. This year, we did the first joint training 
with the NAIC, National Association of Insurance Commissioners 
and State securities regulators, looking at common areas. And 
as Joe pointed out, there are over 250 volunteers right now 
that we have simply assigned to committees. We have a greater 
number that will volunteer with us. I think it is what is 
devoted at the local level that matters. NASAA will do 
everything it can to help support the States' roles in its 
protection.
    Senator Sarbanes. Thank you very much, and continue on in 
your good work.
    Chairman Shelby. Senator Dodd.
    Senator Dodd. Just one. I cannot resist, Ralph, since you 
are here. Anything unique? What are you looking at in 
Connecticut right now, for instance?
    Mr. Lambiase. Our particular issue in Connecticut right now 
really would focus a lot on what we have seen with mutual funds 
and variable annuities. Variable annuities are regulated by 
insurance regulators and not securities in Connecticut, but 
yet, you look at the annuity being wrapped, wrapping a mutual 
fund in it, and securities division does not really have 
jurisdiction, but you look at what is happening. And it is very 
gratifying in some respects to look at some of the 
institutions, the mutual funds that we are seeing, that 
actually stopped market timing, that we call had their own 
market timing police. I mean what is grabbing the headlines 
today are the examples where there were breakdowns, but yet 
there are many firms that actually prohibited, caught, and 
stopped market timing, and I am pleased to say that we have 
seen that in many instances within our own Connecticut-based 
firms.
    Senator Dodd. Good. Thank you again, Mr. Chairman.
    Chairman Shelby. No other questions.
    I want to thank first, Ms. Periman. Thank you as a citizen 
for your story, and I hope things work out for you. I really 
do.
    Ms. Periman. Thank you very much.
    Chairman Shelby. I want to thank the others for your 
contribution too here today. You do play an important role. And 
Senator Sarbanes and a lot of us on the Committee, we 
understand it and we are concerned when people try to talk 
about preemption. Thank you so much.
    The hearing is adjourned.
    [Whereupon, at 11:50 a.m., the hearing was adjourned.]
    [Prepared statements and responses to written quesdtions 
supplied for the record follow:]

                 PREPARED STATEMENT OF PETER C. HARVEY
                 Attorney General, State of New Jersey
                              June 2, 2004

    Chairman Shelby, Ranking Member Sarbanes and Members of the 
Committee. I am Peter Harvey, Attorney General for the State of New 
Jersey. Thank you for inviting me to testify today on the issue of 
State regulation and enforcement of securities laws.
    The States play a critical role in regulating securities. By 
highlighting what we are doing in New Jersey, I hope to illustrate 
clearly why the States are a crucial component of investor protection 
in this Nation. I want to acknowledge and thank Senator Jon Corzine, 
who was a wise and experienced leader in the investment industry and 
now devotes his wisdom and leadership in service of the Nation and New 
Jersey. I want to thank him particularly for being a strong advocate 
for investor education and protection.
State Regulatory Oversight
    The securities markets have attracted investors large and small. 
Many middle-class Americans seek to build their assets for their 
children's college education and retirement by investing in stocks and 
bonds. These days, most of the money is not in banks. It is invested in 
securities, predominantly through pension plans, private retirement 
plans (401(k), Keogh, IRA) and major mutual funds, but also through 
private broker-dealers. Thirty years ago, only a small fraction of U.S. 
citizens ventured into the securities markets. Now, we have nearly 100 
million investors. That is a lot of people and a lot of money.
    Unfortunately, there are plenty of modern-day Willie Suttons--armed 
with a sales pitch instead of a gun--who know where the money is and 
have learned that many investors are easy marks for a scam. Those 
investors are spread over 50 States--too much territory to cover 
without State securities regulators.
    In New Jersey, the Bureau of Securities acts on behalf of the 
Attorney General. New Jersey is one of only five States to place such 
an agency directly under the control of the Attorney General. As 
Attorney General, I have both criminal and civil authority to prosecute 
securities fraud.
    The Bureau has a staff of about 60 people to enforce the New Jersey 
Uniform Securities Law. The Bureau is funded through fees paid by the 
regulated community as well as fines and other sums collected in 
enforcement actions. The Bureau regulates the sale or offer of any 
security sold into or from New Jersey, as well as firms and persons 
engaged in the securities business in our State. The primary mechanisms 
for regulation are (1) registration of securities, firms, and agents, 
and (2) enforcement actions against those who fail to comply with 
registration or engage in fraud.
    Since becoming Attorney General last year, I have dedicated 
increased staff and resources to the Bureau of Securities in order to 
handle the workload. I will highlight a few facts and cases that 
illustrate the scope of the securities fraud problem we face merely in 
the State of New Jersey.
    New Jersey has a large amount of investment activity. It ranks 
fourth in the United States in total firms and agents registered, 
behind only California, New York, and Florida. The Bureau of Securities 
registers approximately 2,700 broker-dealer firms, 155,000 agents, more 
than 2,000 investment advisers, and 12,200 investment adviser 
representatives. In addition to the large industry presence, New Jersey 
has the second-highest per capita income in the country, with many 
people seeking to invest their money to protect and increase it. New 
Jersey also has an aging population, and many of the elderly are 
particularly vulnerable to those engaged in securities fraud.
    Registration is important to States as it permits State regulators 
to weed out bad actors and fraudulent or suspect securities offerings. 
Our Bureau of Securities has the power to deny, suspend, or revoke the 
registration--and consequently the ability to do business in or from 
New Jersey--of any broker-dealer, agent or investment adviser and to 
issue a stop order against any securities offering sold in or from the 
State. In addition, the Bureau Chief has broad investigative powers and 
the power to subpoena records and compel testimony or other statements 
under oath. The Bureau conducts examinations of books and records of 
broker-dealer and investment adviser firms to determine if they are in 
compliance with New Jersey's Uniform Securities Law.
    Another critical component of the Bureau's work is investor 
education. Bureau representatives regularly conduct seminars for senior 
citizens and community groups on avoiding securities fraud. In this 
area, an ounce of prevention truly is worth a pound of cure. There are 
many people entering the market who do not know what to invest in, how 
to choose a broker, or how to recognize a swindle. We teach basic 
precautions, such as checking whether brokers and investments are 
registered, and realizing that if a deal sounds too good to be true, it 
is not true in most instances. State attorneys general and securities 
regulators would welcome Federal assistance in the investor education 
area, whether in the form of national ad campaigns or grants for State 
programs.
    Finally, the Bureau has a full-time staff devoted to fielding 
complaints from investors. The Bureau receives thousands of complaints 
and inquiries each year. Customer complaints are frequently resolved 
with the Bureau acting as a middleman between the investor and the 
broker-dealer firms. Those kind of complaints often involve problems 
with accounts or account statements or with a nonresponsive broker. 
Other complaints are more serious and lead directly to full-scale 
investigations.
New Jersey's Enforcement Efforts
    New Jersey has about 200 enforcement cases in the investigative 
stage at any given time and more than 40 in active litigation. New 
Jersey is no stranger to major securities fraud cases. A good example 
is Robert Brennan, the penny stock king who defrauded investors of 
millions. The high-profile bankruptcy fraud trial which led to 
Brennan's imprisonment in 2001 was a result of a cooperative effort 
involving our Bureau of Securities, the SEC, the FBI, and the U.S. 
Attorney's Office. It was a direct outgrowth of two separate civil 
matters brought by the Bureau of Securities and the SEC. We secured a 
$55 million claim in bankruptcy court against Brennan and a $45 million 
judgment, which we are working to collect. I want to focus, however, on 
our more recent efforts.
    New Jersey played a major role in the landmark settlement announced 
last year between securities regulators and 10 top Wall Street firms 
regarding stock analyst practices. New Jersey was co-chair, with 
California and New York, of the steering committee for the multistate 
task force organized by the North American Securities Administrators 
Association that investigated the firms. New Jersey also was lead State 
for the investigation of Bear, Stearns & Co. The case, as you know, 
brought major reforms to the industry to ensure that stock analysts are 
not subjected to pressure to report favorably on stocks and bonds of 
investment banking clients of their firms.
    Just yesterday, I announced another major settlement with 
significant implications for the industry. New Jersey reached an $18 
million settlement with Allianz Dresdner Asset Management and two 
affiliated companies regarding allegations of a fraudulent arrangement 
that permitted a large investor to market time more than $4 billion in 
transactions in their mutual funds in violation of fund policies and to 
the detriment of long-term investors. The settlement requires the 
defendants to implement corporate governance changes to ensure that 
portfolio managers for their mutual funds function independently of 
business managers, and that the funds comply with their own policies 
barring market timing.
    In between those milestones, New Jersey has filed eight major 
securities fraud cases involving, in the aggregate, more than one 
thousand investors and more than $160 million in investments.
    While some con artists target small, inexperienced investors, the 
reality is that wealth and sophistication are no guarantee that an 
investor will not be defrauded. In February 2004, we filed suit against 
three men and their companies, including Clover Management Group Inc. 
of Fort Lee, N.J., that engaged in an elaborate scheme to swindle 
investors in the United Kingdom out of more than $55 million. The 
defendants falsely claimed to offer investments in the defense industry 
that would provide strong returns while supporting the British and 
United States war effort in Iraq and the worldwide war on terrorism. 
New Jersey has seized the assets of the defendants, including a $2 
million yacht, bank accounts, luxury cars, and a painting by renowned 
artist Eduardo Arranz-Bravo. The seizures followed cooperative 
investigations by our Bureau of Securities, Federal authorities, and 
New Scotland Yard. The defendants duped sophisticated investors out of 
huge sums through slick marketing, which included touring investors 
around a defense industry plant and claiming to be advised by renowned 
military leaders and financiers.
    Elaborate marketing also was involved in the case of Michael R. 
Casey. We filed suit in December to seek restitution for at least 195 
investors who we allege were defrauded of up to $15 million in a real 
estate investment scheme run by Casey. We allege Casey set up a complex 
network of business entities to front his scheme and recruited 
investors through his tax preparation business and a series of 
investment workshops held under the name Midas Financial Planning 
Services Group.
    As mentioned above, as Attorney General, I also have the authority 
to criminally prosecute securities fraud. In June 2003, we 
simultaneously filed criminal and civil actions against more than a 
dozen New Jersey companies and their principals for allegedly stealing 
more than $80 million from investors. The scheme's principal architect 
was Thomas Giacomaro, who pleaded guilty to money-laundering charges 
brought by the Division of Criminal Justice in the Attorney General's 
Office and Federal charges of mail fraud and tax evasion. Among the 
parties who lost money in the scheme was best-selling novelist Mary 
Higgins Clark.
    A common theme in each of these cases is that the securities sold 
by the defendants were not registered with the New Jersey Bureau of 
Securities, as required by law. If the victims had called the Bureau 
before investing, as we urge all investors to do, they could have 
avoided their losses. Again, the need for investor education is 
highlighted.
    Another frequent theme in these cases is cooperation between State 
and Federal authorities. That theme can be seen in the Brennan case, 
the Wall Street stock analyst settlement, the Clover case and the 
Giacomaro case. State securities regulators and the SEC can accomplish 
a lot by working together, as our representatives in the North American 
Securities Administrators Association have been emphasizing in their 
ongoing discussions with the SEC and their cooperative initiatives. 
However, another point should not be lost. States also can be extremely 
effective on their own, as we demonstrated in the Allianz Dresdner 
case. In a 4-month period, we filed and settled a case that addressed a 
serious industry problem and led to reimbursement of the affected 
funds. We secured needed reforms, but resolved the case quickly to 
avoid a lingering cloud that might harm the funds. Several other States 
also have shown their effectiveness on this front.
    Although I have discussed high-profile cases that in some instances 
did catch the attention of Federal authorities, many of our securities 
fraud cases--both civil and criminal--would not be pursued by Federal 
regulators, leaving investors without recourse. There are simply too 
many cases out there, and sometimes the dollar amount of the fraud is 
not large enough to interest Federal securities regulators given their 
limited resources. The States serve as valuable partners in securities 
regulation and in recent years have provided early warnings about 
dangers in the marketplace, sounding the alarm on day trading, penny 
stocks, microcap funds, and analyst conflicts.
    The bottom line is that the task of protecting investors is too 
large to be handled by a single Federal agency, the SEC. Investors need 
the protection of State securities bureaus. The task of protecting 
investors is only going to grow as trends push individuals to deal 
directly with their retirement costs and as discussions proceed at the 
Federal and State levels about giving people increased control over 
investment of their Social Security and other retirement funds, beyond 
401(k), Keogh, and IRA plans.
    We hope that you will maintain if not enhance the authority of 
State securities regulators. Further, any additional resources you can 
provide to us will, I can assure you, be money well spent. Investor 
protection is the key to investor confidence, and investor confidence 
is the key to raising the capital that fuels this Nation's economic 
engine. We can make the Nation stronger by working together.
    Thank you again for the opportunity to testify. I share your 
concern about this vital issue and stand ready to work with you as you 
examine and address it in the future. I look forward to answering any 
questions that you might have for me today.

                               ----------
                PREPARED STATEMENT OF RALPH A. LAMBIASE
                    Director, Division of Securities
                 Connecticut Department of Banking and
                  President, North American Securities
                    Administrators Association, Inc.
                              June 2, 2004

Introduction
    Chairman Shelby, Ranking Member Sarbanes and Members of the 
Committee, I am Ralph Lambiase, Connecticut Securities Director and 
President of the North American Securities Administrators Association, 
Inc. (NASAA).\1\ I would like to thank you for inviting me to appear 
before the Committee today to present an overview on the many ways 
State securities regulators serve and protect the more than 100 million 
investors in North America. I also want to thank Connecticut's senior 
Senator, Chris Dodd, for continuing to serve as a strong advocate for 
investor protection and for listening to the concerns of the 
Connecticut Department of Banking, which includes the Securities 
Division.
---------------------------------------------------------------------------
    \1\ The oldest international organization devoted to investor 
protection, the North American Securities Administrators Association, 
Inc. was founded in 1919. Its membership consists of the securities 
administrators in the 50 States, the District of Columbia, Canada, 
Mexico, and Puerto Rico. NASAA is the voice of securities agencies 
responsible for grassroots investor protection and efficient capital 
formation.
---------------------------------------------------------------------------
States Have Protected Main Street Investors for Nearly 100 Years
    Let me begin with a brief overview of State securities regulation, 
which actually predates the creation of the Securities and Exchange 
Commission and the NASD by almost two decades. States have protected 
Main Street investors from fraud for nearly 100 years.
    The role of State securities regulators has become increasingly 
important as growing numbers of Americans rely on the securities 
markets to prepare for their financial futures, such as a secure and 
dignified retirement or sending their children to college. Securities 
markets are global but securities are sold locally by professionals who 
are licensed in States where they conduct business.
    As the securities director for the State of Connecticut, I interact 
directly with investors who approach me at investor education seminars 
or call my office with 
concerns or complaints. Our agency works with criminal authorities to 
prosecute companies and individuals who commit crimes against 
investors, and brings civil actions for injunctions, restitution, and 
penalties against companies and individuals who commit securities 
fraud.
    Similar to the securities administrators in your States, our agency 
is also responsible for licensing firms and investment professionals, 
registering some securities offerings, examining broker-dealers and 
investment advisers, providing investor 
education, and most importantly, enforcing our State's securities laws. 
Eleven of my colleagues are appointed by their Secretaries of State, 
others by their governors; five come under the jurisdiction of their 
States' Attorney General; and some, like me, fall within their State's 
banking, financial institutions, or commerce departments. No matter 
where we are located in our State structure, each State securities 
administrator shares a common passion for protecting the citizens in 
our States from investment fraud and abuse.

How State Securities Regulators Serve and Protect Investors
    We have been called the ``local cops on the securities beat,'' and 
I believe that is an accurate characterization. We are here to serve 
and protect investors. State securities regulators respond to investors 
who typically call us first with complaints, or request information 
about securities firms or individuals. State officials are directly 
accountable to the electorate.
    While some of our high profile enforcement actions make national 
headlines, I realize that not everyone fully understands the value 
added by State or provincial securities regulators. I would like to 
focus my remarks this morning on the many other ways State securities 
regulators serve investors. In addition to enforcing your State's 
securities laws, we work within your State government to protect 
investors and help maintain the integrity of the securities industry 
by:

 Licensing stockbrokers, investment adviser firms (those 
    managing less than $25 million in assets), and securities firms 
    that conduct business in the State;
 Investigating investor complaints and potential cases of 
    investment fraud;
 Examining broker-dealer and investment adviser firms to ensure 
    compliance with securities laws and maintenance of accurate records 
    of client accounts;
 Assisting small businesses to raise capital and reviewing 
    certain local offerings not covered by Federal law.
 Educating investors about their rights and providing the tools 
    and knowledge they need to make informed financial decisions, and;
 Advocating passage of strong, sensible, and consistent State 
    securities laws and regulations.

    Specifically, I would like to outline significant accomplishments 
of State securities regulators in four areas: Investor education; 
licensing broker-dealers, and investment advisers; helping small 
businesses raise capital; and our efforts to build bridges with 
regulators and prosecutors here and abroad.

Adding Value by Building Financial Knowledge and Security Through
Education
    State and provincial securities regulators have a long tradition of 
protecting investors through financial education. We appreciate the 
Committee's long-standing advocacy of investor education programs to 
give Americans of all ages the ability to 
recognize and avoid investment exploitation and build good money 
management habits. I would also like to commend Members of this 
Committee for championing the need for the coordination and 
implementation of economic and financial literacy programs in the 
United States.
    Recognizing the value and the impact of financial education, 
NASAA's Board of Directors elevated investor education to Section 
status in 1997 to help support the ongoing financial education efforts 
of State and provincial securities regulators. The Investor Education 
Section, along with a network of professionals from across the NASAA 
membership, develops, coordinates, delivers, and supports financial 
education initiatives used by securities regulators in their ongoing 
efforts to improve the level of financial literacy in their 
jurisdictions.
    Most State and provincial securities regulators have established 
investor 
education programs within their agencies. The result is an effective 
network of dedicated professionals delivering financial education at 
the grassroots level. Our financial education professionals can be 
found at work in classrooms, the workplace, and senior centers. They 
partner with teachers, employers, and peer-based volunteer groups to 
deliver financial education to our constituents of all ages.
    For example, under the guidance of the Investor Education Section's 
Senior Outreach Project Group, NASAA initiated a major education 
campaign last fall aimed at senior investors. As part of the 
initiative, we launched an online Senior Investor Resource Center on 
the NASAA website to give senior investors the tools they need to 
reduce their risk of being a victim of fraud. And as part of a 
continuing effort to improve the level of youth financial literacy in 
our jurisdictions, the Investor Education Section's Youth Outreach 
Project Group recently developed a Teacher Training Event blueprint to 
provide a comprehensive, step-by-step system for developing and 
delivering a teacher training event that offers K-through-12 teachers 
the knowledge, resources, and tools they need to efficiently and 
effectively integrate personal finance education into their classroom 
curriculums.
    State regulators, through NASAA, also have developed a series of 
investor awareness brochures to provide financial education to our 
residents. The brochures cover a variety of topics ranging from how to 
protect yourself from cold-calling investment sales pitches to how to 
select a financial planner.
    State securities regulators also look for opportunities to join 
forces with other members of the financial education community. For 
example, we support and participate in a variety of national financial 
education programs to increase financial literacy, such as the American 
Savings and Education Council, the Investor Protection Trust, Jump$tart 
Coalition for Financial Literacy, and Financial Literacy 2010. Through 
NASAA, State securities regulators have collaborated with the 
Securities Industry Association to produce resources to help investors 
understand brokerage account statements; and with the Investment 
Company Institute and the College Savings Plan Network to produce the 
brochure, ``A Guide to Understanding 529 Plans.'' Last year, we 
published a Fraud Awareness Quiz that the AARP will include in newly 
created speakers guides for their local offices. And, we recently 
entered into an agreement with the Department of Defense through which 
our members will work to deliver financial education to members of the 
military.
    Educating and training our members also is a vital part of NASAA's 
mission. This year, NASAA is hosting 12 training seminars including the 
first-ever training session with insurance regulators with the goal of 
sharing information about laws and enforcement practices that can be 
put to practical use in combating securities fraud committed by 
insurance agents. Our emphasis on training helps promote uniformity by 
ensuring that State examiners, investigators, and prosecutors are 
schooled in the current problem areas so that they can more effectively 
serve investors.

Adding Value By Streamlining Broker-Dealer, Investment Adviser
Registration and Licensing
    Our securities markets may operate on Wall Street, but stocks, 
bonds and other securities are sold on Main Street, in our 
neighborhoods and even over our kitchen tables from nearly 96,000 
branch offices nationwide. Today, roughly half of all U.S. households 
rely on the securities markets to plan and prepare for their financial 
futures. And the number of firms and individuals holding themselves out 
as investment professionals has grown significantly in the past two 
decades. In Connecticut, for example, nearly 3,000 investment firms and 
more than 110,000 securities professionals are licensed to conduct 
business with our citizenry. Nationwide, those numbers grow to more 
than 16,000 investment firms and nearly 825,000 securities 
professionals.
    State securities regulators believe it is critical that information 
about these individuals and firms be readily accessible to the 
investing public, industry, and regulators. Two of the more notable 
success stories in accomplishing this accessibility have been the 
Central Registration Depository (CRD) and the Investment Adviser 
Registration Depository (IARD) systems. These powerful tools help State 
securities regulators weed out any ``bad apples'' seeking licenses to 
do business with their State's investors.
    Developed by NASAA and NASD and implemented in 1981, CRD 
consolidated a multiple, paper-based State licensing and regulatory 
process into a single, nationwide computer system. Today, the CRD is 
arguably the best licensing system in existence. Its computerized 
database contains the licensing and disciplinary histories on more than 
650,000 securities professionals and 5,200 securities firms. The IARD, 
developed jointly by NASAA and the SEC, is our newest licensing system 
and is to investment advisers what the CRD is to broker-dealers. Its 
database helps promote uniformity, through use of common forms, and 
efficiency through a paperless environment. It helps investors research 
the employment and disciplinary histories of more than 11,000 
investment adviser firms and 173,000 individual investment advisers.

Adding Value Through Coordinated Review
    States are traditionally recognized as laboratories of innovation. 
Our ability to adapt successful programs launched in one State to 
benefit all has led to regulatory initiatives that have benefited both 
the investing public and industry. For example, a simplified program 
developed in Washington State to help small businesses raise capital 
through a public offering has evolved into a program of coordinated 
review now in place in 37 States. Under NASAA's SCOR program, comments 
from various State regulators are consolidated into one comment letter 
from the ``lead'' State examiner. This allows the company to resolve 
all issues regarding multistate filing through that one examiner and 
allows other States in which a company wants to sell its securities to 
provide comment. Regional SCOR programs have been established in the 
mid-Atlantic, New England, Midwestern, Southwestern, and Western 
States.
    The similar national Coordinated Review-Equity Program (CR-Equity) 
for larger offerings provides a uniform State registration procedure 
designed to coordinate the blue-sky registration process in all of the 
States in which the issuer seeks to sell its equity securities. CR-
Equity generally is intended for initial public offerings. Of the 42 
jurisdictions that register equity offerings, all but one currently 
participates in this program. A third review program, CR-Fran, is 
available to a franchisor filing an initial application to register its 
offering in two or more participating States.

Enhancing Cooperation and Coordination
    NASAA welcomes the opportunity to continue to work with our 
regulatory counterparts at the SEC and the SROs to collectively use our 
resources to protect investors. We also look forward to the continued 
progress of our ongoing series of constructive discussions with the SEC 
as part of the joint initiative launched in September 2003 to explore 
ways to improve coordination and communication. We stand ready to 
provide insight from our unique perspective to the SEC and SROs as they 
move forward in their rulemaking process.
    This ongoing initiative with the SEC is not our only opportunity to 
discuss issues of common concern between State and Federal securities 
regulators. NASAA and the SEC co-sponsor an annual Conference on 
Federal-State Securities Regulation in accordance with Section 19(d) of 
the Securities Act of 1933. As part of the conference, representatives 
from the SEC and NASAA divide into working groups in the areas of 
corporation finance, broker-dealer regulation, investment advisers, 
investor education, and enforcement. Each group discusses methods to 
enhance cooperation in its subject area and to improve the efficiency 
and effectiveness of Federal and State securities regulation.
    NASAA also is taking steps to reach out to other regulators at both 
the State and Federal levels. For example, last month, NASAA 
successfully joined forces with the National Association of Insurance 
Commissioners to conduct the first-ever joint training program to 
benefit State insurance and State securities regulators who want to 
work together more effectively to solve the persistent problem of 
securities fraud by insurance agents. Earlier this year, NASAA accepted 
an invitation from the U.S. Treasury Department to become a member of 
the Financial and Banking Information Infrastructure Committee (FBIIC), 
which is sponsored by President's Working Group on Financial Markets. 
As an active FBIIC member, NASAA helps coordinates public-sector 
efforts to improve the reliability and security of the U.S. financial 
system. FBIIC also develops procedures and systems to allow Federal and 
State regulators to communicate among themselves and with the private 
sector during times of crisis. NASAA also serves as a member of the 
Federal Reserve's Cross-Sector Group. The group's bi-annual meetings 
are hosted by the Federal Reserve and include representatives from the 
State and Federal banking, insurance, and securities regulators.
    As you know, investment fraud knows no borders. That is why State 
and provincial securities agencies, through NASAA, have reached out to 
their colleagues in the international arena. NASAA plays an active role 
in the International Organization of Securities Commissioners (IOSCO) 
and the Council of Securities Regulators of the Americas (COSRA).
    A strong need exists to develop cooperative information sharing 
programs, policies and laws to move toward greater enforcement and 
protection from fraud. NASAA's Board last fall created an International 
Project Group to facilitate this effort. We also have taken steps to 
work more closely with our Canadian colleagues by adding liaisons to 
each of our sections: Broker-dealer, corporation finance, enforcement, 
investment adviser, and investor education. And, we are exploring the 
feasibility of expanding NASAA's membership to include a number of 
other North American jurisdictions.
    When considering State, Federal, and industry cooperation, I think 
one of the best examples is the Securities Industry Regulatory Council 
on Continuing Education. In the months following the market crash of 
1987, I recall Senator Dodd raising the issue of the importance to both 
industry and investors of knowing how various financial products react 
in periods of market volatility. Continuing advocacy from the States 
helped prompt the industry in 1995 to create the Council, which is 
comprised of representatives of the securities industry, self-
regulatory organizations, the SEC, and NASAA. Our joint efforts have 
resulted in a national continuing education program that is accepted by 
all regulatory agencies. Each year, more than 175,000 
financial professionals participate in the continuing education 
program's computer-based training.

Preserving State Regulatory Authority
    The initiatives I have outlined clearly demonstrate the value-added 
benefits of State securities regulators. We focus on Main Street 
investors. We are grassroots regulators. We are the first line of 
defense for investors in our States. I would like to emphasize my 
belief that in cases where State securities regulators investigate and 
resolve enforcement cases, our judgments regarding appropriate outcomes 
must be respected and upheld.
    Our State-Federal system of regulation is collaborative and 
complementary, and above all, we all want what is best for investors. 
The research analyst cases, and the recent investigations of the mutual 
fund industry, are good examples of the value of our complementary 
regulatory system. In these massive undertakings, State regulators 
worked on enforcement issues while the SEC and SRO's devoted resources 
both to enforcement and, most importantly, rulemaking.
    Congress made clear in its passage of National Securities Markets 
Improvement Act of 1996 its intent to foster a cooperative rulemaking 
process between State and Federal securities regulators. The recently 
enacted SEC books and records rule is an example of this cooperative 
process. Some, however, continue to portray our State-Federal 
regulatory system as duplicative. Our actions have been and will remain 
consistent with the intent of Congress. When it comes to investigation 
and enforcement of Wall Street wrongdoing--investors need more cops on 
the beat, not fewer. There must be continued cooperation and shared 
efforts among State, Federal, and industry regulators.
    Earlier this year, Congress recognized that State securities 
regulators are essential partners to Federal regulators in protecting 
investors when it removed Federal preemptive provisions from H.R. 2179, 
the ``Securities Fraud Deterrence and Investor Restitution Act of 
2004.'' We continue to remain vigilant and prepared to face attempts by 
special interests to neutralize State regulators who are aggressively 
protecting investors. These interests will continue to complain about 
the ``patchwork quilt'' they think they see whenever they look out 
across the country. What they are seeing is 50 State agencies working 
collaboratively to keep the industry free of wrongdoing and instilling 
consumer confidence in the marketplace. It is not regulation that keeps 
investors away from the marketplace--it is greed and wrongdoing that 
goes unchecked that undermines investor confidence.
    We have heard industry make an issue about the cost of regulatory 
compliance. I submit to you that despite all of the publicized 
problems, 2003 was one of the most profitable years ever for Wall 
Street. According to the Securities Industry Association, profits in 
the securities industry were $15 billion last year, nearly double those 
of 2002 and the third best year ever for Wall Street.
    We have heard industry say, ``trust us.'' Just last year, the 
president of the mutual fund industry's trade association, praised 
industry executives for their ``unshakeable commitment to putting 
mutual fund shareholder interests first.'' Three months later, State 
regulators launched the first of many investigations into the mutual 
fund industry for, in essence, putting its own interests ahead of those 
of its shareholders.
    We have heard investors say enough is enough. And we agree.
    Protecting investors against fraud and punishing those who would 
commit fraud are fundamental roles of government, be it Federal, State, 
local or in the case of our neighbors to the north, provincial. For 
State securities regulators, ``putting investors first'' is more than 
just a slogan. It is what we do for our citizens on a daily basis.

Conclusion
    Mr. Chairman and Members of this Committee, I would like to offer 
you my personal opinion based on more than 30-plus years as a 
securities regulator. Protecting investors is a significant challenge 
and no single regulatory agency can go it alone. I firmly believe that 
now is the time to strengthen, not weaken our unique complementary 
regulatory system of State, industry, and Federal regulation. 
Collectively, we can all work together--government, self-regulators and 
industry--to achieve positive results. More than 100 million North 
American investors expect us to remain vigilant, to stay the course, 
and to make sure that Wall Street puts investors first. We cannot let 
these millions of investors down.
    I firmly believe that tough and consistent regulatory oversight is 
the key to helping investors maintain their confidence in the market. 
Just as strongly, I believe that straight-talking investor education, 
coupled with hard-hitting and unfailing enforcement, are the keys to 
investor protection. The citizens in my State depend on me to protect 
them by enforcing the securities laws on our books. I can speak for all 
my North American colleagues in stressing the importance of securities 
regulators continuing to protect the citizens in our jurisdictions. Our 
job is straightforward--protecting investors and doing right on their 
behalf.
    It is vitally important that Congress reject attempts to weaken 
State enforcement authority. I am deeply grateful to those Members of 
Congress who have been champions of the rights and protection of 
investors. Congressional commitment to integrity in our financial 
markets, accountability in corporate governance, and full and fair 
disclosure has helped make our Nation's markets the best in the world. 
When investors have confidence in the markets, issuers have access to 
needed capital and our economy prospers.
    I pledge the continued support of the NASAA membership to work with 
the Committee to provide any additional information or assistance the 
panel may need. Thank you for the opportunity to testify on the role of 
State securities regulators.

                               ----------
                  PREPARED STATEMENT OF JOSEPH P. BORG
              Director, Alabama Securities Commission and
            Chairman of the Enforcement Section of the North
          American Securities Administrators Association, Inc.
                              June 2, 2004

    Chairman Shelby, Ranking Member Sarbanes, and Members of the 
Committee, I am Joe Borg, Director of the Alabama Securities Commission 
and Chairman of the Enforcement Section of the North American 
Securities Administrators Association, Inc. (NASAA).\1\ It has been a 
privilege for me to serve as Director of the Commission since 1994, and 
to have been elected as NASAA's President for during 2001-2002. It is a 
particular honor for me to have the opportunity to publicly thank my 
Senator, Richard Shelby, for his thorough and thoughtful approach to 
restoring investor confidence in our markets. You just heard an 
overview of State securities regulation from NASAA's President, Ralph 
Lambiase, and I am delighted to have the chance to share with you some 
highlights from the States' enforcement activities.
---------------------------------------------------------------------------
    \1\ The oldest international organization devoted to investor 
protection, the North American Securities Administrators Association, 
Inc., was founded in 1919. Its membership consists of the securities 
administrators in the 50 States, the District of Columbia, Canada, 
Mexico, and Puerto Rico. NASAA is the voice of securities agencies 
responsible for grassroots investor protection and efficient capital 
formation.
---------------------------------------------------------------------------
Overview
    The Enforcement Section assists the NASAA Board and membership in 
coordinating enforcement efforts regarding multistate frauds by 
facilitating the sharing of information and leveraging the fixed 
resources of the States more efficiently. Members of this Section act 
as points of contact for other Federal agencies and the self-regulatory 
organizations (SRO's), and help identify new fraud trends such as those 
involving promissory notes, viatical settlements, and microcap 
securities. The Section has eight project groups under its 
jurisdiction, with over 40 volunteer members who focus on planning 
NASAA's annual enforcement conference, the enforcement portion of the 
19(d) conference with the Securities and Exchange Commission (SEC) 
mandated by the Securities Act of 1933, maintaining our enforcement 
databases, coordinating special projects, and identifying enforcement 
trends.
    The enforcement role of States securities regulators differs in 
some ways from the SEC and the self-regulatory organizations (SRO's). 
Because our local offices are often the first to receive complaints 
from investors, State securities regulators serve as an early warning 
system, working on the front lines, investigating potentially 
fraudulent activity, and alerting the public to the latest scams. After 
identifying a problem, many States can take immediate enforcement 
action without the time-consuming need to obtain formal agency orders. 
States also have a history of taking enforcement actions against the 
very worst fraudsters, often those selling unlicensed products and 
Ponzi and pyramid schemes of all types.
    In addition to investigating cases and bringing enforcement 
actions, States work with national regulators on marketwide solutions 
when they are needed. Although States do not engage in rulemaking for 
the national markets--that is rightly the purview of the SEC and the 
SRO's--the State regulators are active participants in the SEC's 
rulemaking process. That was the pattern followed with penny stock 
fraud, microcap fraud, day trading, and the analyst cases discussed 
below.\2\ We meet on a regular basis with SEC staff and provide written 
comment to the Commission as it receives information from the States' 
front lines during its deliberative rulemaking process. In the past 2 
years, NASAA has submitted more than two dozen formal comment letters 
to the SEC regarding rule proposals and concept releases. NASAA staff, 
frequently joined by State regulatory personnel, also has held numerous 
informal discussions with Commissioners and SEC staff on issues of 
mutual interest, both in Washington, DC and the field.
---------------------------------------------------------------------------
    \2\ See State/Federal Dynamic Chart Attached.
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Wall Street Analyst Conflict of Interest Global Settlement
    Since the early 1990's, long before the recent Research Analyst 
Global Settlement, NASAA members were involved in a number of 
coordinated multistate settlements with firms including Prudential 
Securities, Salomon Brothers, D.H. Blair, and Stratton Oakmont, amongst 
others.
    Let me take just a moment to provide an update on the States' 
component of the Wall Street analyst conflict-of-interest Global 
Settlement. Christine Bruenn of Maine, then NASAA President, testified 
last May before this Committee on the States' role in the investigation 
and settlement with the Wall Street firms.
    All 50 States, plus the District of Columbia and Puerto Rico, 
agreed to settle with the 10 firms involved. Every jurisdiction, but 
one, has completed the process by executing the settlement documents. 
The Global Settlement was a model for State/Federal cooperation and the 
process was completed in conjunction with the SEC, the New York Stock 
Exchange, and the NASD. If you include the Merrill Lynch settlement, 
which was reached by the States almost a year before the others, the 
firms executed agreements with 52 State jurisdictions for a total of 
520 settlements.
    Those settlements achieved a number of very important objectives. 
For example, in addition to penalties and disgorgement, a portion of 
the payments required under the Global Settlement were earmarked for 
investor education. Specifically, 7 of the firms agreed to pay a total 
of $80 million for investor education with $27.5 million directed to 
the States over 5 years for investor education purposes. That amount 
comprises the ``Investor Education Fund'' that will be overseen by the 
Investor Protection Trust (IPT), a charitable trust, classified by the 
IRS as a public charity.
    The settlements also resulted in much needed change in the way the 
firms conduct their business. The independent research component is 
scheduled to be implemented in July and will provide investors at the 
10 firms with research procured by independent consultants. The 
consultants are also charged with providing a track record of research 
success or failure that can be evaluated over time.
    Finally, a rigorous separation between research and banking was 
effected by this settlement for the 10 firms involved, and by NASD and 
NYSE rules for the rest of the industry. Over the last several years, 
NASAA members have been active participants in the rulemaking and 
legislative process in the area of analysts' conflicts of interest. The 
States worked closely with the SEC and the SRO's, both to leverage 
limited investigative resources and to formulate new, marketwide rules 
that were needed to fix this problem. In addition, we commented on the 
NASD/NYSE's proposed rules relating to research analysts, making 
suggestions that we felt could make the rule stronger in some areas. 
Many of our original proposals were incorporated in the final rule. 
Also, NASAA was strongly supportive of Title V in S. 2673, which became 
the Sarbanes-Oxley Act of 2002.

States' Investigations into Mutual Fund Industry Abuses
    I commend this Committee for its thorough and deliberative 
examination of trading abuses in the mutual fund industry. State 
securities regulators, the SEC, NASD, and mutual-fund firms themselves 
have launched inquiries into mutual fund trading practices. To date, 
more than a dozen mutual funds are under investigation and several 
mutual fund employees have either pleaded guilty, been charged, or 
settled with State regulators. I will not dwell on this subject because 
this Committee has already conducted comprehensive hearings 
demonstrating that some in the mutual fund industry were putting their 
own interests ahead of America's 95 million mutual fund shareholders. I 
can assure you that the States will continue to actively pursue 
inquiries into mutual fund improprieties and are committed to 
aggressively addressing mutual fund complaints raised by investors in 
our jurisdictions.

State Securities Enforcement Activity
    These high profile national cases arise periodically, but they 
should not obscure the more routine caseload representing the bulk of 
the States' enforcement work. As always, State securities regulators 
continue to vigorously pursue sales practice abuses and a variety of 
scams and frauds against unsuspecting investors. State securities 
regulators have a long history of protecting investors at the local 
level day in and day out. We often initiate investigations as a result 
of complaints from investors in your States who feel they have been 
wronged by a broker-dealer, securities professional, or those claiming 
to be a securities specialist. Each NASAA member has one or more 
offices within their State, with contact information readily available 
on the web. Many investors understandably feel that the logical place 
to start with a grievance is their local State securities regulator.
    The States have compiled an impressive record in bringing 
enforcement cases, including criminal prosecutions. The chart before 
you, and attached to this testimony, illustrates State enforcement 
statistics for the reporting period 2002 to 2003 with over 70 percent 
of the 52 jurisdictions responding. The States filed a total of 2,964 
administrative, civil, and criminal enforcement actions; assessed 
$822,315,470 of monetary fines or penalties; collected $660,109,508 in 
restitution, rescission, and disgorgement and sentenced criminals to 
over 717 years of incarceration. NASAA sent out a recent survey to 
obtain this latest data, and I would be pleased to follow-up with the 
Committee in a few weeks with more complete information.
    Because we are grassroots regulators, we often serve as an early 
warning system of emerging corporate frauds and investment scams before 
they are detected at the Federal level. Other frauds, generally 
relating to companies not traded on any exchange, never reach the 
Federal level and are handled by State regulators. The Alabama 
Securities Commission's Enforcement Division opened an investigation on 
Francis Clark Sr., CEO and President of U.S. Fabtec LLC, located in 
Alabama. U.S. Fabtec, LLC was to be a joint venture with Mitsubishi 
Aluminum Fabtec Holding, Inc., a subsidiary of Mitsubishi International 
Corporation. Complaints alleged that Clark spent corporate funds on 
personal items such as country club dues and his hobby of stock car 
racing. Mr. Clark solicited seven domestic investors for $1,407,676 and 
two Japanese companies to invest $1,287,553 for a total of $2,695,229. 
It was determined that Clark thereafter continued to solicit additional 
investments and embezzled money from the company. In 2003, Mr. Clark 
was sentenced to 12 years and to pay restitution of $1,603,117.04 for 
two counts of Securities Fraud and two counts of Theft of Property I.
    For the past several years, NASAA has released its list of top 10 
investment scams, schemes, and scandals to alert investors to 
increasingly complex and confusing investment frauds. I will briefly 
describe several of these scams and provide a State enforcement case 
example for each.

Unregistered/Unlicensed
    One problem area inundating State regulators is unlicensed 
securities sellers pitching securities that are unregistered. Scam 
artists use high commissions to entice some insurance agents, 
investment advisers, and even accountants and lawyers into selling 
investments they may know little about, such as bogus limited 
partnerships or promissory notes, offering high returns with little or 
no risk.

Unlicensed/Unregistered Case Example
    The State of New Jersey is proceeding with efforts to obtain 
restitution for at least 195 investors who may have lost up to $15 
million in a real estate investment scam run by a Michael Casey in 
Upper Saddle River. The suit filed in December 2003 alleges fraud and 
the sale of unregistered securities through a complex set of real 
estate based investments. New Jersey alleges that the monies raised 
were illegally co-mingled, mismanaged, and/or diverted to pay Casey's 
personal expenses and for other purposes unrelated to what investors 
were promised.
    Casey allegedly used his tax preparation business and a series of 
investment workshops under the name Midas Financial Planning Services 
Group to recruit investors. These workshops, held as recently as August 
2003, involved numerous oral and written misrepresentations to 
potential investors. Casey allegedly continued to conduct the workshops 
in violation of a consent order he entered into with the Bureau of 
Securities on April 7, 2003 that barred him from ``issuing, selling, 
offering to sell, purchasing or offering to purchase, promoting, 
negotiating, advertising or distributing from or within New Jersey any 
securities or investment advisory advice concerning securities.''

Unlicensed/Unregistered Case Example
    In Delaware, an insurance agent, who had been the subject of a 
prior Delaware Cease and Desist Order prohibiting him from selling 
unregistered securities, once again began selling unregistered 
securities in violation of the existing order. Subsequent to the filing 
of the Order, the Delaware Securities Division received a 
complaint from a senior citizen who had invested $35,000 after 
responding to an anonymous advertisement in a senior citizen newspaper. 
The seller of the unregistered fraudulent offshore securities 
(certificate of deposit issued by the First International Bank of 
Grenada and Wellington Preferred Stock) was the same insurance agent 
who had been ordered to stop selling unregistered securities. This 
$35,000 investment represented the victim's entire life savings. She 
received the $35,000 by the sale of her marital home which she sold 
before moving in with her son after her retirement. The victim was a 
retired State employee who was forced to return to the work force as a 
result of the crime.
    Through the use of a search warrant, Delaware seized the offender's 
computer and business records and was able to find 14, primarily 
elderly, victims who had invested in these fraudulent offshore 
investments sold by the insurance agent. He was convicted in Delaware 
Superior Court of 29 felonies and received a term of incarceration of 7 
years. While the Court ordered over $600,000 in restitution, the 
offender has not repaid any of his victims.

Unlicensed/Unregistered Case Example
    In Alabama, an individual without use of ads, commercials, or 
flyers was able to get 30,000 participations in an advance fee loan 
investment by use of the Internet within a period of less than 100 
days. The Alabama Commission issued 18,682 checks to reimburse 
investors at 70 percent of their investment. The Commission, moving 
quickly, was able to freeze bank accounts before the funds could be 
transferred overseas.

Prime Bank
    Prime bank schemes are a perennial favorite of con artists who 
promise investors access to secret, high-yield investments made through 
trades among the world's top or ``prime'' banks. Promoters falsely 
claim the investment is guaranteed or secured by some kind of 
collateral insurance or bank guarantee. The investors ultimately find 
out that the prime banks simply do not exist. Negative publicity 
attached to these schemes has caused some promoters in recent cases to 
avoid explicitly referring to prime banks. Now it is common to avoid 
the term altogether and underplay the role of banks by referring to 
these schemes as ``risk free guaranteed high yield instruments.''

Prime Bank Case Example
    The Arizona Corporation Commission shut down a prime bank scheme 
and ordered 6 companies and their representatives to pay over $4.5 
million in restitution and penalties for State securities violations. 
The State has already recovered $3 million for investors. This case is 
unusual because it is rare that large amounts of money are recovered 
for investors in prime bank cases. The perpetrators told investors 
their money would be safely held in bank certificates of deposit while 
funds were traded in foreign banks. The duo also promised returns 
greater than 500 percent. They continually sent newsletters to 
investors trumpeting their million-dollar returns, but all the claims 
were false. The case involved 102 investors from Arizona and other 
States as well as from Germany and Japan. Most of the money was 
funneled through a bank in Arizona to a bank in Texas and ultimately to 
the Turks and Caicos Islands.

Variable Annuities
    Sales of variable annuities have increased dramatically over the 
past decade. As sales have risen, so too have complaints from 
investors. State securities regulators are concerned that investors are 
not being told about high surrender charges and the steep sales 
commissions agents often earn when they move investors into variable 
annuities. Often pitched to seniors through investment seminars, these 
products are unsuitable for many retirees. Some investors also are 
misled with claims of guaranteed returns when variable annuity returns 
actually are vulnerable to the volatility of the stock market. The 
benefits of variable annuities--tax-deferral, death benefits among 
others--come with strings attached and additional costs. High 
commissions often are the driving force for sales of variable 
annuities.
    Variable annuities are considered to be securities under Federal 
law. Some States consider variable annuities to be insurance products 
and others consider them to be both insurance and securities. NASAA is 
encouraging changes in State laws that would allow State insurance 
regulators to continue to oversee the insurance companies that sell 
variable annuities while authorizing State securities regulators to 
investigate complaints about variable annuities and to take action 
against the companies and individuals who sell them. State securities 
regulators look only at the sales practices of those selling variable 
annuities as opposed to the licensing and registration of the product.

Variable Annuities Case Example
    The Alabama Securities Commission and Mississippi Secretary of 
State recently announced a joint enforcement action against AmSouth 
Investment Services, a subsidiary of AmSouth Bank, which had acquired a 
broker-dealer in a bank merger with First American of Nashville, 
Tennessee. In this joint investigation involving two State regulators, 
and information sharing with the SEC and the NASD, we found a number of 
cases of poor oversight and, in one case, serious violations by an 
AmSouth Investment Services representative. Most of the problems that 
we found related to variable annuities and their unsuitability for most 
investors. The case began after a routine examination by State 
investigators discovered improper activity.
    Under the agreement, AmSouth Investment Services paid a $25,000 
fine, reimbursed the States $75,000 in investigative costs, contributed 
$125,000 for investor education programs in Mississippi and Alabama, 
and set up an uncapped fund to handle claims for those who wish to 
surrender these policies if unsuitable. The broker-dealer must also pay 
for an independent review of all internal policies and procedures 
designed to detect and prevent securities law violations, and improve 
access to compliance and supervisory rules at every branch office 
including obtaining a new, state of the art computer compliance system.
    On a negative note, there has been a major push by certain 
insurance industry associations to remove variable annuities from State 
securities review, even though variable annuities are securities under 
Federal law. These efforts have been successful in preventing or 
eliminating securities review in several States, hindering progress in 
the uniform treatment of what are essentially stock funds with an 
insurance element.

Viaticals
    Risky viatical settlement contracts are products that have been on 
our radar screen and subject to State securities enforcement actions 
for the past several years. The viatical industry began around 1990 as 
a way to help the terminally ill, most notably AIDS patients. In a 
typical transaction, the person holding a life insurance policy sells 
it to a third party ``broker'' in return for a portion of the death 
benefit. The broker then sells shares of the policy to investors, who 
collect a share of the death benefit from the broker when the original 
policyholder dies.
    A viatical settlement transaction is a hybrid transaction that 
implicates both insurance and securities law. The securities law 
component of a viatical settlement transaction arises when a viatical 
settlement provider solicits investors to raise money to fund the 
payout to the insured. Although in some jurisdictions State insurance 
authorities have sole authority over viatical settlement transactions, 
in the States where securities and insurance regulators share 
oversight, securities regulators uniformly have stated that viatical 
settlement transactions constitute securities under State securities 
law and have vigorously pursued enforcement actions.

Viaticals Case Examples
    In February 2002, NASAA issued a press release \3\ about viatical 
settlements, citing deceptive marketing practices, numerous instances 
of fraud, and warning investors not to be misled by claims that 
viaticals offer safe, guaranteed returns like 
certificates of deposit. The release cites a Vermont investigation into 
practices at Mutual Benefits Corporation (MBC). The Vermont Securities 
Division currently has a civil lawsuit pending in Superior Court 
alleging that MBC violated the Vermont Securities Act by: (1) selling 
unregistered securities; (2) employing unregistered sales reps (mostly 
insurance agents); (3) misrepresenting to investors the risks involved 
in the purchase of viatical settlements; (4) misrepresenting the life 
expectancies of viators; and (5) violating the suitability provisions 
of Vermont law. The lawsuit seeks a civil penalty and restitution of 
approximately $2 million. The Superior Court denied MBC's motion to 
dismiss several months ago and the case is currently scheduled for 
trial during the first week of December.
---------------------------------------------------------------------------
    \3\ NASAA press release dated February 26, 2002; ``Risky 'death 
futures' draw warning from State regulators, Congressional scrutiny.''
---------------------------------------------------------------------------
    Just last month, State and Federal regulators stepped in to shut 
down and revoke the license of Mutual Benefits Corporation, for 
securities and insurance law violations, fraud and misrepresentation. 
Florida's Office of Statewide Prosecution has charged the company with 
racketeering and 15 counts of investor fraud, saying the company lured 
tens of thousands of investors into an elaborate Ponzi scheme that 
raised more than $1 billion.

Affinity Fraud
    Con artists know that its only human nature to trust people who are 
like yourself. That is why scammers often use their victim's religious 
or ethnic identity to gain their trust and then steal their 
lifesavings. Unfamiliar with the financial markets, too many people do 
not know how to thoroughly research an investment and its salesperson. 
So, many fall prey to affinity group fraud in which a con artist is, or 
seems to be, a member of the same ethnic, religious, career, or 
community-based group.

Affinity Fraud Case Example
    The Alabama Securities Commission initiated an investigation into 
an affinity fraud case that resulted in six defendants being sentenced 
to jail by a judge for the Nineteenth Judicial Circuit. The charges 
surrounded financial activities including nonexistent bonds, money 
laundering, and securities fraud involving the proposed expansion of 
the former Daystar Assembly of God church located in Prattville, 
Alabama. It is estimated that the congregation lost about $3,000,000. 
As a result of this scam, the congregation lost their church building 
because funds were not available to meet mortgage payments. This case 
clearly shows the power of cooperation and communication among the 
local police department, county, and State legal authorities to work 
together and take strong actions against white collar crime and people 
who steal from members of their own community. The principal 
perpetrator received a 31-year prison sentence.

International Efforts
    My colleague, Ralph Lambiase, has already summarized most of the 
States' international outreach efforts. In addition, I recently 
represented NASAA at the United Nations Commission on International 
Trade and Law's Colloquium on International Commercial Fraud. The 
Colloquium was convened to address various aspects of the problem of 
commercial fraud from the point of view of private law and to permit an 
exchange of views from various interested parties, including those 
working in national governments, intergovernmental organizations, and 
relevant private organizations with a particular interest and expertise 
in combating commercial fraud, what we generally call ``investment 
fraud.'' The idea was to begin an exchange of views with the 
international criminal law and regulatory sectors that combat 
commercial fraud and to identify matters that could be coordinated or 
harmonized. I was invited to present issues related to securities fraud 
including the difficulties we experience in conducting investigations, 
document production, and bringing civil and criminal prosecutions due 
to ``red tape'' across international borders. I believe we will see 
greater efforts made to share information and expedite investigations 
with a view to freezing and preserving assets for investors.

Coordination
    As we move forward, NASAA will enhance its existing cooperative 
relationships and launch new projects to coordinate enforcement 
activities. Even with the funding increase Congress allocated for the 
SEC, the Commission cannot go it alone. That is why there must be 
cooperation and division of labor among State, industry, and Federal 
regulators.
    In September 2003, the NASAA President and SEC Chairman announced a 
joint initiative to address issues of coordination and cooperation 
between Federal and State securities enforcement authorities. Since 
December 2003, a working group consisting of six representatives of the 
Commission staff and six representatives of NASAA has been meeting on a 
regular basis to study ways to improve Federal and State cooperation. I 
am a member of this working group and assure you that the discussions 
have been thorough, constructive, and educational.
    Another entity that NASAA works closely with is the Securities and 
Commodities Fraud Working Group, which is an informal association of 
law enforcement departments and regulatory agencies at the Federal, 
State, and international levels. Organized under the auspices of the 
Justice Department in 1988, the Group seeks to 
enhance criminal and civil enforcement of securities and commodities 
laws through tri-annual meetings and other information sharing 
activities. For example, the Group maintains a ``Directory and Resource 
Guide'' containing contact information for a broad range of law 
enforcement and regulatory agencies.
    State securities regulators routinely work and cooperate with other 
agencies such as the Department of Justice, the National White Collar 
Crime Center, the U.S. Postal Service, the Department of Homeland 
Security, the Regional Organized Crime Information Center, and others.
    In December 2001, the NASAA/NAIC Enforcement Coordination Subgroup 
was formed. Comprised of delegates from each association, its mission 
is to improve enforcement coordination between insurance and securities 
regulators at the State level. A key focus of the group is the 
persistent problem of insurance agents engaged in the unlawful sale of 
various securities investments. Last month, the group hosted its first 
joint training seminar for the benefit of regulators from both 
disciplines.

Conclusion
    Mr. Chairman and Members of the Committee, State securities 
regulators are dedicated to pursuing those firms and individuals who 
have violated the securities laws. We will fight to ensure that State 
securities regulators maintain the authority to regulate at the local 
level and bring enforcement actions with appropriate remedies against 
those firms that violate securities laws in their jurisdictions.
    The NASAA membership wishes to work with the Committee to provide 
you with any additional information or assistance you may need. Thank 
you again for inviting me to speak on behalf of the States to discuss 
our efforts to protect the investing public. I am happy to answer any 
questions you may have.



                  PREPARED STATEMENT OF CHARLES LEVEN
                  Vice President, Board Goverance and
                    Chair, Board of Directors, AARP
                              June 2, 2004

    Good morning Chairman Shelby, Ranking Member Sarbanes, and Members 
of the Committee on Banking, Housing, and Urban Affairs. My name is 
Charles Leven. I am AARP Vice President for Board Governance and Chair 
of our Board of Directors. I appreciate this opportunity to testify on 
a matter of keen interest to us--investor protection. My testimony 
today focuses on the role that State securities regulation and 
regulators, and the North American Securities Administrators 
Association (NASAA), play in securing essential marketplace conditions 
of fair play and practice.
    Your letter of invitation asked for AARP's perspective on the role 
played by State securities regulators in restoring public trust and 
providing effective oversight of investment markets. More specifically, 
you asked for our views on the:

 Enforcement actions State securities regulators have taken,
 Coordination efforts they have made with Federal regulators, 
    and
 Investor education programs they have undertaken.

    The rapid growth in investment activity over the past decade has 
severely taxed the resources of Federal and State securities 
commissions. According to NASAA there are at least 20,000 investment 
advisor firms in the United States. Approximately 8,000 of these are 
larger firms that register with the U.S. Securities and Exchange 
Commission (SEC) because they have more than $25 million in assets 
under management or are active in at least 30 States. The remaining 
smaller firms are registered with the States. NASAA also estimates that 
150,000 to 175,000 individuals hold State licenses to act as investment 
advisor representatives.
    According to the 2001 Federal Reserve's Survey of Consumer 
Finances, the percentage of households that own stocks, either directly 
or indirectly (through mutual funds, retirement accounts and other 
managed assets), increased from 32 percent in 1989 to 52 percent in 
2001. The shift to defined contribution plans places significant 
responsibilities on individuals to make appropriate investment choices 
so that they will have adequate income when they reach retirement. It 
also heightens their risk if losses are incurred due to bad advice, 
abusive practices, or fraud.
    In recent years, stock markets have weathered a sluggish economy, 
the steep market declines exacerbated by the September 11 terrorist 
attacks, trade deficits, and reports of numerous scandals--ranging from 
illegal corporate accounting practices to insider trading. These shocks 
to the securities marketplace have resulted in serious consequences for 
ordinary saver-investors. Suffice it to say, a lifetime's worth of 
saving is not a renewable resource for older Americans.\1\ A recent 
2004 survey of investors by AARP confirms a reduced confidence in 
financial services professionals, continuing concerns about the 
fairness of stock market conditions and practices, and the desire for 
stronger regulation of the securities industry.\2\ This is the legacy 
from a still recovering marketplace.
---------------------------------------------------------------------------
    \1\ See: ``Impact of Stock Market Decline on 50-70 Year Old 
Investors,'' an AARP survey report published, December, 2002 (available 
at: http://research.aarp.org).
    \2\ See: ``Investor Perceptions and Preferences Toward Selected 
Stock Market Conditions and Practices: An AARP Survey of Stock Owners 
Ages 50 and Older,'' published March 2004 (available at: http://
research.aarp.org).
---------------------------------------------------------------------------
    Others can speak more authoritatively about the evolution of the 
Federal-State relationship over time--including the periodic tensions 
that have surfaced between State and Federal regulators. We can 
understand how some differences might surface with Federal regulators--
and among States--when a timely response to an emerging market problem 
is needed. Nevertheless, we are reminded by recent market history just 
how vital the State securities commissions are in our dual system of 
market regulation and investor protection. The sensitivities and 
concern associated with ``prior consultation'' will no doubt 
periodically resurface.
    For us, however, the goal of providing American investors with 
market conditions of fair play and practice is advanced by promoting 
harmonization wherever possible within our concurrent Federal-State 
system of securities regulation. Clearly State securities regulatory 
commissions and NASAA must and are playing an essential role. We 
believe State regulatory authority must be maintained as an integral 
component of our concurrent system, and refreshed as evolving market 
circumstances warrant.
    State regulation of securities is based on statutes that serve 
three primary functions. These are the:

 Registration of certain securities;
 Registration of broker-dealers and their agents and more 
    recently of investment advisers and investment adviser 
    representatives; and
 Enforcement of fraud and other remedies.

    The State securities regulators are responsible for the licensing 
of firms and investment professionals, the registration of some 
securities offerings, branch office sale practice audits, investor 
education, and most importantly, the enforcement of State securities 
laws. Securities regulatory commissions are located in all 50 States, 
the District of Columbia, and Puerto Rico.

Enforcement
    One of the principle virtues of our concurrent system of securities 
regulation is State securities commission authority to investigate and 
bring enforcement actions with respect to fraud or deceit or unlawful 
conduct in connection with securities transactions. State securities 
administrators are frequently the first point of contact when an 
investor has a securities transaction-related complaint. State 
regulators often work very closely with criminal prosecutors at the 
Federal, State, and local levels to punish those who violate our 
securities laws.
    The New York State criminal case against research analysts, 
initiated in early 2003, is a useful illustration of the significant 
role that State securities regulators can play in enforcement. 
Precisely because the States also had investigatory and enforcement 
powers, one State was able to take the initiative in what became a $1.4 
billion settlement with 10 leading broker-dealer firms. Ultimately 
NASAA, the State of New York and the Federal regulators worked 
cooperatively on the Global Research Analyst Settlement.
    Later in 2003, the securities regulators in Massachusetts began 
what would become a series of investigations by other State and Federal 
regulators into the Nation's $7.6 trillion mutual fund industry. 
Clearly, these examples serve to validate the rationale for maintaining 
a well-balanced and concurrent securities regulatory system.
    From our perspective, the most serious ongoing State enforcement 
issue is inadequate enforcement budgets--a challenge not unknown to 
Federal regulators. We support increased State budgets to combat the 
significant increases in fraud being found in many States. We believe 
that Congressional and judicial oversight can mitigate disagreements 
that periodically emerge.

Coordination
    State regulators have been active in coordinating reviews of 
filings, developing a uniform registration statement for offerings that 
are exempt at the Federal level, and in crafting policy statements on a 
number of review issues that strengthen uniformity of review in the 
States. There are over 60 of these NASAA statements of policy which 
have been adopted at the State law level as State rules or guidelines. 
These statements of policy provide flexibility in the rapidly changing 
securities marketplace, and can provide a basis for Federal-State 
cooperation and coordination.
    Two additional examples of the cooperative role that NASAA has 
played with Federal regulators involve working with:

 NASD to computerize and maintain the licensing and 
    disciplinary histories on more than 650,000 securities 
    professionals (broker-dealers) and 5,200 securities firms (referred 
    to as CRD for Central Registration Depository); and more recently 
    with the
 SEC to develop a licensing, registration, and enforcement 
    database for investment advisors. This database, the Investment 
    Adviser Registration Depository (referred to as IARD), provides 
    employment and disciplinary histories on more than 11,000 
    investment adviser firms and 173,000 individual investment 
    advisers.

    In 2002, a new version of the Uniform Securities Act was adopted by 
the National Conference of Commissioners on Uniform State Laws. The 
Uniform Securities Act has been the model for nearly 40 States' 
securities laws including a reciprocal provision to the Securities Act 
of 1933 that provides that the securities administrators ``shall, in 
its discretion, take into consideration in carrying out the public 
interest . . . maximizing uniformity in Federal and State regulatory 
standards.''
    As a practical matter, the SEC's annual conference on Federal 
securities regulation, to which State securities regulators are 
invited, provides a forum for addressing a range of mutual concerns. 
And NASAA has been a frequent and influential commenter on SEC rule and 
form proposals, and State regulators are often called to testify before 
Congress on matters pertaining to securities regulation.

Education
    AARP recognizes State securities regulators and NASAA for their 
impressive efforts to enhance the capacity of individual investors and 
their agencies to detect, report, and eliminate abusive and fraudulent 
behavior. This effort at capacity-building is based on better investor 
education and through improved agency staff training. Investor 
education is the ordinary investor's first and sometimes their ultimate 
line of defense against exploitive securities sales practices. Our 
dynamic stock market makes upgrading investment skills a necessity.
    Last year, complementing its existing Investor Education Section, 
NASAA initiated a major education campaign aimed at older investors by 
launching an online ``Senior Investor Resource Center.'' NASAA also 
offers training to its members on an average of one seminar a month. It 
also offers K through 12 teacher training academies.

Conclusion
    While a range of statutory conventions and informal policy 
discussion venues are available for harmonizing Federal-State 
regulatory enforcement, stimulating coordination, and upgrading 
investor education and investment skills, this does not mean that every 
difference of view can or should be summarily resolved. By the same 
token, our dual system of securities regulation provides a great deal 
of flexibility for each State to address local concerns. There may be 
modest costs associated with the concurrent system of regulation, as 
well as redundant regulatory efforts including multiple fees for 
securities issuers and professionals. But we believe that there are 
demonstrated benefits to the dual system, and to the role and value of 
State securities regulators. State securities regulatory authority 
helps fill what would otherwise be important enforcement gaps.
    I appreciate this opportunity to testify on behalf of AARP on the 
important role that State securities commissions play in efforts to 
secure marketplace conditions of fair play and practice. We look 
forward to working with Members of this Committee in pursuit of these 
shared goals. I would be happy to answer any questions you may have.

       RESPONSE TO A WRITTEN QUESTION OF SENATOR MILLER 
                     FROM RALPH A. LAMBIASE

Q.1. I asked Chairman Donaldson in a hearing on the ``State of 
the Securities Industry'' what kind of working relationship he 
had with the State securities administrators and the State 
attorneys general on resolving the various enforcement issues 
that have arisen, and whether he thought there were any changes 
that might be needed to be made in the SEC's relationship with 
the States.
    Let me quote Chairman Donaldson's response to me. He said

    That is an excellent question. It is one that we are very 
concerned about. Let me say this, that we need and encourage 
all the help we can get from local regulators in the securities 
industry at the local level where they can uncover and 
investigate things that go beneath our screen, so that if there 
is malfeasance or fraud or whatever at a local level, we 
welcome the local administrators, securities administrators, 
and so forth.
    At another level, and that is the level of the structure of 
the markets themselves, we believe and I believe very strongly 
that we cannot have 50 different structural solutions, we 
cannot have 50 different ways, perspectives as they are put 
out, and trading rules and so forth, I believe that that has to 
be done by the Federal administrators.
    Having said that, we need to and we have cooperated with 
local securities regulators, andjust 2 weeks ago in connection 
with the chairwoman of the National Regulators Trade 
Association, we agreed to enter into a joint arrangement with 
them to see if we could not improve the communication between 
what they are doing and improve the cooperation between what 
they are doing. I think that will go a long way.
    I will say it again and in frank answer to what you said, 
there are areas where a local authority can step in too late to 
an investigation that is already under way and in so doing 
interrupt a carefully put-together investigation by a Federal 
functionary, and this is where I think we get into trouble, 
where there is considerable work that has been done, cases 
being built, and someone comes in from left field and does not 
really add anything and in fact might create an environment 
where the accused will get off because of a technicality.

    I would like to ask each of you basically the same 
question.
    What kind of working relationship does each of you have 
with the SEC on resolving the various enforcement issues that 
have arisen, and whether you thought there were any changes 
that might be needed to be made in the SEC's relationship with 
the States? And do you have any other comments on Chairman 
Donaldson's response to me?

A.1. In September 2003, the NASAA President, Christine Bruenn, 
and Securities and Exchange Commission (SEC) Chairman Bill 
Donaldson announced a joint initiative to address issues of 
coordination and cooperation between Federal and State 
securities enforcement authorities. Since November 2003, a 
working group consisting of six representatives of the 
Commission and six representatives of NASAA has been meeting on 
a regular basis to study ways to improve Federal and State 
cooperation.
    I believe the relationship between State securities 
regulators and the SEC is already more open and cooperative 
than it was when Chairman Donaldson appeared before the Banking 
Committee on September 30, 2003. We are working on various ways 
to exchange information on cases, and make a determination as 
to when and how to work together on cases. Developing trust 
between the States and the SEC is a key component of this 
effort. As I said in my testimony, there is complete trust and 
cooperation among State regulators. We share information, we 
share resources, and we work jointly. We have a trust and 
respect for each other that allows us to work as effectively as 
we do. I would like to see that model extended to the State and 
Federal working relationship.
    Last fall, I stated that my foremost goal as President of 
NASAA is to work with the SEC and the SRO's to use our 
resources collectively to protect investors. This process has 
to be a two-way street with information flowing back and forth 
between our organizations, and I continue to work toward 
reaching that goal.
    Since Chairman Donaldson's September 2003 testimony, the 
NASAA leadership has met several times with the Chairman and we 
have had open, frank discussions on a variety of subjects. He 
and his staff have been most receptive to our thoughts and 
concerns. I agree with him that the SEC is the lead regulator 
when it comes to establishing national rules for the securities 
marketplace. Over the last several years, NASAA members have 
been active commenters in the rulemaking and legislative 
process. The States worked closely with the SEC and the SRO's 
both to leverage limited resources and to formulate new, 
marketwide rules on a variety of issues.
    Also, NASAA invited Chairman Donaldson's Managing Executive 
for Policy and Staff to a number of our meetings and gave him 
the opportunity to address our membership on key topics of 
interest to both organizations. In addition, the NASAA Section 
Chairs meet regularly with corresponding SEC Division staff to 
discuss issues of common interest.

       RESPONSE TO A WRITTEN QUESTION OF SENATOR MILLER 
                      FROM JOSEPH P. BORG

Q.1. I asked Chairman Donaldson in a hearing on the ``State of 
the Securities Industry'' what kind of working relationship he 
had with the State securities administrators and the State 
attorneys general on resolving the various enforcement issues 
that have arisen, and whether he thought there were any changes 
that might be needed to be made in the SEC's relationship with 
the States.
    Let me quote Chairman Donaldson's response to me. He said

    That is an excellent question. It is one that we are very 
concerned about. Let me say this, that we need and encourage 
all the help we can get from local regulators in the securities 
industry at the local level where they can uncover and 
investigate things that go beneath our screen, so that if there 
is malfeasance or fraud or whatever at a local level, we 
welcome the local administrators, securities administrators, 
and so forth.
    At another level, and that is the level of the structure of 
the markets themselves, we believe and I believe very strongly 
that we cannot have 50 different structural solutions, we 
cannot have 50 different ways, perspectives as they are put 
out, and trading rules and so forth, I believe that that has to 
be done by the Federal administrators.
    Having said that, we need to and we have cooperated with 
local securities regulators, andjust 2 weeks ago in connection 
with the chairwoman of the National Regulators Trade 
Association, we agreed to enter into a joint arrangement with 
them to see if we could not improve the communication between 
what they are doing and improve the cooperation between what 
they are doing. I think that will go a long way.
    I will say it again and in frank answer to what you said, 
there are areas where a local authority can step in too late to 
an investigation that is already under way and in so doing 
interrupt a carefully put-together investigation by a Federal 
functionary, and this is where I think we get into trouble, 
where there is considerable work that has been done, cases 
being built, and someone comes in from left field and does not 
really add anything and in fact might create an environment 
where the accused will get off because of a technicality.

    I would like to ask each of you basically the same 
question.
    What kind of working relationship does each of you have 
with the SEC on resolving the various enforcement issues that 
have arisen, and whether you thought there were any changes 
that might be needed to be made in the SEC's relationship with 
the States? And do you have any other comments on Chairman 
Donaldson's response to me?

A.1. I agree with Mr. Lambiase's comments and want to elaborate 
on the cooperative enforcement efforts between State securities 
regulators and the SEC. Even with the funding increase Congress 
allocated for it, the SEC cannot go it alone. The scope of the 
fraud and the other violations occurring in the financial 
marketplace today is unfortunately just too large for one 
regulator to handle. That is why there must be cooperation 
among State, Federal, and industry regulators. And NASAA is 
committed to that principle. As we move forward, NASAA will 
enhance its cooperative relationships and launch new projects 
to coordinate enforcement activities.
    The advantages of having State as well as Federal 
enforcement of the securities laws are many. As noted above, 
the dual system simply brings more needed resources to bear. In 
addition, States have historically played an important role 
``an indispensable early warning system for fraud.'' Because of 
their proximity to local investors, State regulators often are 
the first to detect an emerging scam or pattern of violations. 
Also, in some cases, States may have jurisdiction over an 
investment or an activity while the SEC does not--and vice 
versa. Further, some violations are more local in nature and 
therefore more appropriately handled by the States. In 
addition, some State securities regulators can bring criminal 
prosecutions, which is especially important where the case is 
not sufficiently national in scope or even in national cases 
where agent 
activity is of such a local nature not to warrant involvement 
by the U.S. Attorney's office. For many reasons, therefore, 
investors benefit from having a dual system of State and 
Federal enforcement.
    The benefits of this dual system are often seen when the 
States and the SEC work together in the same case. In my own 
State of Alabama, we have had an effective working relationship 
with our SEC Regional Office in Atlanta and the District Office 
in Miami, Florida. As an example, in April 2004, after 
extensive discussion and investigation by the SEC and Alabama 
Securities Commission (ASC), the ASC issued its Cease & Desist 
Orders against Heymen International and other parties for their 
involvement in a Ponzi scheme. The SEC simultaneously filed 
their injunctive action in the U.S. District Court, with both 
the SEC and Alabama Securities Commission lawyers appearing in 
court. The joint SEC/ASC press release acknowledged the 
investigative and cooperative efforts of the SEC, the State of 
Alabama Securities Commission, the FBI, and the IRS. 
Cooperative efforts such as these go back many years, including 
one ofthe first of the ``cooking the books'' accounting 
scandals within Comptronix, a publicly held company, in 
Guntersville, AL. That case was prosecuted in 1996 and resulted 
in felony convictions for corporate officers.
    The working relationships between any State and any 
regional office of the SEC, or other regulators, is determined 
by a number of factors, including the type of case, the 
personal relationships that have been developed over time 
between respective offices, and the relative interest in the 
case by Federal and State regulators. At certain times the 
focus of Federal regulators may be on areas other than a 
particular securities fraud, while at the State level there may 
be occasions where State securities regulators are inundated 
with other matters and therefore resources are stretched to the 
limit precluding extensive efforts in a specific case.
    As others have observed, however, enforcement of the law 
should be distinguished from writing the rules. In Mr. 
Donaldson's response in September 2003, he stated that there 
cannot be ``50 different structural solutions . . . cannot have 
50 different ways . . . trading rules.'' And he is correct. 
State enforcement efforts target a specific fraud or rule 
violation that affects the bedrock of our economy--the 
investor. Enforcement actions and conduct remedies specifically 
target a particular set of circumstances where the law has 
already been transeressed. These responses to misconduct cannot 
be confused with the formulation of new rules and regulations 
that govern the national markets generally.
    State regulators do work with national regulators on 
market-wide solutions when they are required, but they do not 
impose solutions. This is the pattern followed with penny stock 
fraud, microcap fraud, day trading, and other areas all of 
which were first ``uncovered'' by State securities regulators. 
The States investigate and bring enforcement actions. They do 
not engage in rulemaking for the national markets. The States 
comment regularly on proposed market rules and meet with 
various divisions of the SEC to share their experiences in the 
``laboratories'' of the States and to discuss the implications 
of new rules and procedures. The final result of these 
discussions and commentaries is that the States have input into 
the SEC's determinations of what will finally emerge as rules 
for the national markets.
    Finally, Chairman Donaldson mentioned concern that a local 
authority could ``interrupt a carefully put together 
investigation by a Federal functionary.'' This, of course, 
works both ways, and in the instance referred to by the 
Chairman in his testimony, the participant in the Federal 
investigation was not a State securities regulator. 
Nevertheless, State and Federal regulators alike should be 
mindful ofthese concerns and should certainly try to assist, 
rather than hamper, each other. This is a main focus in our 
current NASAA/SEC meetings. It should be also be noted that 
Chairman Donaldson's September 2003 testimony on this point 
occurred prior to the joint initiative meetings between the SEC 
and State regulators, and since that time there has been 
extensive dialog and the lines of communication between the SEC 
and State regulators have opened up considerably.
    These communications continue as SEC and NASAA 
representatives meet on a monthly basis. As I stated in my 
testimony, these meetings are productive, giving both 
regulators enhanced insight into each other's operations, 
needs, and concerns. The future of cooperation between the SEC 
and State securities regulators continues to be effective, and 
with additional refinements now in process, should become more 
efficient to the benefit of all investors.
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