Thank you for that kind introduction. I'm very pleased to be with you this morning to help kick off NAVA's 2007 Compliance and Regulatory Affairs Conference.
Conferences like this provide an ideal setting for regulators and market participants to engage in a productive dialogue concerning the exciting issues in this fast-changing market.
Over the next few days, you will have the chance to get into the nuts and bolts of SEC and NASD regulatory priorities, technological innovations and industry developments.
I'd like to step back and take a wide-angle view of the industry and discuss some of the extraordinary changes taking place in the capital markets, as well as the challenges ahead.
Today, globalization, international mergers, faster technology and an aging population are transforming the financial services industry. Our challenge will be to anticipate that change and, when possible, get out in front of it.
As I look ahead, there is no doubt in my mind that the challenges we face will test firms of all business models and sizes, as well as regulators.
So today, I want to focus on what NASD is doing to prepare for these challenges and the evolving markets of the future, as well as what NASD is doing to help your firms prepare for tomorrow's market realities.
Regulatory Consolidation
The most visible step we are taking to keep pace with the changing marketplace is, of course, the NASD/NYSE regulatory consolidation.
This plan will combine NASD and NYSE Member Regulation into a single, new self-regulatory organization which will be called the Securities Industry Regulatory Authority. SIRA will be responsible for all 5,100 securities brokers and dealers doing business with the public in the United States.
The consolidation plan will enable us to establish a more sensible, less complex regulatory regime that will be more efficient and effective. There will be a single set of rules adapted to firms of all sizes and business models. There will be one set of examiners and one enforcement staff.
We'll fashion the new rulebook in a more targeted way, taking into account firm size and business model. We believe that this tiered approach to regulation will result in rules better rationalized between intent and impact and, therefore, more efficient regulation.
SIRA's Board will balance strong, independent public governors with robust industry representation. Ten of the 23 governors will be industry representatives. Of these industry seats, three are allocated to large firms, one to medium-sized firms, and three to small firms.
There are also three industry seats set aside for particular business models, one of which is allocated to an independent dealer/insurance-affiliated firm, one to a NYSE floor broker and one to an investment company-affiliated firm. The goal is to balance industry expertise with independent voices, with the entire Board working together to ensure that investors are protected.
Our hope is to have all the necessary approvals and a final agreement completed with NYSE Euronext in the next few weeks.
It is important to understand that once the consolidation occurs, there will be no immediate, dramatic changes for firms as far as rulebooks, exam cycles or forms and technology are concerned.
Upon closing, rulebooks will remain the same for firms. Dual firms will be subject to both rule sets until our rulebook is merged, and NASD-only firms will continue to be subject only to NASD rules.
Exam cycles will remain the same, except dual firms will have coordinated exams. Forms and technology interfaces will stay the same as we merge systems and rulebooks. And most of 2007 will be spent integrating staffs, systems and rulebooks. Firms can expect to see more significant changes in 2008.
In other words, there should be no surprises for you.
Trends and Issues
One of our jobs as a regulator is to understand the trends facing the industry, and to stay ahead of those trends. Let me speak for a few minutes about what we see as the most significant issues facing investors and the brokerage industry today.
First, there is the technology revolution. Simply put, technology has changed our everyday lives and has empowered investors like never before.
Today, essentially all of our computers are connected to one another through the Internet. At the click of a mouse, investors in Australia can receive real-time information about U.S. markets and even place an order from the beach in Perth.
Investors now demand quicker access to more information that is easier to understand.
We think that the demand for information, together with new technology, will drive a new kind of disclosure regime in the future.
That's why NASD is advocating revamping the disclosure regime for mutual funds. We've recommended to the SEC that they adopt a two-page, Internet-based disclosure form for mutual funds, which states in plain English the objectives, risks, benefits and costs of the fund.
Working with the industry, we have also begun working on a similar short form document for annuities, starting with indexed annuities. We will certainly keep you updated on any developments.
This rapid technological change also creates challenges for firms.
As we emerge from a period of active rulemaking that followed the excesses of the dot-com era, firms have spent a great deal of money on systems and data to enhance supervisory and compliance processes.
On balance, better technology should translate into enhanced investor protection.
I encourage firms to continue to invest in providing their compliance professionals with automated tools and better access to information. I know that NAVA has recently launched its Straight-Through-Processing initiative to try to improve the use of technology and automation in all aspects of the annuity sales. We applaud the industry for taking a serious look at these issues and will look forward to following the effort closely.
For our part, we continue to focus on developing tools and services to help bring clarity, transparency, and integrity to the marketplace. For example, we worked with DTCC to develop an industry database to improve sales practices and investor disclosure with respect to mutual fund sales charges.
More recently, we've formed a task force of executives from insurance carriers and broker-dealers to help us evaluate the concept of a central database to collect up-to-date variable annuity product information. Product information would include key characteristics of a variable annuity that a person would most commonly need to know in order to understand and evaluate a particular product. The Task Force met for the first time last month, and we expect to work with them to continue to flesh out the concept. Expect to hear more from us on this later this year.
We want to make sure you have ready access to the information you need to make good recommendations and the proposed database is one way we can use technology to serve you better.
The second trend that is transforming our industry is the coming tidal wave of baby boomer retirees. Over the next 20 years, 75 million Americans will turn 60. That's 10,000 new 60-year-olds every day.
The difference between a senior who is well prepared for the challenges of retirement and one who is not becomes a stark reality in the golden years. It's the difference between living a life of dignity, with the means to live comfortably, and living one's last years in worry and debt.
Annuities can help many Americans achieve a secure retirement. A person seeking guaranteed income for life may find much to like about annuities. After all, only an annuity can offer a customer income for life even if the payouts exceed the annuity's principal.
It explains why annuities have become a very popular retail product, and the demographic transformation of our country offers great opportunity to the industry.
The third, and related, major trend we are watching is customers' desire for holistic financial solutions from their financial professional, not just a securities purchase or sale.
This trend shows more and more investors relying on structured or packaged products, such as mutual funds and variable annuities, rather than traditional stocks and bonds. A robust and competitive market for a new generation of packaged products could be quite helpful to investors struggling to make sense out of complexity.
We need to balance the innovation that these products will bring with an equal emphasis on training those who sell these products, and on providing understandable information to investors.
We remain willing and interested in a dialogue with distributors and product manufacturers to do whatever we can to ensure that products are sold appropriately, and with full disclosure of the risks, costs and benefits of each product.
I can't stand up here without saying a few things about Rule 2821, which governs variable annuity sales practices.
From the very beginning, we have worked with the industry on this issue. This cooperative effort continued after we proposed our new variable annuity rule. We made extensive changes that reflected our careful consideration of the issues that the industry raised concerning the original proposal.
For example, we created a broad exemption for transactions in connection with qualified employment plans. We also eliminated the requirement for a written, product-specific disclosure about the variable annuity being offered. And we eliminated the proposed requirement that firms determine that their customers "need" the variable annuity in comparison to other products.
In a similar vein, we also modified the requirements for principal review to give firms more flexibility in approving customer transactions. Nevertheless, we continue to believe this aspect of the rule proposal is very important. The requirement for principal review of variable transactions not only protects investors, but better ensures that problems will be caught early and that transactions will not have to be unwound.
These changes were made only after thorough consideration of whether the modifications would advance our goal of protecting investors. In each case, we listened carefully to comments and crafted changes that addressed legitimate concerns. Our goal with any rulemaking process is to advance investor protection and market integrity, without putting unnecessary complexity into the process.
Rule 2821 now awaits SEC action, which we hope will be forthcoming soon. I understand that some firms already have adopted the procedures that Rule 2821 will require and I applaud that proactive commitment.
The Modern Regulator
The changes taking place in today's market not only impact firms; they impact regulators as well, and NASD recognizes the need to keep pace.
As our Chairman and CEO Mary Schapiro has pointed out, to be a successful regulator today, we must be more things to more people. Let me lay out a few of the attributes that we think are essential to being a modern regulator.
First, we must ensure that investors have choices in the types of firms they seek to do business with and the array of products and services those firms offer. We must be more sophisticated in understanding different business models, and the particular challenges of different sized firms, without compromising investor protection.
That means "one size fits all" rulemaking isn't always the best approach. It means considering a principles-based approach to regulation, or tiered regulation based on firm size.
Second, the modern regulator is proactive, not just reactive.
We must always be on the lookout for risk and developing problems. Waiting for a product or practice to blow up and then reacting is not effective investor protection. And it is no longer sufficient in this day and age.
Proactive regulation means exploring all of our options for addressing emerging issues once we identify them. There should be no automatic response. We must consider a range of options, including best practices, guidance, education and task forces to help us understand the problem and propose effective solutions.
One example is our work with the industry to examine the clarity and accessibility of account opening forms. It's no surprise to you that customers often find these forms dense and confusing. And the density of these disclosures may have diluted their impact.
But we're working on a fix-a voluntary online and paper template that firms could choose to use. It would present, in plain English and a clear format, the critical terms of the agreement. The forms will be customizable, so that a firm can tailor them to its business model, as well as its branding needs.
As this example shows, the modern regulator can be proactive, and that doesn't mean just writing new rules. But even where rules are the right answer, we have an obligation to follow through with appropriate steps to help member firms comply.
Which underscores my third point: A modern regulator needs to find ways to assist you in meeting your compliance and regulatory obligations.
Education is one of our central obligations as a regulator. Ten years ago, we offered a small handful of conferences to the industry.
Today, we've invested significant energy and resources into developing a wide range of programs to offer, from conferences, training courses and, more recently, a compliance boot camp, to a wide range of online programs such as e-learning, webcasts, podcasts and online workshops.
You will see much more from us in terms of member education, particularly when it comes to offering online programs that are easily accessible for firms of all sizes.
Aside from helping firms comply with our rules by offering educational programs, we also need to make sure that we periodically step back and examine the impact of those rules. What we need to be asking ourselves on a regular basis is: Are the rules doing what we intended them to do? Are they protecting investors? At what cost? And finally, is there a better, more efficient way to achieve the benefit?
The fourth attribute of the modern regulator is to understand the world in which we operate. It is clear that regulatory jurisdictional boundaries are blurring, both abroad and at home.
Whether it is through U.S. investors' appetite for exposure to foreign stocks, or exchange mergers such as the NYSE/Euronext or NASDAQ/OM mergers, regulation of broker-dealers in the U.S. is no longer just a U.S. proposition.
This necessitates that regulators must learn to operate in a world less and less defined by geographic borders. This global transformation won't wait for regulators to figure it out, so we need to re-double our efforts to work with fellow regulators across the globe.
But international boundaries should not be our only concern. Jurisdictional boundaries are not serving investors well, either. As investors turn to financial professionals to help them manage their assets, they often do not know the difference between insurance and securities products, or fiduciary duties versus suitability obligations. They just want someone they can trust to help them put their money to work so they can meet their financial and life goals.
We believe retail investors should get the same basic regulatory safeguards and protections no matter which investment product they choose.
Financial product regulation must have a harmonized approach, irrespective of whether the product is insurance, securities, banking or investment advisory.
We're not talking about more regulation or additional jurisdiction for NASD. The point is that as the market evolves, products and providers no longer fit into neat little boxes. Therefore, regulators need to work together to regulate products that look and act in similar ways.
An excellent example is the initiative that we kicked off last year with our Annuity Roundtable. The Roundtable had an ambitious agenda designed to start a dialogue about the regulatory systems that govern different types of annuity products and whether the systems should be harmonized in any way.
We have formed a working group of NASD and state insurance and securities commissioners to continue this dialogue. The mission of the working group is straightforward: To work cooperatively in order to ensure that the purchasers of different types of annuities receive similar protection.
Last month, the Working Group issued a Joint Statement expressing strong support for the Model Suitability Rule recently approved by the National Association of Insurance Commissioners.
This Model Rule would impose a suitability standard upon annuity manufacturers and insurance agencies with regard to the sale of annuities, regardless of the age of the prospective purchaser. The Annuity Working Group is urging every state that does not currently have a suitability standard applicable to the sale of annuities to enact the Model Suitability Rule.
The fifth and final attribute of the modern regulator is that rather than simply respond to investor complaints, or problems that have already come to light, we need to engage investors.
Investor education is a component of this, as is delivery of information directly to the public through systems like TRACE and BrokerCheck that inform and ease an investor's interaction with the marketplace.
NASD has significantly increased its investor education efforts over the past several years, and will continue to do so as SIRA.
Conclusion
We are living in a time of exponential change. Technology and product innovation creates tremendous opportunities for the industry and investors. And for us to serve our role of protecting investors in this rapidly changing environment we will continue to be nimble and forward-looking.
I hope you have gotten the sense from me today, that as we emerge as the new SIRA, we plan to do just that and continually evolve our approach to achieve our mission of investor protection and market integrity.
We look upon these times of change as an opportunity to improve our capital markets and further solidify them as the most efficient, liquid and best regulated in the world. And we look forward to an ongoing dialogue with industry so we can work together to achieve these goals.
Thank you for listening. I hope you enjoy the conference.
("Copyright 2007 National Association of Securities Dealers, Inc.")