SEC's Stein Calls for Presidential Working Group on Retirement Security

Commissioner Kara Stein of the Securities and Exchange Commission called on President Donald Trump to issue an executive order to create a working group on retirement security during a recent speech.

"Today, we as a nation face a fast-approaching crisis — an aging population without sufficient resources to fund a secure retirement. This crisis is a collective problem that, unless solved, will cause many individual tragedies," she said during an event hosted by The Center on Regulation and Markets at Brookings about retirement security.

Stein notes that the SEC's mandate "only encompasses a small portion of the larger retirement issue" because the regulator deals with individuals who "already have enough resources to save and invest." This is why Stein called for a collaboration with other government agencies and a wide range of people.

"The working group would assemble regulators from the Departments of Labor, Treasury, Commerce, and others," she said. "It would also bring together major market participants, such as asset managers, exchanges, broker-dealers, and others to determine private-sector solutions wherever possible."

According to Stein, the purposes and functions of the group would be to enhance the state of retirement security in the United States by making recommendations regarding legislative, regulatory, or other changes.

"Both the government and the private sector have work to do to prevent a potential crisis that has many causes, but also many possible solutions," she said.

In her speech at Brookings, Stein also outlined several ways that the SEC itself can help with retirement security.

Educating Investors

One way is to help educate investors. Stein said that the SEC should work with other agencies to create a model curriculum for schools.

"We know that much of the education people receive about investing comes once they have enough money to invest," she said. "But if we are truly to make a difference, financial literacy education needs to start much earlier."

Stein suggested that the SEC could sponsor contests — similar to spelling bees — for middle school and high school students about investing in their future. She also suggested creating an app that teaches kids and adults how to invest.

Enhancing Investment Advice

Another way is to enhance investment advice by addressing the differing standards of conduct applicable to investment professionals in a way that protects investors.

In a recent survey conducted by SEC staff, most investors assume that someone who is giving them advice has to put the investor's interests first. However, that is not always the case.

According to a 2015 Council of Economic Advisers report that was used by the Obama administration to justify its now-defunct fiduciary rule, retirement savers lose about $17 billion to conflicted advice each year.

Stein called this "a staggering sum that has real-world consequences for retirees," and she said that the SEC must take action.

"Recognizing that many Americans depend on [investment] professionals for their retirement, the commission must ensure that they are giving their clients unconflicted advice," Stein said.

Stein sees at least two ways going about this: Raise the duty for all investment professionals so that it meets investor expectations, or teach investors to treat the advice that they receive from certain professionals differently.

"My guess is that it would be easier to simply require that all persons actually giving investment advice put their client's interest first," Stein added. "It's simple and straightforward."

Stein notes this may require action from Congress.

Protecting Investors

As retirees rely more and more on their investments, Stein stressed that the SEC must work to ensure that those investments are protected from fraud.

"Sadly, retirees lose billions of dollars every year to fraud and abuse. And after-the-fact enforcement is only so useful," she said. "Often, by the time the SEC arrives, the money is already gone and investors can never be made whole."

According to Stein, deterrence is critical to preventing such losses, and she added that effective deterrence requires meaningful penalties.

"We all know that when it costs more to park in a garage than to pay a parking ticket on the street, the number of illegal parkers goes up," she said. "Penalties cannot be merely the cost of doing business. They must be large enough to deter others from engaging in similar conduct."

However, Stein noted that the SEC's penalties are trending down. In fiscal 2016, the SEC imposed penalties of almost $1.3 billion. In fiscal 2017, the SEC imposed penalties of $832 million, according to the SEC's Division of Enforcement 2017 Annual Report.

She also noted that the SEC is limited to obtaining five years' worth of ill-gotten gain as a result of a recent Supreme Court decision.

"This means that clever wrongdoers are able to retain tens of millions of dollars of investors' money," Stein said. "When crime pays, investors, including retirees, pick up the tab."

According to Stein, the solution to this problem does not lie at the commission.

"This is something that Congress must fix and I urge them to do so," she said.

What the SEC can do, she said, is ensure that known wrongdoers are unable to repeatedly access markets..For instance, Stein pointed out that the SEC can bar lawyers and accountants from practicing before it, bar broker-dealers and investments advisors from the industry, and request officer and director bars. The SEC also can apply certain restrictions on issuers who have engaged in bad conduct.

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