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82–917 PDF 2002

S. HRG. 107–767

RETIREMENT SECURITY AND CORPORATE

RESPONSIBILITY

FIELD HEARING

BEFORE THE

SPECIAL COMMITTEE ON AGING

UNITED STATES SENATE

ONE HUNDRED SEVENTH CONGRESS

SECOND SESSION

INDIANAPOLIS, IN

AUGUST 8, 2002

Serial No. 107–31

Printed for the use of the Special Committee on Aging

(

SPECIAL COMMITTEE ON AGING

JOHN B. BREAUX, Louisiana, Chairman

HARRY REID, Nevada

HERB KOHL, Wisconsin

JAMES M. JEFFORDS, Vermont

RUSSELL D. FEINGOLD, Wisconsin

RON WYDEN, Oregon

BLANCHE L. LINCOLN, Arkansas

EVAN BAYH, Indiana

THOMAS R. CARPER, Delaware

DEBBIE STABENOW, Michigan

JEAN CARNAHAN, Missouri

LARRY CRAIG, Idaho, Ranking Member

CONRAD BURNS, Montana

RICHARD SHELBY, Alabama

RICK SANTORUM, Pennsylvania

SUSAN COLLINS, Maine

MIKE ENZI, Wyoming

TIM HUTCHINSON, Arkansas

JOHN ENSIGN, Nevada

CHUCK HAGEL, Nebraska

GORDON SMITH, Oregon

MICHELLE EASTON, Staff Director

LUPE WISSEL, Ranking Member Staff Director

(II)

C O N T E N T S

Page

Opening Statement of Senator Evan Bayh ........................................................... 1

PANEL I

Keith Taylor, Retiree ............................................................................................... 5

William Christopher, Executive Director, Indiana Teachers Retirement Fund . 13

Chuck Leven, Member, AARP Board of Directors ................................................ 24

Elisse Walter, Executive Vice President, Regulatory Policy and Programs,

NASD .................................................................................................................... 32

(III)

(1)

RETIREMENT SECURITY AND CORPORATE

RESPONSIBILITY

THURSDAY, AUGUST 8, 2002

U.S. SENATE, SPECIAL COMMITTEE ON AGING, Indianapolis, IN

The committee met, pursuant to notice, at 2 p.m., at the Senior

Center, Indiana State Fairgrounds, Indianapolis, IN, Hon. Evan

Bayh presiding.

Present: Senator Evan Bayh

OPENING STATEMENT OF SENATOR EVAN BAYH

Senator BAYH. I want to thank all of you for coming and call this

meeting of the Senate Special Committee on Aging to Order.

I would like to thank everybody at the Indiana State Fair for

their cooperation in bringing us together now for the third straight

year on Senior Day here at the Fair. I want to thank Bill Stinson

and everybody else here at the Fair who have been so, so helpful.

I would like to thank all of you. I know that there are other

things that you could be doing on a beautiful day like this. The fact

that you would be here to help us focus on making corporations

more responsible and accounting more accurate to protect the investments of our senior citizens I think is very, very significant.

I am particularly glad to be here today. If I speak a little less

clearly than normal, I hope you will forgive me. I was in the dentist’s chair for 2 hours this morning, so I am particularly glad to

be out here and to be with you.

I would like to take this one moment of personal privilege, if I

could. The three most important members of my family are with

me today at the Indiana State Fair, and that is my wife, Susan,

and my sons, Nicholas and Beau. So I would like to introduce all

of you.

Stand up and wave, fellows.

I promised them as soon as I introduced them to the crowd they

could go off and get some cotton candy or go on the rides. So fellows, you are released as soon as your mother says that is OK.

All right. Have fun.

Today’s hearing is going to focus on the recent corporate financial

scandals and their impacts on seniors. Most importantly, what can

be done to prevent the kind of losses to senior citizens and other

investors that we have seen in recent months. Millions of Americans were adversely impacted, but seniors were disproportionately

adversely impacted. Shareholders, employees, and retirees have

lost billions of hard-earned dollars. Uncertainty about financial

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scandals has deepened the retreat of our financial markets, causing

further losses, and it has reduced investments, both from at home

and abroad, that would make our economy stronger. So we need to

remove this uncertainty, because it is important to the overall

health of our economy.

It has been tragic for everyone, but for seniors, they have been

particularly hard-hit. The statistics—and I think Dr. Christopher

may—or the gentleman, rather, from the AARP may discuss these

in just a few moments—62 percent of our seniors now rely upon investment income to supplement their standard of living in retirement, and 43 percent of our senior citizens rely in whole or in part

on pension income. Obviously investments and pension funds alike

have been hurt by the recent corporate scandals. I think Dr. Christopher may have some testimony about how Indiana has been affected.

Although the worst of the abuses have been located in other

States, Hoosiers have also been affected. I believe that the Teachers Retirement Fund has lost about $25 million as a result of investments in Worldcom and things of that nature, and the Public

Employees Retirement Fund for state employees has lost a further

$66 million. Of course that is on top of the private losses that individual investors have suffered in 401(k)s and other private investments. So losses to Hoosiers have been real and significant as a result of these corporate frauds and scandals.

To prevent further abuses Congress has acted quickly, and the

President just recently signed into law the Corporate and Auditing

Accountability Act. It was bipartisan. The vote in the U.S. Senate

was unanimous. That does not happen very often, and that shows

you how strongly people are interested in doing something about

this. This Act is going to do things to try to make sure that these

sorts of financial frauds and shenanigans never happen again.

First we want to ensure that the auditors, who are supposed to

be the independent watchdogs of our publicly held companies, are

truly independent. There is going to be a new Auditing Standards

Board created. It is going to be completely independent of the auditing industry, and that is to make sure that the standards and

the auditors’ conduct is in the best interests of shareholders and

public citizens like those of you here, and not just in the best interests of the auditing profession itself. There will be limits placed

upon the conflicts of interest that exist in the auditing profession,

where auditors make substantial amounts of money from the companies in other services that they are also providing audit services

to.

This legislation will ensure management accountability on the

part of CEOs and chief financial officers and others who are running America’s largest corporations. CEOs and chief financial officers will be required to personally attest to the validity of financial

statements, with strong criminal penalties, including jail time, for

those who knowingly sign false reports to America’s shareholders.

Self-dealing, like getting large loans from the company, from

those of you who are shareholders, giving your money to corporate

officers and directors, that is prohibited except in a very, very few

limited instances.

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Top officials in companies who have cashed out and taken their

money and run, only to then restate financial earnings and other

statements to—in other words, they cashed out at the top, then

said, ‘‘Never mind’’ and restated their earnings, saying that all the

facts were not exactly so—they are going to be required to disgorge

those profits, those earnings, and give them back to the company.

So there is no more taking the money and running in corporate

America.

Executives are going to be subject to the same kind of severe

penalties that other employees are for things like securities fraud,

which is a new crime created in this legislation. It actually was not

a crime in the United States to engage in securities fraud; the prosecutors and law-enforcement authorities had to pursue these individuals who had ripped off all this money using other statutes, but

now it is a specific crime to engage in securities frauds.

There is going to be tougher enforcement, with real teeth. The

Securities & Exchange Commission is going to have its budget substantially increased, to hire more investigators, and so that they

can review very thoroughly, on an annual basis, the financial reports that are filed with the Securities & Exchange Commission.

There are whistle-blower protections, so that when individuals

like this woman in Enron who came forward, stepped forward to

blow the whistle on fraud and other abuse in large companies, they

will be protected from retribution by those upon who they are blowing the whistles.

We are going to hear about all of this from four witnesses today,

on two panels.

Our first witness will be Keith Taylor. Where is Keith?

Keith, thank you for joining us today.

Mr. Taylor is going to share his first-hand experience. Keith, I

understand unfortunately you have lost about two thirds of your

investment income.

I am going to get to the panels in just one minute.

He is going to tell us how that has impacted his life and share

with us some thoughts about what we can do and what the impact

of the new legislation may mean, in terms of protecting people’s retirement security. I appreciate your willingness, Keith, to share

with us your personal experience in this regard, so that others will

not be similarly impacted in the future.

Also testifying will be Dr. Christopher, who I referred to earlier.

Bill is the Executive Director of the Indiana State Teachers Retirement Fund. As I mentioned, the fund has suffered some losses as

a result of these financial frauds, and obviously that is the kind of

thing that we do not want to see teachers have to suffer, and gives

us a strong interest in preventing these kinds of frauds.

Catherine is showing the chart here. OK.

Mr. Chuck Leven—Chuck, did I pronounce that correctly? Good.

Thank you.

Chuck Leven, a member of AARP’s Board of Directors, is here

today to explain some of the work that has been done to protect

seniors and how the Corporate and Auditing Accountability Act

will help to stop Worldcoms and other situations like Enron,

Adelphia, and others from recurring in the future.

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Chuck, I want to thank you and AARP; you have been great from

the beginning, supporting this accountability legislation, and your

track record in terms of protecting Indiana’s and the rest of America’s seniors is exemplary, so I want to thank you for your presence

today, and we are looking forward to hearing from you about a host

of things, including what our seniors can do to help protect their

savings.

I think we have both AARP’s toll-free number and their website

here, that you can contact for further information about what to do

if you think you have been the victim of financial fraud, and some

tips on what to do to protect your savings.

I believe we have handed out these yellow packets. For those of

you who have not gotten a yellow packet, we are handing them out.

They also include information—for example, here are the top ten

investment tips for seniors, how to protect your retirement savings.

There is other good information in here about the basics of investing in the stock market, other things like that to help protect retirement savings and to tell you where to go if you think you have

been the subject of fraud or investment abuse.

So Chuck, thank you for being with us today.

Our final witness will be Miss Elisse Walter. Where is Elisse?

Thank you for coming today. Appreciate your making a trip here

to the Indiana State Fair.

Miss Walter is the Executive Vice President for regulatory policy

and programs at the National Association of Securities Dealers, the

NASD.

I would like to thank all of you for being here today. We are looking forward to hearing from our witnesses.

There are cards included in the packets, like this. If you have

questions for any of our panelists, please feel free to pass out these

cards. At the end of the panels, I am going to ask that the cards

be collected at the end of the first panel and at the end of the second panel. They will be collected. We are going to get to as many

as possible. For those of you whose questions we do not have time

to ask here today, we are going to get you a written response. I

think there is a place here for your address. Please include your

address, so that if a panelist cannot give you an oral answer today,

we will give you a written reply, so that every question will be responded to. So, for those of you who have questions, here are the

cards. Please fill them out. We will collect them at the end of each

and every panel.

The final thing I would say—and I am going to ask our first panelists to come up—is this: This is a very important topic. It affects

the life savings of millions and millions of American seniors, in

401(k)s and other retirement vehicles. It affects the health and

wellbeing of our national economy, because when there is uncertainty about our financial information people are less willing to invest, investors from abroad are less willing to put their money into

the United States America, and this harms us in a lot of ways.

But folks, at the end of the day what this is about more than

anything else are our values as a country, the kind of behavior we

are willing to tolerate and the kind of behavior that we will not tolerate. I hope that with the passage of this new Accounting Responsibility Act we are sending a loud and clear message to corporate

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America, but also to people in government and other walks of life,

that the United States of America is going to continue to be the

land of opportunity, not based upon fraud or deceit or financial chicanery, but upon hard work and ability and thrift and those basic

virtues that have always made this country great. That is what we

are here today to endorse and protect, and in the final analysis

that is what it is going to take to have better accounting standards

for the large companies and others across America.

So thank you for coming. Let us ask the first panel to come up.

Will Dr. Christopher and Keith please come up? We are looking forward to hearing from you.

Again, ladies and gentlemen, thank you for your time today. I

appreciate your presence. Let us get to the first panel.

Keith, we are going to start with you. Again, I want to thank you

for your willingness to share your personal experience with us.

Dr. Christopher, if neither you or Keith will be insulted, I am

going to take my coat off. So you feel free to do the same.

Mr. TAYLOR. Can I leave my hat on?

Senator BAYH. You can leave your hat on, and be proud of it.

Pull the microphone forward, so we can hear you.

Mr. TAYLOR. OK.

Yes.

Senator BAYH. Mr. Taylor, please. The floor is yours.

STATEMENT OF KEITH TAYLOR, RETIREE

Mr. TAYLOR. My name is Keith Taylor. I was born and raised in

Indianapolis, IN. I quit school when I was 16 years old, to go to

work. I worked hard for the next 50 years, and then I retired. That

was about 4 years ago.

I do not know much about business, and my only claim to fame

is that all my life I have worked very hard. I worked a lot of hours,

and I saved a lot of money—maybe not a lot——but some.

Well, I saved a lot of money, more or less. When I was 18, you

know, I got a great opportunity from who I consider a great man,

Mr. Carl Gruenman, owner of Universal Tool & Engineering. He

gave me my first break, and from then on I worked mostly 60 and

80 hours a week as a toolmaker.

For most of my life I had two jobs: I worked for Ford Motor Company, and I had a small machine shop in my garage. I saved money

I made, and I invested it. I thought I had a solid amount of money

for my retirement for me and my wife.

My wife and I were going to travel. We cannot necessarily do

that now. In the last year I have lost two thirds of my retirement

investments because of the wrongdoings by the CEOs, and because

of the lack of confidence in business leaders in the market. The entire market is suffering.

I think that most of my stock will come back, but there are several that were my pride and joy, that will not because of the shenanigans of the CEOs and the board of directors. I just thank God

each day that I have my Social Security and my Ford UAW pension. [Applause.]

The recent events have taught me how important Social Security

is and how it needs to be available for everyone. Social Security

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has to remain stable and secure, and we should not make any

changes to privatize it. [Applause.]

I never dreamed I would be in the situation I am today. Like I

said, I worked hard and always played by the rules. What makes

me mad is that every day you see where these corrupt CEOs have

ripped off millions of dollars from innocent people. Do you know

where that money comes from? It comes from people like you and

me, who invested it, and who had faith and trust in their CEOs.

When you buy into a company, you are hiring the CEO, and the

board of directors, to look after your investment. Not just my investment, but every investor’s money. They should do their job, not

just for the enhancement of the corporate elite and for their own

CEO salary.

I just read somewhere where CEO salaries have jumped something like 500 hundred times that of the average employees. Ten

years ago they were at something like 50 times greater; and that

was a lot. Are they really worth millions of dollars a year? Do they

really need that much? They should be putting some of that money

back into the company, so that the shareholders can benefit. It is

a sad commentary on our culture and society to have people in very

high positions that are interested only in their personal gain rather

than the fulfillment of their sworn obligations.

These are people who are supposed to be running the company.

The board of directors are hand-picked by the CEO’s. They are

hand-packed, too. Sorry about that, secretary.

Senator BAYH. Tell it like it is, Keith. [Laughter.]

Mr. TAYLOR. The CEO dictates to the board what his salary or

severance pay should be, and the board just rubber-stamps it. The

basic stockholder, like me, does not really have a choice at all. We

can vote for, abstain, or vote against the board, but we cannot

nominate them. As long as the CEOs have control of the board of

directors, there will be no check on the CEOs. What these CEOs

have done is like shooting fish in a rain barrel. You can get a lot

of fish this way, but it is not very sportsmanlike.

Instead, they rip off people like me. We had faith, trust, and confidence in them, we should not have had.

I do have faith and confidence in my Senators and my country.

Indiana has two of the greatest Senators around. I really believe

that honestly. I know, Senator Bayh, if someone with real integrity

was CEO of the companies that I invested in this would not have

happened. I wish you were the CEO of one of the companies in particular I invested in.

Senator Bayh, I want to thank you for your work on the Accounting Reform bill. That law will be very helpful in protecting investors like me and putting corporate criminals behind bars. [Applause.]

Yes, behind bars; that is where they belong.

Before, high-level crooks would get fined millions of dollars, but

that does not help. Money is never going to be a deterrent to the

higher-level crooks. They have insurance to cover themselves, insurance me and other investors helped buy for them. Jail time is

different. You cannot get insurance for your jail time, and you cannot pay somebody to go to jail, to do jail time for you. Jail is a real

deterrent. If I am a CEO with a big house in Florida, being in the

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Big House, the jail, is not going to allow me to enjoy all my money.

Jail will get the attention of high-level crooks.

So let me say thank you again, Senator, for passing that bill. I

really appreciate it.

I have a personal plea I would like to leave you all with: Our society needs to restore its ethics and its conscience. People need to

remember to do the right thing, the moral thing. All the laws in

the world will not make a difference if people do not change their

behavior. We have the greatest country in the world, the greatest

economy. What has happened is, CEOs thought their behavior was

OK. We cannot go on letting people get away with lying, cheating,

and stealing.

Thank you for letting me testify today. God bless the two great

Senators from Indiana, and finally, God bless U.S.A.

[The prepared statement of Mr. Taylor follows:]

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Senator BAYH. Thank you very much, Mr. Taylor.

Dr. Christopher.

STATEMENT OF WILLIAM CHRISTOPHER, EXECUTIVE

DIRECTOR, INDIANA TEACHERS RETIREMENT FUND

Dr. CHRISTOPHER. Senator Bayh; ladies and gentlemen:

I am Bill Christopher. I am the Executive Director of the Indiana

Teachers Retirement Fund. I am also an Educator and Administrator. I have been Director for almost 4 years, but I have been a

member of the fund for over 42 years. It does not seem that long,

but it has been. The Executive Director of the Teachers Retirement

Fund is the Chief Executive Officer of the fund.

Senator Bayh, I thank you for inviting the Teachers Retirement

Fund to testify on behalf of our membership. Your leadership for

our State and Nation are much appreciated, and respected. I feel

especially fortunate in having worked with you in the past, and I

appreciate your guidance and help in my past work, and look forward to working together on behalf of Indiana citizens, especially

teachers, in the future.

At the Teachers Retirement Fund we are fortunate to have a

board of trustees of five very supportive and involved former educators and private citizens of our State, who are very knowledgeable about pension systems and investments. The trustees freely

give of their time in helping to improve our fund.

Our membership consists of all of the licensed public school

teachers and administrators in Indiana. We also serve as the pension fund for a large number of college professors and administrators. For the first time this year, we are currently enrolling teachers and administrators of the newly formed charter schools.

The Indiana Teachers Retirement Fund has over 114,000 members. Most are citizens of Indiana, or they live somewhere in the

United States. We have a very small number who currently are living in foreign countries. Almost 34,000 of that number are currently living as retired people, receiving monthly retirement

checks. About 100 of these retired members left teaching before

1950, if you can imagine. We have one who retired in 1939. 75,650

are active teachers or administrators. Of the active teachers, about

10,000 are over the age of 60, and have been in education for over

35 years. Thirty are past the age of 75 and still teaching. Essentially, we have a working relationship with Indiana teachers and

educators that can span over a period of 75 years.

The Teachers Retirement Fund manages about $6 billion in assets on behalf of our membership. We continually rank in the

upper quartile on our investments when compared with other pension funds. At the end of the last calendar year we were the only

fund of our group of 65 plans that had a positive year-end earnings

rate. We are an independent body corporate and politic, with an

independent board of trustees.

Many of our retired members are actively engaged, serving as

leaders and important members of their local communities. They

often continue their participation in the education of young people,

and in many, many other community service organizations. Of the

34,000 retired members, we have 44 who are over 100 years old;

37 survivors of former teachers are receiving pensions that are also

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above the century mark. If you can believe it, we have four members who are receiving pensions who are over the age of 106.

Indiana is unique of the teacher retirement funds of the country.

Our uniqueness comes from the fact that teachers in Indiana have

the opportunity to make investment choices with money contributed to their annuity savings account. This makes our retirement

system a blend of the traditional defined-benefit plan, or, as most

States support, a plan that consists of the basic pension and a defined-benefit plan.

This has worked well for our teachers. They have the stability of

the more traditional pension and the opportunity for participation

in a growing economy with the annuity savings portion of their retirement program. Teachers can direct the investment of their annuity savings portion of their retirement plan as they so choose.

Teachers have a choice of five investment options, including the

Guarantee Fund, currently paying 7 percent; an S&P 500 account;

small-cap investments; an international fund; and a domestic bond

fund. Indiana teachers are vitally interested in their annuity savings account and the investment of those accounts.

Most recently, teachers have expressed their concern about the

highly reported losses from Enron, Worldcom, Q-West, and others.

This fund lost about $37 million. Now I have to quickly add that

that is less than one tenth of a percent of our total holdings. We

are troubled with the reasons underlying these losses.

Senator Bayh, we really appreciate your leadership and the actions of Congress for the review and completion of legislation concerning accounting and other regulatory rules and regulations.

When we communicate with our members, we continually remind

them that, although any short-term loss is not good, we are, however, in long-term investments. Losses and gains are part of the

normal cycle of investment. Actuaries account for our investments

over a 40-year period. I suppose the argument could be made that

we invest on an infinite timeline. This is especially true when we

have people beginning their investment in our fund as teachers at

the age of 21 and currently retiring at an average age of 58, and

some living past 106.

The message to our members is that we are unhappy with any

loss in these equities markets, but because of our long-term investments and the relatively small percentage of the loss, we will recover. We have an extensive asset allocation plan that contemplates losses and gains.

Senator Bayh, your leadership in developing the new legislation

that addresses accounting fraud is appropriate, and certainly was

needed. Especially welcome is the establishment of the Federal

oversight board for the accounting industry. By restricting the

nonaudit services that accounting firms may provide to clients, the

statute strengthens the concept of an independent audit. Your handling of stock analyst conflicts of interest is certainly positive, considering the recent disclosures of such conflicts. Major changes in

severity and length of penalties strengthen the concept of accountability, and offers renewed faith in financial markets. By supporting the SEC with greater funding authority, the Congress has

given that regulation needed to bring back a greater faith in our

economy. The bottom line, however, is defined by having people

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with integrity and a sense of basic honesty heading companies and

systems invested in by pension funds and by individuals.

We are pleased that we are able to talk with you today. Thank

you for having us here and being able to participate in the hearing.

I would be pleased to answer whatever questions that anyone

might have.

[The prepared statement of Mr. Christopher follows:]

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Senator BAYH. Thank you very much, Dr. Christopher.

I neglected to mention, but I am glad that we had the opportunity to work together for several years when I was privileged to

be the Governor of our State. Bill, I am very grateful to you for you

continuing your public service and watching out for retirement savings of our teachers. I think they are in very capable hands. Thank

you.

Now I misspoke when I mentioned earlier, what we are going to

do here is, I am going to have some questions for Keith and Bill,

and then we are going to have the second panel come up, and then

we are going to call for your questions so we can ask questions of

both panels simultaneously, so a couple of questions from me for

each one of you, and then we will bring the second panel up, I will

ask a couple questions of them, and then we are going to have the

audience questions for all of us.

Keith, let me start by asking you something: There may be other

people in the audience here today who have had your experience

with the losses that you have suffered. I know there are others at

home. What advice would you have for people here today? What,

if anything, can they do to get through a situation like this or avoid

it, and how much will it be of benefit to folks like you in the future

to know that those financial statements are more accurate when

you see them about companies that you invest in?

Mr. TAYLOR. Senator, I wish I had some good advice. But the bottom line is, you know, even doing your homework and studying and

looking at past performance, if there is somebody out there who is

flat-out lying to you with the intention of cheating you, chances

are, if you are a little individual investor, that guy is going to get

the job done.

One of my particular stocks that really hurt me personally, because I had so much faith in it and it was such a good company

for so long, I just saw the handwriting on the wall, but I just could

not believe what was happening was going to happen. But it did.

The thing that can prevent this from coming about again is just

what you have done, Senator: You put something in there that I

feel is really going to get their attention. That is going behind bars.

Because I do not care how much money you have got on the outside, if you are looking at jail time, I think these guys are going

to give some serious thought before they hoodwink, swindle, lie,

cheat, and steal from people like me.

Senator BAYH. I think you are right, Keith. That is why we put

stiff jail time in there.

You know, if you hold up a five-and-dime and you take a couple

hundred dollars, you end up going to jail, but in the past if you

have stolen millions and millions of dollars, very often you have

not. That is just not right. So I hope it will get their attention. I

think you will see that some of these individuals are going to be

living in public housing for quite some time. But it is not going to

be a country club.

You mentioned something else that caught my attention. Now,

you have got a pension from Ford; right?

Mr. TAYLOR. Yes, sir.

Senator BAYH. You have worked hard, and so you have been able

to put a little bit of money away, and that has been taking a beatVerDate 11-MAY-2000 14:02 Dec 11, 2002 Jkt 000000 PO 00000 Frm 00024 Fmt 6633 Sfmt 6633 C:\DOCS\82917.TXT SAGING1 PsN: SAGING1
21

ing in the stock market. I assume you are also qualified for Social

Security.

Mr. TAYLOR. Yes, sir.

Senator BAYH. Now, a lot of our seniors do not have a pension,

and they have been able to save a little but not a lot, and so they

rely really for a preponderance of their retirement income on Social

Security. What kind of shape do you suppose they would be in if

they had invested that money in the stock market, the last few

years? I notice that you did not seem to think that was a good idea.

Mr. TAYLOR. Senator Bayh, I love Social Security; I always did.

My parents were very, very fortunate to have it when they retired.

Thank God I have got it, my wife and I, when we retired. It scares

me, when reading the paper about people of high level want to diverse Social Security and let the individual invest their own

money. Even people I worked with for the last 10, 15 years, because the stock market has been on a roll, everybody has this,

‘‘Gosh, if I could invest my Social Security money, look at what I

would have!’’ You read in the paper where the advocates of changing Social Security as it is say, ‘‘Look what you could have if you

only invested it and if you only had the right stocks!’’ Yes, right

there is the key word, though: When you invest in Social Security,

you are investing in the U.S. Government. I have faith and confidence the U.S. Government is always going to be there; Social Security is always going to be here; you are always going to have a

pension come available from Social Security.

But if you are out there betting on the stock market, you just

might as well go down to the racetrack and bet too. You may or

you may not have anything when you get to that retirement age.

I am thankful that Social Security was brought about, and thankful for having it like it is.

I think, if we ever let people take part of their Social Security

and invest it individually, what is going to happen when these people, lose all of their pension, they lose all of their investments— what are we going to do? We are going to have to put them on welfare.

Senator BAYH. You are afraid that we would take the ‘‘security’’ out of Social Security if we changed it.

Mr. TAYLOR. That is right.

Senator BAYH. Well, thank you.

I assume that, like a lot of seniors, if they do not have a pension

or much savings, that if their Social Security went down the drain,

you would be in pretty tough straits; right?

Mr. TAYLOR. That is right.

Senator BAYH. Well, thank you very much, Keith. I do very much

appreciate your being here, your sharing your experience with us,

and your kind words about me.

Mr. TAYLOR. Senator, I certainly thank you.

I tell the ladies that helped me that, you know, I am 70 years

old; first time I have ever given a public speech. So—— Senator BAYH. I think you did pretty well! Do you not think so?

[Applause.]

Seventy years young, Keith.

Bill, a couple questions for you, Bill, and we will get the second

panel up here.

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I do not know how many of you were paying attention when Bill

was speaking, but of the 65 retirement funds that are in the same

category as the Indiana Teachers Retirement Fund, our Teachers

Retirement Fund is the only one that had a positive return over

the last year. The only one. They consistently rank in the top quartile of all of the pension funds against which they are compared.

My question to you, Bill, is, with all the turbulence in the markets—and I think one of our next panelists is going to point out

the S&P 500 is down 40 percent or thereabouts over the last couple

of years—how did you do this over the last year? Why were you the

only one that had a positive return? What can some of our seniors

who are here today learn about managing their own retirement

savings based upon your performance?

Dr. CHRISTOPHER. Well, first of all, as you recall, since you were

Governor at the time, it was not until 1996 and thereafter that we

were able to invest in the equities markets. We had large investments in bond funds and in the fixed-income funds. Today we still

have large investments in fixed-income funds. This is because it

takes a long period of time to transfer everything over into an asset

allocation plan that would include a lot of equities.

Senator BAYH. So one of the lessons we have learned is what

they call dollar-cost averaging——

Dr. CHRISTOPHER. That is right.

Senator BAYH [continuing]. Where you do not put all your money

into one investment at one point in time; you put it in over a longer

period of time and you kind of take the—some of the ups and

downs out the system?

Dr. CHRISTOPHER. Absolutely. My dad said, ‘‘You do not put all

your eggs in one basket,’’ and that is certainly true in equity. You

do not put it all in one basket; you need to have a very good asset

allocation plan.

In fact they tell us that about 92 percent of any earnings that

you can make on your investments would have to be because you

do have an asset allocation that offsets the ups and the downs.

Senator BAYH. So that is the second lesson. The first is with regard to timing: You put it in over a longer period time, to take

some of the ups and downs out. The second is asset allocation?

Dr. CHRISTOPHER. That is right.

Senator BAYH. So that even if you are putting it in over a longer

period of time, you do not just put it all into stocks or one different

kind of—not one kind of investment vehicle——

Dr. CHRISTOPHER. That is right.

Senator BAYH [continuing]. You spread it around, and that helps

diversify.

So dollar-cost averaging, diversification——

Dr. CHRISTOPHER. That is——

Senator BAYH. Anything else you might share with the folks here

today? Besides great management, the great leadership——

Dr. CHRISTOPHER. No, I agree——

No, actually I think it is in paying attention. You have got to

really pay attention. It is not a job for the weak at heart; you have

to pay attention on a day-to-day basis, what is going on, and make

sure your assets are continuing——

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Senator BAYH. So, an informed investor, having people here look

at the sheet from AARP and elsewhere to learn about how to evaluate their investments in companies, that really—— You know, we can pass the best laws in the world, and we are

trying, we are going to throw people in jail when they break the

law, but as you point out, at the end of the day there is no substitute for honesty in the management of some of these companies.

Bill, as you are pointing out, really our best defense is an informed

consumer. As Keith pointed out, the most informed consumer, if

they give you bogus numbers it is kind of hard to manage your investments, but as best you can you have got to try and stay on top

of it.

Dr. CHRISTOPHER. Yes. I think that is—that also goes back and

points out to everyone the importance of the legislation which was

just passed, where we do have independent audits, where we are

demanding that, where you have offered the leadership to make

sure that we do have independent auditors, that we are—there are

jail terms for not doing things in an appropriate and responsible

manner, and I think that is really important.

Senator BAYH. Bill, one final question for you, and we will get

our next panel up here.

Keith mentioned something, and I am sure it is frustrating to

many people in the audience today and elsewhere across our State

and country. You know, Keith felt a little powerless, he said, where

the CEOs picked the board members and they kind of, you know,

treat the CEO well in exchange for that, and he kind of just said,

‘‘Well, we cannot nominate members of the board and that kind of

thing.’’

But one thing I have noticed that is going on, Keith, although it

is hard for a single investor to have much impact, we are getting

a lot more what they call ‘‘institutional shareholder activism.’’ So

your pension fund at Ford or the Indiana Teachers Retirement

Fund are getting more active in scrutinizing management and saying, ‘‘Look, we are just not going to invest in certain kind of—in

companies if you do not have certain kinds of rules and if you do

not live by them.’’ So, Bill, I would like to ask you, are you at the Teachers Retirement Fund thinking about having standards that you will insist

that companies abide by in terms of accounting standards and, you

know, CEO and board relationships and things like that before we

will invest our money in them?

Dr. CHRISTOPHER. We have——

Senator BAYH. Because, Keith, while your voice may not be

heard, Ford Pension’s voice will be heard, or Mr. Christopher’s

voice might be heard because he represents billions of dollars.

Dr. CHRISTOPHER. One of the really interesting things is that in

the last few weeks we sent letters to all of our investment managers—we have about 32 companies that invest on our behalf—and

we asked them to really look carefully at the stocks they buy and

look at the leadership that is there and to look at what is going

on in the corporate governance of those funds, to make sure that

we are not being hoodwinked, as we suggested here earlier. I think

that is the way we can put pressure on. If any is, we can vote the

stock and vote the proxy, and we continue to do that and work toVerDate 11-MAY-2000 14:02 Dec 11, 2002 Jkt 000000 PO 00000 Frm 00027 Fmt 6633 Sfmt 6633 C:\DOCS\82917.TXT SAGING1 PsN: SAGING1
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gether on it. I think we all have to work to get together to make

it better.

Senator BAYH. You can vote the stock, and you can also vote with

your feet by withdrawing the money.

Dr. CHRISTOPHER. Absolutely.

Senator BAYH. Might get their attention, too.

Dr. CHRISTOPHER. Right.

Senator BAYH. Well, gentlemen, thank you.

Let us express our appreciation to Bill and Keith. They are going

to stay around, see if they can answer any questions from the audience.

Thank you.

Senator BAYH. If we could have Chuck and Elisse come up.

Elisse, thank you. Chuck, thank you.

All right, let us get to the next panel. We are very fortunate to

have Chuck and Elisse with us. Just a couple of words about both

of them, and then we are going to get right to their statements.

Mr. Leven, is that how I pronounce it, Chuck? Leven?

Mr. LEVEN. Right.

Senator BAYH [continuing]. Was elected by the board of directors

of the AARP to serve as Vice-President, Secretary-Treasurer. He

also serves as chairman of the board’s audit and finance committee.

Prior to his retirement in 1994, Mr. Leven served in a variety of

positions in retail management, including senior vice-president of

operations for Saks Fifth Avenue and Abraham’s and Strauss.

Mr. Leven will discuss the importance of the recently enacted

Corporate and Auditing Accountability Act, as well as what seniors

have to do to protect their own financial interests.

Let us please welcome Chuck Leven.

STATEMENT OF CHUCK LEVEN, MEMBER, AARP BOARD OF

DIRECTORS

Mr. LEVEN. Thank you very much. Good afternoon, Senator

Bayh. My name is Chuck Leven. I am a member of AARP’s board

of directors.

On Seniors Day at the Indiana State Fair, it is good to see so

many AARP members in the audience. [Applause.]

Go, team!

I appreciate this opportunity to offer AARP’s assessment of the

importance of the recently enacted Accounting Reform and Corporate Responsibility Act to the retirement security of older Americans.

We believe this new law has the potential to become one of the

most important anticorruption reforms since the U.S. Securities &

Exchange Commission was created during the Great Depression.

While accounting is not the subject of many movies, it did provide

the legal evidence on which Al Capone was sent to Federal prison

during that era. As the saying goes, ‘‘The devil is in the details.’’

Since then the stock market has developed in ways that make an

increasing number the Americans feel they would be treated fairly.

The trust encouraged more and more middle-income individuals

and families to invest their savings in personal investments and

through their pension funds. Investors who are 65 or older own apVerDate 11-MAY-2000 14:02 Dec 11, 2002 Jkt 000000 PO 00000 Frm 00028 Fmt 6633 Sfmt 6633 C:\DOCS\82917.TXT SAGING1 PsN: SAGING1
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proximately 17 percent of all mutual funds. Income from investments has become increasingly important to older Americans.

According to the Census Bureau, more than 28 million Americans over age 65 rely to some extent on investment income to meet

their living expenses. Three quarters of older persons depend on investment income to meet 25 percent or more of their total income.

What Americans are demanding again today is stock markets

that will provide them with equal access to the best information

that is available so they or their money managers can fairly consider their investment choices and risks. Like the economy, we all

know the stock markets can go down as well as up. So it has been

the last couple of years.

One well-known measure of our stock market, the S&P 500 stock

index, has gone down approximately 40 percent since the year

2000. The cumulative effect of the market’s decline is to the real

and widely felt loss to personal income and savings. That loss has

been estimated to be well over $5 trillion.

In addition, mounting reports of accounting irregularities, corporate mismanagement, and bankruptcies have led to a loss of

trust in corporate America, and a deepening mistrust of the stock

markets. There has been a growing sense that only corporate and

market-based insiders know how companies are really doing.

This crisis of investor confidence developed in spite of the fact

that most Federal and state securities statutes and regulations

have as their primary goal the promotion of fair and full disclosure

of corporate and stock market information.

A consensus has emerged that our system of stock market regulation has been weakened by widespread conflict of interests, outdated regulatory checks and safeguards, and insufficient resources.

There is also concern that company shareholders have been poorly

protected because of inadequate oversight of corporate management.

The Enron Corporation’s bankruptcy, which was filed in December 2001, sounded the alarm and spawned many investigations by

the SEC and the U.S. Department of Justice and by the Congress.

These investigations indicated to us that the stronger legislative

medicine proposed by Senator Sarbanes of Maryland and eventually enacted with your help, Senator Bayh, was necessary to renew

public trust in our stock markets.

For older Americans, whose retirement incomes are dependent on

investments in our markets, the reforms put into effect as part of

the Accounting Reform and Corporate Responsibility Act will bring

critically important reassurance. The new act does strengthen

criminal and civil penalties for fraudulent misbehavior by top corporate officials.

But perhaps more importantly in the longer term, the act establishes a new set of legally enforceable regulatory guidelines to

make the accounting profession, corporate boards of directors, outside attorneys, stock analysts, rating agencies, and the SEC, more

responsible for recognizing and preventing the wave of scandals we

have recently seen.

But in the end reputable people will have to be selected to make

the new system work. Above all, we must have qualified professional, dedicated to enforcement of this new law. Accurate corVerDate 11-MAY-2000 14:02 Dec 11, 2002 Jkt 000000 PO 00000 Frm 00029 Fmt 6633 Sfmt 6633 C:\DOCS\82917.TXT SAGING1 PsN: SAGING1
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porate and market information is important, not just to individual

investors and pension fund participants. Whether or not we have

invested money in the stock market ourselves, we want those who

do to put it into businesses that will make the best use of it to create jobs, to make and do the things that we need at the lowest possible prices, and for healthy businesses and their employees to pay

their fair share of taxes, to support important programs that we all

benefit from, like Social Security and Medicare. We can perhaps

appreciate more today how important these programs are.

But it is also clear that ordinary investors will have to do more

to protect their own financial interests. As a second act, Senator

Bayh, I have attached to my written statement a copy of AARP’s

Investing Basics of the Stock Market. I believe copies of this document are available as handouts for today’s audience.

One final comment: We believe that Congress has unfinished

business. Particularly important to AARP is pending legislation to

upgrade Federal pension law to better protect workers’ retirement

savings, particularly from the devastation of losses in employers’ stock holdings. Of the 21 largest corporate bankruptcies filed since

1980, New Generation Research, Inc. reports that nine of those

bankruptcies occurred within the last 19 months. Among these filings are the two largest corporate bankruptcies in American history: Enron and Worldcom, both of which declared themselves insolvent within the last 9 months. Thousands of retirees and thousands more whose retirement depended on the pension plans provided by these corporations have been victimized, with tragic personal consequences. More still needs to be done.

The Senate is scheduled to take up pension reform this fall. We

believe the law should be amended to provide greater choice in pension investment, to ensure that employees are not loaded up with

employers’ stock preference. In addition, we should ensure that

pensioners get quality investment advice, given by professionals

who do not have a conflict of interest in the advice they have given.

Last, we should make sure that pensioners have an effective

means to recover money lost due to fraud or wrongdoing.

Senator Bayh, you are an active and important member of several different Senate committees that have acted on these problems. We appreciate your efforts to help enact the Corporate Responsibility Act, and look forward to working with you on the unfinished parts of the reform agenda, particularly pension reform.

With these observations I will close. I will be happy to answer

any questions.

[The prepared statement of Mr. Leven follows:]

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Senator BAYH. Chuck, thank you very, very much.

I want to again thank AARP for the leadership role that you

have played both in the accounting and corporate responsibility

arena, and I am glad you mentioned the pension issue. That is

going to be one of the top priorities when we return in September,

and I am hopeful that we will be able to enact those meaningful

reforms that you mentioned and have the President sign it into law

yet this year. It would be a tragedy to have any other companies

go under before we have had an opportunity here to protect those

employees and retirees.

Thank you.

Elisse Walter is with us. She is the Executive Vice-President for

regulatory policy and programs of the NASD. She oversees operating, legal, and policy activities at the NASD.

The NASD’s core mission is to regulate the securities industry in

order to protect investors and to insure market integrity. I think,

Elisse, you are going to discuss with us investment-protection

issues, and the ways in which the NASD serves to help investors.

So we thank you for your time.

By the way, both Elisse and Chuck are from New York State; we

are grateful to have them with us. I have encouraged both of them

to spend lots of money while they are here in Indiana. We appreciate you both.

Folks, let us give Elisse a warm welcome.

Thank you for joining us, Elisse.

STATEMENT OF ELISSE WALTER, EXECUTIVE VICE

PRESIDENT, REGULATORY POLICY AND PROGRAMS, NASD

Ms. WALTER. Thank you, Senator Bayh. Thank you for the mission of spending money; I am very good at that.

On behalf of NASD I would like to thank you for the opportunity

to be with you today at the State Fair and testify on investor and

investment issues.

I was vividly reminded, in listening to Mr. Taylor earlier, that

today’s investor lives not on Wall Street but on Main Street. There

are more than 84 million Americans and countless others in other

countries who now participate in the securities markets, either directly or through mutual funds and pension plans. It is obvious

that for a lot of them—in fact, for a lot of us—if we look at our

401(k) account balances, our mutual fund account balances, and

our retirement plan balances these days, the result is really quite

disheartening.

As a result, I think today, perhaps more than ever in the recent

past, there is a huge demand for information about investing and

investments. As Senator Bayh said in other words earlier, sound

information is simply your best tool to protect yourself.

To meet this need, NASD is really uniquely situated to bring individual investors fair information. I cannot tell you where to put

your money, but I can explain to you how—or at least some of the

ways in which you can learn more before you invest.

Under the leadership of Congress, NASD has been working to

protect investors and to make the markets more transparent and

fair in these times, which certainly have challenged investors’ confidence. For example, we recently adopted tough new rules which

33

force research analysts to be more independent, and to make their

recommendations more useful for all investors.

Senator Bayh, I would like to add my congratulations to those

you have already heard today at your efforts in passing the new

accounting reform bill. It is simply critical that investors be able

to rely on the financial information that they are provided, and I

certainly believe that the new system of regulation that the bill has

enacted will have a very significant impact on investing in this

country.

In particular I would like to highlight the new accounting oversight board, which is going to bring a system of private-sector regulation like that that NASD provides in the securities industry to

the accounting profession.

NASD as an organization first came into being more that 60

years ago as part of the response to the Great Depression and the

market crash of 1929. The Federal Government gave this privatesector body the authority to be a regulator for the securities industry, with the mission of protecting investors. Now, more than 60

years later, we have over 2000 employees and an annual budget of

about $400 million. Those people and that money is devoted to the

protection of investors. Because we are a private-sector regulator,

like the new accounting board, that extra layer of protection does

not cost the taxpayers a dime.

Under Federal law, every securities firm that does business with

the public must be a member of the NASD. We regulate about 5500

brokerage firms, 90 thousand branch offices, and almost seven hundred thousand stockbrokers. Our mission includes writing rules for

the firms and their employees, checking up to see if they are following the rules, and taking strong action against them if they do

not. Our standards are not merely best practices or simply examples of what good behavior should be; instead, they are enforceable

rules. We vigilantly monitor our firms and their staffs, and if they

break our rules they experience enforcement with teeth.

One example, this year alone, acting jointly with Securities &

Exchange Commission we brought a case and imposed sanctions of

$100 million against a major investment banking firm for giving its

favored customers special access to profitable stock deals when

companies go public. Of course for a price.

NASD is doing everything that it can to ensure that our country’s financial markets remain strong. Healthy securities markets

attract investors, generate capital, create jobs, and spur economic

growth. But they can only fulfill that promise if they are fair. On

average, we bring more than one thousand new disciplinary actions

every year, and we sanction our firms and their staffs with actions

ranging from censures to fines to suspensions from being in the

business, to permanent expulsion from the securities industry.

Again, there is an analog here to certain provisions in the new accounting reform bill.

We add to our enforcement efforts by referring cases to the SEC,

to the state authorities, and to criminal authorities. This is critical,

catching people who violate the law and sanctioning them. It is

critical both to individuals, and it is also critical to the markets

and the investing community as a whole, including most of the peoVerDate 11-MAY-2000 14:02 Dec 11, 2002 Jkt 000000 PO 00000 Frm 00037 Fmt 6633 Sfmt 6633 C:\DOCS\82917.TXT SAGING1 PsN: SAGING1
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ple in the securities industry, who are law-abiding and play by the

rules.

These people undermine investors’ confidence. We can help by

going after fraud and conflicts of interest. But at the end of the day

regulators can never eliminate risk in the markets or do the homework that we as investors all need to do for ourselves. What we can

do, though, is to help investors do their homework. I would like to

highlight today two of the important programs we have that do just

that, our investor education program and our public disclosure program.

Through our website and publications, we provide a range of information, tools, and resources. One of them is included in the folder you have today, that investors can use to educate themselves

about all that the securities industry offers to them. We are expanding the breadth and depth of those offerings, and reaching out

to new audiences, including retirees.

We have also created a Targeted Investor Protection, or what we

call a TIP group, which is made up of experts from all our different

departments, and their mission is to stop problem trends early, so

that we can provide timely investor alerts to all of you, to help you

steer clear of the problems rather than being caught short by them

after you have already become involved. We have issued alerts on

topics such as mutual funds and variable annuities, among others.

A critical first step is involved in our public disclosure program,

and that is the question of, with whom do you invest? When you

pick a stockbroker you should find you should find who that person

is. We have a system that will enable you to find out about that

person, what he or she has done, and what their disciplinary history is, and you can access that public disclosure program through

our website at WWW.NASD.COM or through a toll-free telephone

number.

Investors can also contact their state securities department to obtain information about brokers and to lodge complaints. In Indiana

Brad Skolnik, who is here with us today, is the Securities Commissioner, who works hard to protect Hoosier investors. We work closely at the NASD with the States, including Brad, on the full range

of issues relating to licensing and enforcement.

Our goal is not only to be the preeminent source of information

for investors but also, first and foremost, to protect them. Despite

our best efforts, at times people get hurt.

So what recourse do investors have? The first line of recourse is

really for an investor to go back to the investment firm with whom

he or she invests and submit a complaint to them, because the

problem may be able to be taken care of at the firm itself. If investors are not satisfied with that, or if they choose instead to come

to us first, they can lodge complaints with us, or with their state

regulators, or with the Securities & Exchange Commission.

For us, investigating investor complaints is a large part of our

job. There are thousands that we look at every year. You can submit a complaint to us either electronically or by letter through one

of our district offices. With us today as well is Carla Romano, who

heads our Chicago district office, and whose territory includes the

great State of Indiana.

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If none of those avenues work, investors should also know that

NASD runs the largest and most effective securities dispute resolution forum in the country. We handle 90 percent of securities mediations and arbitrations. You can get more information about that

as well on our website and in our publications.

To close, the entire financial industry depends on investor confidence. Our job, our complete and full mission, is to try to bring

integrity to the markets and to protect investors. We have all been

reminded all too recently that lasting confidence has to be based

on that solid, good information and sound regulation.

Senator Bayh, I would urge your constituents to look to NASD

for answers, information, and help.

Thank you. I would be happy to answer any questions.

[The prepared statement of Ms. Walter follows:]

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Senator BAYH. Thank you very much, Elisse. We appreciate your

being here and your comments.

In addition to her insightful comments, Elisse is also a mindreader: I was just handed a piece of paper, informing me that Brad

Skolnik is with us. I wanted to acknowledge Indiana’s Securities

Commissioner, one of the top enforcement officials in the State of

Indiana to root out securities fraud. So, Brad, it is good of you to

come. Thank you. Thank you for being with us.

Just a couple quick questions, Chuck, for you and Elisse, and

then we will take questions from members of the audience for either this panel or members of the first panel.

First, Chuck, Keith mentioned, on the first panel, the privatization of Social Security. I do not want to ask for AARP’s official position, but do you have an opinion about what position investors

would be in, as you know, many of our seniors do not have pensions; many of them have not been able to put away sufficient retirement funds. What kind of condition would they be in if they

had been invested in the market here the last few years?

Mr. LEVEN. Well, let us go back to, first of all, Social Security.

Roughly 60 percent of the people who collect Social Security depend upon it almost entirely for their income.

So if you took that away, you would then have a huge increase

in poverty-level people in the senior citizen group.

Senator BAYH. So, taking Keith as an example, he lost two thirds

of his investment savings. So, as 60 percent of our retirees, all they

can rely on is Social Security; if they lost two thirds of their Social

Security, they would be down to only a third.

Mr. LEVEN. Complete disaster.

I will tell you AARP’s position, since you were kind enough not

to ask me. That is very simply this: We believe that Social Security

is an insurance program. It is not meant to be an investment program. It is simple. An insurance program is one of the legs of a triangle. It must be retained pretty much as it is. Now, if the Congress in its wisdom wants to go beyond that and allow additional

monies for private investment, that is all right.

Senator BAYH. Supplemental, but not—— Mr. LEVEN. Supplemental; right. [Applause.]

But Social Security must be kept intact. That is our strong position, and we will continue to stand with that.

Senator BAYH. Thank you, Chuck.

My second question for you would be, included in the handout

that we provided to everyone is Investing Basics for the Stock Market. Could you share with us a few of the things that are on there

for those who have not had a chance to look at it?

Mr. LEVEN. I think that some of the most important things you

ought to know is: No. 1, develop your own financial plan. What do

you really need when you are going to retire? How much money are

you going to need to live on? How much cash should you have?

We recommend typically 6 months’ worth of your expenses

should not be in anything but a cash or some asset that could be

quickly converted if needed.

Senator BAYH. What percentage is that, again?

Mr. LEVEN. I would say 6 months’ worth of your living expenses.

Senator BAYH. Six months’ worth.

43

Mr. LEVEN. Yes, to make it—if you can do that. Not everyone

can, unfortunately.

We think that you should have a mix. Diversification is the key

word: Diversify, diversify, diversify.

Fixed assets, fixed-income assets, and then of course equities.

I will tell you that, as with the teachers union, AARP has its own

personal investment program. It has been largely in fixed-income,

but we have now converted to some degree, because you have to

change as the circumstances change. So you do need some financial

advice, and you need it from independent advisors that you can get.

That is very important. Not from an advisor who is paid by the

company that the stock is suggested; that would obviously be not

the thing to do.

I think the other thing you have to remember is that you make

sure that you know what funds are insured by the FDIC and what

are not. If you buy a mutual fund through a bank, it is not insured.

The only thing that is insured is your cash investments, basically.

I think that is important to know.

The other things you should know, in here we have a whole

group of agencies you can contact—no charge to do this—and they

will give you advice. There is plenty of advice out there. The thing

you have to do is educate yourself. That is the responsibility of the

individual.

Senator BAYH. Thank you.

A lot of great information in here from the AARP, and I would

commend it to everyone here when you have a few minutes at

home, tonight or over the weekend. It really is good advice.

So, Chuck, we appreciate your making that available to us.

Elisse, a couple of questions for you.

You have mentioned that very often the first way to resolve a

conflict is by contacting the investment company with whom you

have a complaint, and if that does not work, then they can contact

the NASD.

Just very briefly, could you—for someone I knew, if they have a

complaint with an investment firm, could you walk us through,

how would they go about filing such a complaint with them, or how

would they go about contacting the NASD if they did not get satisfaction from their investment company?

Ms. WALTER. Certainly.

The people that you want to talk to at the brokerage firm generally are the compliance department, because their job within the

brokerage firm is to take care of exactly these kinds of issues. They

are essentially an internal watchdog, so that if you are not getting

satisfaction from the person who is in charge of dealing with your

money from your individual broker, you should ask to be transferred to the compliance department, and ask for the address of the

compliance department, which is generally located in the headquarters of the firm.

Of course, when you have difficulty getting that information, that

may be a sign that you are not going to get really good satisfaction.

As I said, to contact the NASD you can go to any of our district

offices. Carla Romano’s district office—and if Carla will raise her

hand—is the one that is closest to you. The address of all those district offices I believe is in the publication that you have in your yelVerDate 11-MAY-2000 14:02 Dec 11, 2002 Jkt 000000 PO 00000 Frm 00047 Fmt 6633 Sfmt 6633 C:\DOCS\82917.TXT SAGING1 PsN: SAGING1
44

low folder. Those addresses are, of course, also on our website. Our

website we keep trying to expand as much as possible to provide

more and more and more useful information, not just to professionals in the investment community but to investors as well.

I would say, just ask you for one other favor, is that if you visit

our website and there are things that you think that would be

helpful to you that are not there, we would like to hear that. Because expanding our investor education efforts is something the

NASD really wants to do and be more aggressive at doing.

Senator BAYH. Thank you, Elisse.

My final question for you, and then we will get to the audience’s

questions—something that Chuck mentioned, and I think NASD

has taken some action on it already—and that is to promote analyst and advisor independence, where you get these conflicts of interest where somebody who is advising one of our seniors about

how to invest their money may have, you know, financial interest

in offering a particular kind of advice. Can you share with us the

steps you have taken in trying to promote analyst independence?

Ms. WALTER. We have adopted a set of rules, and we have a little

bit more work to do under the new legislation, but those rules really try to accomplish essentially three different things:

First, they try to improve disclosure about the conflicts that analysts have, because one has to face the fact that, if an analyst is

working for a brokerage firm, that is not the same thing as having

an analyst work for you.

So people need to understand the position people occupy, they

need to understand certain things about stock ownership. So there

are a lot of conditions in these rules about disclosure.

There are also certain provisions in the rules that prohibit conduct where it was thought that the conflict really was so severe

that it really just should not be allowed.

Finally there are provisions, for example some charts that track

stock price and reading some of the signs, to educate people about

what research reports are all about.

I think one of the most important aspects of the rule is to try

to break some of the conflicts by trying to control the people who

are able to give input into the compensation that research analysts

get. Because if research analyst compensation is governed by people who are out there selling new stocks, then those analysts are

obviously going to be more likely to support those stocks. So there

are provisions in the rules that try to break that tie.

Senator BAYH. Thank you, Elisse.

Let us now get to the audience questions.

I am going to ask David——

David Beebe is with us. He is the Deputy Director for the Bureau

of Aging and In-Home Services. He is going to be the moderator of

the question session here. Keith and Bill I think are also still available.

So let us collect the questions from anyone in the audience who

has them, and we will answer to the best of our ability.

David, how are you? Thank you for helping out today. I appreciate it.

Also, before we get to our first question, I would like to ask everyone on my—I have really the benefit of having a lot of wonderVerDate 11-MAY-2000 14:02 Dec 11, 2002 Jkt 000000 PO 00000 Frm 00048 Fmt 6633 Sfmt 6633 C:\DOCS\82917.TXT SAGING1 PsN: SAGING1
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ful help from members of my own staff, who work for all of us.

They do a great job. Catherine has been kind enough to sit behind

us, close to here. Catherine, come on out of there. Sohini, raise

your hand. Everybody who has helped us to put this together

please raise your hand, because I would like to thank all the hardworking staff people here today for their help.

Thank you very much.

David, What is the first question? Who is it for?

Mr. BEEBE. It is a general question:

Will penalties for fraud and related financial misrepresentations

as designated in the bill signed by the President last week be retroactive for all the perfect debacles in the last year?

Senator BAYH. Well, that is a good question.

I think it is actually against the Constitution of the United

States to have retroactive penalties. I think that the penalties that

are in place are effective as of the time of the crime. But if there

are ongoing violations or new violations that are uncovered, then

the stiffer penalties would apply to them.

I think that is the correct answer, is it not, Catherine?

So it is actually against the Constitution to go back and increase

the—to make something illegal that was legal at the time, or to increase a penalty on something, greater than it was at the time of

the act. But going forward, the penalties will clearly get higher.

I suspect that we may not have seen the end of some of these

kind of disclosures, and so going forward we will definitely have

stiffer penalties in terms of financial fines, and as Keith was pointing out, in terms of actual jail time.

Mr. BEEBE. This next question is related to that one:

What will the bill passed by Congress on corporate responsibility

really do to punish CEOs?

Senator BAYH. Well, the financial penalties are higher; the jail

time potentially is higher. There are going to be a whole host of

things that—this business of using your company as a piggybank,

taking out large loans, that kind of thing is going to be, in most

cases, the vast majority of cases, prohibited. As I mentioned, if

there is a situation where they cashed out at the top and then restate their financial results later, the profits from that kind of activity will have to be disgorged, returned to the company.

So there are a whole host of ways in which the CEOs are required to personally attest to the accuracy of the financial statements. Then there are stiff penalties for knowing violation of those

kinds of requirements.

So there are a whole host of things that apply to CEOs, the

CFOs, restrictions on the boards of directors for great independence

there, and things of that nature.

I suspect that there—this is some pretty aggressive action, but

I suspect it is not the final action that is going to be taken. We

need to see how the SEC responds; we need to see how the courts

interpret the law, and then continue to come back and press, and

press, and press to plug other loopholes if they be proven to exist.

But those are some of the things, in addition to others, that are included in the law that apply directly to CEOs.

Is there anything else? Chuck, would you or Elisse like to add

to——

46

Mr. LEVEN. I think what you said is absolutely right: This is not

an absolute cure. There are going to be other things that come up;

you are going to have to keep an alert eye. But most importantly,

the men and women who are put on this supervisory board are

going to have to be determined and convinced that it is the right

thing to do and enforce the regulations; otherwise it is going to be

meaningless.

Senator BAYH. Chuck raises a good point. This does not apply

specifically to the CEOs, but up until now the accounting profession, the auditors who actually were supposed to be the independent watchdogs to go in to look over the company’s books to make

sure that they were accurate, the accounting profession basically

regulated itself. Now the body that is going to oversee the independent watchdogs, the accounting profession, will be independent.

It is going to be funded separate from the accounting industry.

Those who serve on it cannot be actively employed in the accounting industry. So there is going to be much greater independence

and objectivity on the part of the independent outside auditors

than has previously been the case.

There is also going to be substantial additional resources for the

SEC, the enforcement activities of the SEC. There are so many financial filings today, I am under the impression, at least, that the

SEC simply does not have the wherewithal to review a lot of them

on a timely basis, and so we are going to able to have much more

timely review and enforcement actions on the part of the SEC. So

that is something that will be very helpful here as well.

Mr. BEEBE. This next question is kind of a combination of several

that people asked:

How do you get help for seniors who, by the time they pay their

bills, have nothing left for food and medicine they need? Several

people are interested in what you are doing to help seniors obtain

those medications.

Senator BAYH. First of all I want to correct something that I said

that is hopefully the most serious error I will make today: Mr.

Beebe’s name is Doug, not David.

So just for the record and our reporter, here, Doug, we are grateful to you for all of your help.

Elisse, do you want to say what are some of the things that

someone that feels they have been defrauded can do to help put

things back together and they have really lost their life savings?

Ms. WALTER. Well, one of the systems that works if you are dealing with the securities industry is the arbitration and mediation

system, which is a cheaper, faster way to try to get your money

back. We try, when we can, if there are specific individuals that are

involved in cases that we bring, we target the funds to be returned

to the people from whom they were taken. Of course all of those

things take time. In other aspects the court system has to be used

rather than arbitration or mediation. But there are a variety of dispute-resolution mechanisms that you can turn to, at least with respect to the securities industry.

Senator BAYH. Doug, we operate mostly through deterrence and

using the law enforcement mechanism. You know, clearly we would

like to get some of this money back for investors through the companies. There will be shareholder lawsuits in most of these cases,

47

I am sure, as well, that perhaps can regain some of the money for

the individuals.

If the question was, though, was Congress going to appropriate

actual tax dollars to compensate people, that has not been contemplated yet. There are some things to try and insure the integrity of pension funds, but in terms of actually taking tax dollars for

repaying investors for the money that has been lost, that really has

not been done in the past, and has not been done to date. So perhaps in the future there are some things that could be considered,

but if that was the gist of the question, that has been not been

done.

Mr. BEEBE. There was a side question about help with obtaining

prescription medications in general, unrelated to the fraud question.

Senator BAYH. OK. Well, why I do not get into that—Why do not

we deal with the subject at hand here, and I will be happy to talk

about the price of——

Well, let me give you 2 minutes on that.

There is a big debate in Congress about the price of pharmaceuticals for all Americans, but for seniors in particular. There are

a number of Medicare drug benefit bills that are being debated,

that have been voted on, that have not been passed yet. It is my

hope that we can at least cover people who have suffered catastrophic drug bills or people with low incomes, and also get some

further discounts for those who have not suffered catastrophic

losses or are on low income, so that we will bring the price of pharmaceutical prescriptions down.

In the Senate we did pass a bill that will expedite the process

of bringing generic drugs to the market, which is one way to get

prices down. But right now the House has one version, the Senate

has another version, the President has other ideas. I am hopeful

that by the end of this year we will be able to get this passed and

bring the price of these pharmaceuticals down for all Americans,

but for seniors in particular. There are some of us who think that

this should be a part of Medicare. I believe that position has been

endorsed by the AARP. I do not want to speak for Chuck and his

organization.

We are off into the pharmaceutical or benefit debate here, Chuck.

I believe AARP has endorsed, or at least your preference is to have

the benefit provided as a part of Medicare. We have voted on that

in the Senate. We actually had 52 votes in favor of that. Unfortunately, in the Senate it takes 60 votes to get something passed.

As a fallback, we then tried to at least cover people who had catastrophic losses, or who were in lower-income groups. That also did

not get 60 votes.

But I think, my direct answer to your question is, although it has

not been accomplished yet, I think we are going to be voting this

again in September, and I would hope, and personally will support

very strongly, trying to get something done to bring these prices

down yet this year. I am hopeful in that regard, but it is tough because there are so many different ways to go about it, it is hard

to get people to come together on that issue.

Chuck, anything you’d like to add, about a drug benefit through

Medicare?

48

Mr. LEVEN. We believe that drug—prescription drugs should be

a defined benefit within Medicare. We do not think it should be income-based, because Medicare is not an income-based program; it

is not a welfare program, and we think that that is the way it

should continue.

Consequently, that is the position that we most advocate, and

will continue to advocate, hopefully with great enthusiasm, in the

coming months.

Senator BAYH. I support the program that is endorsed by the

AARP to provide a universal drug benefit just as a part of Medicare and the reason I do is that, when Medicare was first enacted

back in 19—— It is very interesting: Do you know who got the first Medicare

card?

Lyndon Johnson went to Independence, MO. Harry and Bess

Truman received the first two Medicare cards.

Back then, pharmaceutical costs were a very small part of health

bills. But today, of course, they are a very major part of health

bills. So it makes sense, as Chuck was saying, to include a drug

benefit as a part of Medicare: You are on Medicare, you receive it,

everybody on Medicare receives it.

Unfortunately, there are some who are just adamantly opposed

to that, for a number of reasons that I will not bother to get into

right now. But that is my position, it is AARP’s position, and I

hope that we will ultimately be successful in having that prevail.

Doug is giving me this. I am going to stay around for a while.

Those of you who would like to talk to me, I will be right down

front here.

I would like to thank our panelists once again; I would like to

thank all of you in the audience for your patience; everyone at the

Indiana State Fair—when I say ‘‘Doug’’, you.

Ladies and gentlemen, I look forward to bringing this hearing

back again next year to the Indiana State Fair, and I want to

thank all of you for the honor of representing you in the U.S. Senate.

The hearing is now officially adjourned.

[Whereupon, at 3:32 p.m., the committee was adjourned.]

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