Mary L. Schapiro

Chairman and CEO

NASD

1735 K Street, NW

Washington DC 20006-1500

RE: Your remarks, STA 73rd Annual Conference & Business Meeting

Dear Ms. Schapiro,

Over the past 15 years, I have repeatedly attempted to get the powers to be to actually help investors understand the risks of the equities market. I have entered remarks to the SEC and to the NASD- yourself directly- regarding the ineptness and outright fraud of the various individuals and firms who, as such, have deliberately violated their duty to consumers. The NASD is right up front with such violations. I realize this is harsh and direct rebuttal to your October statements, but I state for the record that I doubt that either you or your cohorts know the true definition of diversification. (It is NOT "don't put all your eggs in one basket"- the sophomoric commentary even expressed by Chuck Levitt in his first book.) Further, I can state categorically that none of you understand the proper definition of risk since literally all investment and financial plans have deliberately and repeatedly presented fraud as facts. (The continued use of standard deviation as risk, ipso facto, is a fraud.)

To wit, "I'll close with a few words about a different, but related, subject——one that will surely shape the role of regulators well into this century——investor education as investor protection. I believe very strongly that the people best able to protect investors from mistakes, misunderstandings, deception or outright fraud are the investors themselves——if they are knowledgeable about investing and the markets. I cannot overstate the importance of this, particularly given that we're facing a looming crisis——the impending retirements of millions of baby-boomers, many of whom are financially ill-prepared to stop working."

That is disingenuous as best. Investor education? You will not provide investing fundamentals to brokers. (The fundamentals include alpha, beta, correlation, standard deviation, diversification and more.) You will not provide fundamental education to arbitrators. Actually, I do not believe you have anyone on staff who could provide the fundamentals of investing even if you wanted to. If you could, why haven't you? (The answer is the sophomoric comment from your agent- the "NASD is a procedural entity not a substantive one".) The NASD statement that attorneys would provide (in whatever manner) the material and facts to a case to arbitrators is laughable. Sorry- attorneys are consumers/investors as well and are clueless to the same issues I state to you: they do not know diversification, they do not know risk. More importantly, the reference you make about mistakes, misunderstanding, deception or outright fraud is what the SEC and NASD have perpetrated for at least the last 15 years. Proof? All one has to do is review the licensing material required for a broker. The fundamentals noted above are not taught for licensing. The idea that you are therefore going to bypass the industry and provide the necessary insight to consumers is absurd, illogical and just plain won't work in the real world. Actually, the idea that a broker does not need to know what diversification is is so far removed from a fiduciary responsibility at any level that it is just disgusting. I know this is brusk. But since 15 years has gone by and not one entity has bothered with serious and truthful knowledge and education, I am entitled to berate those who violate their duty. I ask anyone at the NASD to properly define diversification. I ask anyone at the NASD or SEC, to define risk and show that it is being properly defined to any consumer. If I am wrong, it shouldn't be hard, should it? That said, I do not believe you have anyone that can do it. Nor the NASAA, AARP ad infinitum. Period.

You further noted "Making matters worse is that Americans, by and large, are not particularly well-schooled in how to manage their own finances, nor do young adults enter the workforce with even a basic appreciation of the importance of starting to save and invest for retirement early."

Fine, true. But none of Americans know what the true risk of the market is because the governmental entities have specifically avoided teaching it to its securities agents. Investing for retirement is mandatory. But if no one identifies the true risk and another 1973- 1974 or 2000- 2002 occurs again (and again) with another set of losses over $1 trillion, how are they going to survive for 20+ years? How is the country going to survive?

"Then there is the fact that there is a dizzying array of products being invented and marketed to investors, leaving them confused and perhaps even paralyzed in making decisions. The complexity of many new products——with elements of insurance, options, interest rate, commodity or real estate exposure, to name just a few twists——makes understanding their risks through different economic cycles a challenge, and deciding how they fit into a diversified portfolio even more daunting. Many investors feel they are simply not capable of understanding, so they toss the dice and buy an expensive, complex product they don't understand, or they give up in frustration and don't invest at all."

I do not dismiss the difficulty at all. It's an exponential increase in product and sophistication. But they will never be able to understand what to do (certainly by themselves) nor with any agent since the agents are woefully unprepared to discuss even basic stock positions. It is the height of hypocrisy to offer assistance to the least enlightened where you are offering no education- even bothering to recognize the inherent incompentency and fraud- of the very industry you lord over.

That said, it is possible to edit some of the material so that it can be comprehended. For example, index annuities are as complicated as any hedge fund to statistically define. You attempt to explain index annuities: Http://www.nasd.com/InvestorInformation/InvestorAlerts/AnnuitiesandInsurance/Equity-IndexedAnnuities-AComplexChoice/NASDW_010614. Do you really expect consumers to read and properly interpret what to expect? Here is what they offer: In 65%- 75% of the time, the return should exceed a regular fixed annuity; in 15%- 25% of the time, the return will be the same as a fixed annuity; in 5%- 10% of the time, the return will be less than a fixed annuity. Simple and direct. No involvement with spreads, caps or all the other hieroglyphics. It is what people need to hear- but why has it not happened so far?

"NASD has a deep and abiding commitment to investor education."

"Our foundation issues grants to universities and non-profits for research and programs that help people understand the complexities of investing and the markets. It is particularly concerned with population segments that are underserved, such as minorities, members of the armed forces and senior citizens."

Sorry, members of the Armed Forces were sucker bets for the guys that sat next to their base that offered contractual plans for decades. I harped on this during the 80s and 90s whenever I did a securities licensing class. It was shameful. Anyone with a clue knew what was going on but it was only till recently that some politician finally rang the bell on this abhorrent scheme. Where was the NASD then??? Where was the SEC? Where was anyone?? It's a little late to the game for such commentary for all the people who put their lives on the line for all those years.

As for the grants to universities and non profits- maybe they can work but you don't have (probably) any of these researchers actively and directly working with investors/consumers. And since they don't know the fundamentals either, just how rich in detail can their studies be? I do not dismiss professional studies- use them all the time. But if in 15 years none of the studies have resulted in a real life application of knowledge and education to the industry, then the entire effort is suspect. That's validated since none of the brokers have ever been taught investing fundamentals. Is it the fact that those getting grant money are effectively clueless? Yes.

Retirees- and those soon to be retired- certainly need lots of help. You apparently believe that you can do it. Why? Literally every investment plan offered by brokers fraudulently presents risk. Invariably they state that risk goes down over time. Categorically false. Do you know why? Can anyone in your staff tell you why? If not, then your entire assistance is questionable. It is the reason why over $1 trillion was lost in 2000- 2002 and why it will happen again. I can't tell you the number of people that have indicated they had to go back to work as greeters at WalMart, making phone calls for some service at age 70 in order to offset some of the losses they sustained; some even committed suicide. Rhetoric doesn't cut it. The minorities, the elderly need help. But you won't help any of the others avoid fraud with the flatulent offerings to date. I will repeat over and over- if you do not know diversification, you cannot get to risk. And if you cannot understand risk, you cannot deal with suitability.

"Investor education is not a very exciting topic, but it is crucial to our ability as a nation to ensure that our citizens have invested consistently and well and can avoid living in retirement with much reduced means, or even in poverty."

With the material currently being offered by the industry- and including the CFPs and ChFCs- it cannot happen. They are misrepresenting risk- however with the tactic approval by the NASD, SEC, NASAA, et al- either due to outright fraud or outright incompetency. No matter which- consumers will be left reduced income. The industry must understand risk- the risk of statistical loss as defined by Bodie, Mandlebrot, Norstad, etc.- though put into real life application.

"We're equally dedicated to upholding the integrity of our industry, which is absolutely vital to the health of our nation's economy."

O.K., where is the integrity if the fundamentals of investing have never been taught to agents in the business; if the fundamentals are unknown by the NASD, SEC, NASAA. You have to know diversification in order to understand risk. You must understand risk to get to suitability. Look in the manuals that the NASD and SEC mandate as required knowledge for licensing agents to sell products. You won't find diversification. You won't even find alpha. You won't find correlation- an absolutely necessary issue for the sale of any equity. On what basis therefore are you telling the press that education, integrity, fiduciary responsibility or whatever else is capable at your level?

"But we're actually much more than that. NASD has taken huge strides toward becoming a holistic industry utility, combining our traditional responsibilities for regulation, registration, testing and transparency with a large and growing inventory of industry facilities; as well as compliance-related education and training programs and tools for our members and an ambitious and well-funded investor education effort."

I do not dismiss your capability in running a major organization. I could not. I do not dismiss the NASD's involvement in certain issues far beyond my ability or knowledge. But I can take direct and considerable umbrage to the idea of education and training since I am one of the very few people in the U.S. who has ever taught all the licensing classes; financial classes at universities; and continues to offer financial planning for individuals as well as expert witness services on complex financial issues. I have researched effectively all the areas on personal finance. Yet you have a budget of millions of dollars and no one understands risk???? You present classes on legal motions to arbitrators and they do not understand diversification??? And you expect an attorney to provide the proper direction in an arbitration? Incredulous. They do not know that they do not know. Find me an attorney who understands the proper risk that must be provided to consumers. No one that you know and none that I have ever met.

"It means, first and foremost, an unshakable commitment to investor protection and market integrity, fueled by our unique position as a private-sector regulator that neither owns markets nor has any stake in their financial success or failure. It also means regulatory programs powered by a commitment to developing sophisticated technology to support our core regulatory functions and an unwavering commitment to a continuous learning environment for our employees and rigorous development of the skills necessary to regulate ever more complex markets."

Unwavering commitment? Rigorous development? Not if you do not understand diversification and continue to make no effort to instruct any entity on the fundamentals of investing.

"The committees are looking at a wide range of rules including those covering sales practices, supervision, registration, qualification and continuing education requirements."

The committees have had at least a decade and a half to get up to speed. I was glad to see the continuing education requirements- but I have yet to see the fundamentals. So, what's your point? A sale must be suitable. How can one conduct a sale of securities if you do not know the fundamentals of investing? How can you supervise a sales person if none of the licenses for supervisors covers any of the fundamentals either. Nothing on suitability.

"The second aspect of NASD regulation in the 21st Century that I want to discuss is the growing use of our expertise and financial strength to fund initiatives that enhance the industry's ability to serve its customers to their satisfaction and to provide tools to assist members in meeting compliance obligations.........They cover timely industry issues ranging from 529 college savings plans to suitability considerations to customer data protection to fee-based brokerage accounts."

Nope- if you do not understand the fundamentals of investing, this is a lie. For at least 20 years I have been involved with suitability- but there is literally no entity ever trained by the NASD that can even remotely define suitability. It's hard enough when you know the fundamentals of investing. It is impossible if you are clueless to such fundamentals.

"One tool, of particular industry-wide and investor value is the mutual fund breakpoints search tool. It used to be that determining a customer's eligibility for a volume discount on front-end load fund shares could be an ordeal, because there were so many factors to consider——whether the customer had money in another fund of the same fund complex, whether members of the customer's family had shares in the same fund, whether the customer had committed to buying additional shares in the future, and every fund complex has a different set of rules to apply and offered a different percentage discount. And, indeed as a result of historical shortcomings in firms' performance in this area, more than $100 million has been refunded to investors in the past two years."

Excellent tool.

"We believe that in the long term what's good for investors is good for broker-dealers."

I doubt it. I was told in the mid 90s that my effort to provide education would slow sales and the B/Ds would never allow it. Well, they were right- education, to knowledge, to suitability would unquestionably slow sales of a lot of unsuitable issues. So, it didn't happen then- and it isn't happening now. If you do not know diversification, you cannot get to risk. If you cannot get to risk, you cannot get to suitability. I realize that gets old real fast but you either know and can apply the fundamentals of you are effectively clueless to suitability.

"Transparency of products is as important as transparency of markets. And nowhere is that more true than with mutual funds. More than half of America's households own fund shares, and their assets exceed $8 trillion. So, after the dust had settled from the directed brokerage and revenue sharing enforcement issues of a couple of years ago, we assembled an industry task force to make recommendations on, among other things, how to make mutual fund fees and expenses more transparent to investors."

Very good.

"In accordance with the task force's recommendations and in response to the SEC's Point of Sale Disclosure proposals, we have developed and consumer-tested a brief disclosure document that explains in plain English the material features of the fund an investor is considering——fees and expenses, investment strategies, risks and conflicts of interest——information that is either embedded in a prospectus or SAI, or not provided at all."

You do not define risk- even for a single issue. Further, regardless of what you disclose there, is the fact that fee funds are generally sold on the ability of the adviser (actually the same thing occurs with no load funds suggested by an agent) not through any reading of a lengthy legal document (correct risk is not in a mutual fund prospectus). So how is the agent going to disclose risk- certainly when they invariably use some software that states that risk goes down over time? Risk of loss goes UP over time. Effectively every investment plan is not just flawed - it is directly and truthfully a violation of every statistical measure that definitively measures risk.

Over $1 trillion was lost in 2000- 2002. Retirements lost, lives in disarray. Why? Obviously it was not the total fault of any entity or individual. But a good part is due to the failure of the various governmental agencies to do their job by making sure that at LEAST its licensing of its agents covers the fundamentals of investing. Only then can it attempt education of consumers.

Lastly- mostly because there is just too much to cover- is this referral to the SEC site on mutual funds, "Generally, the success of your investments over time will depend largely on how much money you have invested in each of the major asset classes –– stocks, bonds, and cash –– rather than on the particular securities you hold. When choosing a mutual fund, you should consider how your interest in that fund affects the overall diversification of your investment portfolio. Maintaining a diversified and balanced portfolio is key to maintaining an acceptable level of risk."

Oh really? The statistical risk of loss goes UP over time. That is acceptable??? The SEC is not telling anyone. NASAA isn't doing it. The NASD is clueless. Why? Is it incompetency? Fraud? Unfortunately, since the SEC and NASD are the preeminent authorities and set the rules and laws on securities, then they "must" be obviously knowledgeable about risk and reward and know that the above statement on acceptable risk is false. Hence breaches of fiduciary duty to all.

Very, very truly,

Errold F. Moody Jr.

David M. Walker, Government Accountability Office;

Kathleen Pender, San Fransicso Chronicle

Joe Borg, President NASAA;

Zvi Bodie, Boston University School of Management

John Norstad