ERROLD F. MOODY JR.
March 15, 2006
Ms. Mary Schapiro
Chairman and Chief Executive Officer;
Ms. Barbara Z. Sweeney
Senior Vice President and Corporate Secretary
1735 K Street, NW
Washington DC 20006-1500
RE: Arbitrator Education and Training Proposal
Dear Ms. Schapiro; Ms. Sweeney
I am a personal financial planner who has taught most financial courses for universities and private institutions (see resume for complete background). I have also acted as an arbitrator in the 90's and still provide expert witness services on financial matters of all types. The reason for this proposal is that the fundamentals of investing have never been taught to arbitrators, judges, attorneys and, quite remarkably, to brokers or supervisors through any of the securities licensing preparation. Such topics include diversification, standard deviation, correlation, beta, alpha, dollar cost averaging, asset allocation, Monte Carlo analysis, efficient market, rebalancing, market timing- the list is extensive. Even those individuals with designations- CFPs and CPAs for example- do not have adequate knowledge of risk. Almost all are notoriously weak on annuities and insurance products or procedures, be they fixed or variable.
The first point is that if you do not understand what diversification is by the numbers, you cannot determine risk. If you cannot determine risk, you cannot determine suitability. (It is not "not putting all your eggs in one basket". That is sophomoric and statistically useless.) Over the years I have tried to get the responsible parties to focus on the problem. I did receive acceptance for the only securities course approved by the California State Bar- Practical Investment Theory and Application- as well as my own course for CFP credit at the University of California at Irvine and Berkeley. Unfortunately, limited attention was paid during the 90's because everyone "knew" that economic cycles were a thing of the past and returns of 20% were preordained. Now we have a broken pension system, employee dissatisfaction with 401(k) plans, retirements in disarray- a complete chaos economically and financially.
Additionally, there are a lot of mushrooming problems with fixed and variable annuities via various "guarantees", the nil understood Equity Indexed Annuities, bonus interest; all types of insurance including term rebates, no lapse products, the complicated variable insurance; revocable and irrevocable trusts; extended life expectancies, life settlements, long term care and more. Many state departments of insurance have already issued edicts on the use of insurance and annuities for the elderly- though many have recently recognized that the young require the same type of caveats. These issues need to be reviewed for the same reasons- the knowledge is absolutely necessary to competently review a case. Arbitrators et al simply cannot rely on attorneys to provide the insight- and to date (from my experience and research) they have not.
I have never yet met a securities attorney who knew diversification by the numbers. I have never yet met an attorney who understood the internal machinations of an insurance policy. The failure to educate on such fundamentals is a rift of our systems, securities, insurance or otherwise.
The changing economics, the volatility of all markets along with the loss of guaranteed retirements have put consumers at further risk in purchasing more complicated products and procedures. It is compulsory that all parties to an arbitration claim or jury trial firmly grasp such fundamentals behind these issues in order to provide competent analysis to any claim. The NASD- actually all entities including the SEC, state departments of securities and departments of insurance- have been seriously neglecting the requirement of adequate education. Obviously I have reviewed the education topics offered by the NASD and such fundamentals have never been identified for training. That is a serious breach.
Additionally, arbitrators et al need to grasp the fundamentals of a financial calculator. Literally every case has reams of numbers but it is necessary that an independent tribunal have the capability of analyzing certain values for validation. It is also mandatory to create a damages calculation that is based on more than subjective commentary. I am not stating that arbitrators et al become statisticians or actuaries, but they do need to be able to do basic present and future value calculations with some degree of proficiency. No one can say they understand any area of finance unless they know how money works. It is mandatory to know how to do basic calculations.
I am fully aware that this offering might find little comfort within the B/D industry since such fundamentals may conflict with current practice (not exactly the greatest sales pitch for a course- but it does reflect the truth of existing knowledge and application within the industry). But if the practice does not instruct on the correctness of risk, then it is devoid of almost any position regarding suitability. And, as referenced in my resume, I have taught the series 6, 7, 8, 24, 27 and so on and have a complete understanding or what is and is NOT contained in any licensing training. Same with CFP instruction. And I have taught a vast number of continuing education courses for insurance agents as well and wrote No Nonsense Finance (McGraw Hill, 2004) as a real life application of financial planning in all elements (including ethics, long term care, estate planning, etc.)
The enclosed syllabus is from my 11 week class for the University of California. It is presented in full so that you can see the areas addressed. It is obviously impossible to put everything into an eight hour course- a minimum for the fundamentals of most areas of securities and insurance- but it is possible to present the salient issues of each in a real life application. It is not a business course for MBAs since, for example, the presentation of standard deviation would take hours by itself. That's not necessary nor desired. The application of standard deviation had to be taught in less than 45 minutes in an understandable format and where the essence could be used immediately. The course was also NOT a sales pitch for any product or system- that is not education. It is simply a factual overview of the various methods of planning in a real life environment- the only way that such complicated material should be presented.
I submit that such a distilled offering of such facts in a real life presentation specifically addressing risk will give anyone dealing in securities, investing, annuities, insurance the required knowledge base to analyze suitability objectively. It will provide a much needed layer to consumer protection.
Errold F. Moody Jr.
The reply: - "we must decline to use your services to provide additional training to the arbitrators on its roster. As a matter of policy, the NASD provides procedural rather than substantive training to its roster members. In arbitration, the parties present their arguments and evidence to the arbitration panels and the arbitrators are not expected to do their own research. While most arbitrations claims present questions of fact, some parties relay on a specific law, statute or industry standard. Generally, the party who has raised such an issue will offer the panel a brief setting forth how the law, stated or industry standard applies to the case."