Written by: Phil Feigin
It’s August, and that means football is back! We have had but one pre-season game to date, the Hall of Fame game, but it was from the halls of Congress, not the gridiron, that we saw the launch of the first “Hail Mary” pass of the year. The op-ed piece written by Chairman Spencer Bachus (R-Al) in yesterday’s Wall Street Journal, “Financial Advisers, Police Yourselves” made this loyal Broncos fan yearn for the days of Tim Tebow. Even Tebow’s passes were more accurate than the good Congressman’s desperation heave to revive his moribund investment adviser SRO bill.
I could hardly believe what I was reading. Rather than lift his voice and assert his Chairman’s authority to support enhanced, targeted funding for more SEC investment adviser inspections, at no expense to taxpayers, Bachus urges the profession to cough up millions more in fees to “police itself,” to create its own self-regulatory organization, or, more plainly stated, line FINRA’s shrinking pockets with a newfound membership base.
Bachus and his ilk would rather we rely on a private club of overpaid mercenaries than fulfill the government’s responsibility to provide basic protections for its citizens. On that logic, let’s cut funding to the EPA. After all, the Gulf spill happened on their watch, didn’t it? We should let the petroleum industry police itself. And the FDA and phen-fen, and the FBI and 9-11. His argument is simply ridiculous.
In support of his misguided proposal, he and his supporters wave the “bloody shirts” of Bernie Madoff and Alan Stanford. Bit it was the NASD/FINRA that last inspected Madoff. And don’t give me that tripe about FINRA lacking the authority to look at the adviser side of Madoff’s operation. Ask any broker with his own IA in a FINRA exam how much information he is required to provide to them about his RIA business. (Think colonoscopy.)
And as for Stanford, yes, the SEC could have acted sooner, but it wasn’t all out of lethargy and not caring. The Congressionally mandated barrier to the SEC getting involved in the activities of banks (at the urging of the banking lobby) must account for at least some of the SEC’s reluctance to pursue the matter earlier and more aggressively. And oh, didn’t Stanford operate a FINRA member brokerage firm?
And let us not forget the stellar work of the National Futures Association, another broker-dominated SRO, in uncovering MF Global and Peregrine before any harm could befall their customers.
Further, Chairman Bachus cites to the Madoff and Stanford disasters rather than the thousands of scams-in-the-making uncovered by state and SEC adviser inspections over the last 72 plus years, and without an SRO.
It may be a dirty little regulatory secret, but inspections are not the be-all and end-all of regulation. They help detect problems, but they are not foolproof. Brokerage firms are required to inspect branch locations regularly, with searching for evidence brokers are selling away from the firm high on the priority list. Protection of the firm’s own checkbooks are on the line. Even so, dozens if not hundreds of selling away cases come to light every year.
Inspections are regulatory tools with an enforcement side effect. Inspections, exit meetings and follow-up deficiency letters are designed to help industry professionals better comply with statutes and rules. Sometimes you get lucky and uncover a fraud, but that’s not common. Crooks are crooks, and are very good at doing what they do, at least for a time. Once in a rare while, they can pull it off for years. A crook’s success is often due in greater part to weakness in the statutory and regulatory system, not the lassitude of regulators.
Instead of adding another SRO, the debate ought to be whether we need any SROs in today’s market. FINRA has evolved into nothing more than a private police force. Give the same authority and even half its resources and personnel to the SEC and state securities regulators, and brokerage and advisor misconduct would be pulverized.
If the lake is flooding over the dam into the valley, you don’t tell the villagers to hold a bake sale and buy their own bricks. The town council finds the funds to build up the dam for the benefit of all. I don’t want some private security service trying to protect me and my loved ones, I want real police, well staffed, trained and funded. So should everyone. So should Spencer Bachus.
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