Thursday, December 15, 2011

Jon Corzine, Bernie Madoff, And Why The SEC Should Directly Regulate Investment Advisors - Forbes

I have certainly been critical of FINRA in the past, and it certainly makes its share of mistakes, but this piece in Forbes is a bit aggressive and over the top.
The argument here is that because FINRA did not catch Madoff, and gave Corzine a waiver on his securities examinations, the SEC should regulate investment advisors. That, with all due respect to Forbes and the author, makes no sense.
First, let's be clear. My firm belief is that the SEC should regulate investment advisors, and I am even firmer in my belief that FINRA should not be allowed anywhere near investment advisors. That being said, the Forbes article is off base for a couple of reasons.
First, the SEC IS the entity that is responsible for regulating investment advisors, at least those with in excess of 30 million dollars under management.
Second, using Madoff as an example is not such a great example, since the SEC was the regulator with primary responsibiltiy for oversight of Madoff - the fraud occured for the most part at his investment advisory firm, which was regulated by the SEC, not FINRA.
And third, we are going argue against FINRA as a regulator because it waived examinations for Corzine? Really? I can think of at least a dozen reasons not to give FINRA oversight of investment advisors - waiving the examinations for Corzine, while a terrible move both on an regulatory and public relations front, is not in the top 20 reasons to deny them that authority.
At the top, FINRA tries. Its executives talk a good game, but they are terrible at getting their message down to the staff, who still, in far too many instances, treat brokers and firms as if they are criminals, conducting exams with a "gotcha!" mentality, and constantly looking for the "career making" error in every examination they conduct. It is absurd, and not good regulatory policy. The Corzine incident was an embarrassment. The forging of documents during an SEC investigation is unforgiveable, and would result in a permant bar from the industry if a brokerage firm executive pulled such a stunt.
And, lets keep in mind that although you would never know it from dealing with them, FINRA is a membership organization, it is owned, operated and controlled by the big firms. Independent broker-dealers and investment advisors are NOT part of that association, and are competitors to the brokerage industry. In fact, I would imagine that many of the executives in the investment advisory world went to that side of the industry to get away from the very issues that FINRA cannot shake - it is owned, lock, stock and barrell by the large firms.
In what other industry would a regulated entity be permitted to continue in operations with tens of millions of dollars in fines, with multiple, systemic violations, year after year? That could only occur when the regulated entity is in control of the regulator.
We don't need FINRA expanding its power and authority over yet another facet of the financial industry, increasing its ability to quash competition. If we want sound regulatory oversight, it needs to come from an independent entity, not one that would love to see the regulated put out of business.
Jon Corzine, Bernie Madoff, And Why The SEC Should Directly Regulate Investment Advisors
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