State Regulators May Supervise More Registered Investment Advisers

One of the items being kicked around in Congress right now is to allow the SEC to handoff to the individual state regulators the regulation of registered investment advisers with total assets under management of $100,000,000 or less. This would make a whole lot of sense. I read at Investment News online today, http://www.investmentnews.com/, that the SEC only reviews about 9% of all registered investment advisers each year. This means that 91% are not being examined.

The bulk of all registered investment advisers are in the $100,000,000 and less category. Currently, if you have $30,000,000 or more, then you must be registered with the SEC. By raising the threshold, then the bulk of registered investment advisers would fall back to the states for supervision. Of course in this economic environment, we may see a lot of understaffed and underfunded state securities regulators with a lot more on their plates. Nevertheless, something good may come out it, like new jobs!

Here is an example of the problem with regard to the current regulatory environment. Let us suppose that a registered investment adviser has $50,000,000 under management. Further, let us assume that this registered investment adviser is doing something unethical enough to be shut down. If only 9% of the registered investment advisers are examined each year by the SEC, how long could this unethical firm continue to operate? Theorectically, they could probably go on for a few more years, perhaps even five or six more years before the SEC ever got around to examining them. The state regulator's hands are tied, since they do not have jurisdiction. Even if they were to clue the SEC in on the unethical activity, there is no guarantee that the SEC would deem it serious enough to swoop in immediately. Or, the SEC may have other pressing issues that they deem to be more important.

Contrast this with the same firm being under state regulation now. The state regulators, who are more aware of what is going on with the unethical firm, would have nothing in their way to go in for a surprise exam. They could go in and clean things up.

All in all, I totally agree with the idea to raise the minimum assets under management to be registered with the SEC from $30 million to $100 million. Let us hope that they can get this done.

Thanks.

Regulatory Regime?

SEC Chairman Mary Shapiro continues to work the media in regard to the harmonization of "regulatory regimes." I do not know about you, but when I hear the word regime I think of places like North Korea, Iran, Venezuela, Cuba and the Taliban. I am not sure if we need a regulatory regime.

She keeps referring to brokers and investment advisers as being "virtually identical." I believe this is the end game. The powers to be want to meld the broker dealer world with the investment adviser world into a unified regulatory structure.

http://www.investmentnews.com/apps/pbcs.dll/article?AID=/20090619/REG/906199968/1094/INDaily01

It is funny when regulators fail in their duty to protect investors they suddenly become the mouthpiece for what is wrong with the regulations. Their patented answer is always "we were under staffed and under funded." If only they had more employees and more money, then that certainly would have solved everything. I beg to differ.

I think the problem lies in training. A trained eye would have been able to look at the account statements produced by Bernard Madoff Investment Securities LLC (FINRA regulated for 28 years) and determine within a few minutes that they were fraudulent. It was obvious to me that a template method was used to produce those statements. A template is a blank statement where the template is put into the printer while someone prints bogus information from a spreadsheet to perfectly fit the columns in the template statement.

Last summer, I met a couple whose broker had done something similar. This broker cut and pasted financial firm logos in an unusual manner in letters and emails. This broker sent out numerous communications from a financial firm that he was not even affiliated with to these clients. All you have to do is go to FINRA broker check and see that this broker was not registered with the company that he was purporting to be a broker with. I was able to spot it in about two minutes. I worked with a federal regulatory person to help put this broker out of business. Luckily, we caught him after he had duped only three investors and I believe a lot of the damage was reversed. Oh by the way, this unscrupulous broker was a FINRA registered representative. Imagine that! That came as no surprise to me, of course.

Make no mistake. I am not here to beat up on the SEC Chairman or the regulators in general. They have a tough job and it is not getting any easier for them. My take on it is that better training (forensics) should be the focus.

Further, if the regulators focus on those brokers or advisers who sell exotic products, then they are likely to find most of their criminals in these areas. For example, highly exaggerated performance claims, 12% promissory notes, 12% CD's, Private Equity, Illiquid Real Estate Limited Partnerships, Structured Products and various Alternative Investments. Most of the problems involving criminals revolve around appealing to greed by promising high returns. Registered investment advisers out there charging a percent of assets under management for investing in widely held, exchange listed investments are not near the problem that those advisers selling exotic investments are to the regulators.

Another idea may be to allow any financial institution accounts opened by a financial adviser to be run through filters at the SEC. These filters would be looking for large personal deposits that are outside the normal deposits of that particular adviser. It seems to me that this could be done similar to the way anti-money laundering is managed. If a highly unusual deposit into a personal or business account is discovered, then the SEC could immediately begin an inquiry. Honest investment advisers would not mind the scrutiny. I know that I would not mind such scrutiny.

The SEC commissioner has said that fully one third of the regulatory actions taken this year have been against registered investment advisers. At first glance, that may sound bad. However, this means that fully TWO THIRDS of the regulatory actions taken were against FINRA brokers! Now you tell me, where is the bigger regulatory headache?

That's what I thought!

Keeping the Status Quo?

It looks like the Obama Administration is going to accept the status quo with regard to Wall Street and regulatory reform according to a recent article on the Investment News web site.

http://www.investmentnews.com/apps/pbcs.dll/article?AID=/20090614/REG/306149969

A source from the Obama Administration says that creating a new regulator for registered investment advisers "is not a core issue."

The Obama Administration is correct. We do not need a new regulator for registered investment advisers. Registered investment advisers are not the problem. FINRA is the problem. They are the root cause of the recent market meltdown due to their lack of regulatory oversight, in my opinion. Cronyism at its finest especially in their supervision of Bernie Madoff's firm.

Larry Doyle of http://www.senseoncents.com/ had on his weekly radio show Bill Singer, an attorney with Stark and Stark, one of the nation's premier Securities Related Legal Firms. The transcript for A Real Regulatory Review: An Interview with Bill Singer is available here:

http://www.senseoncents.com/2009/06/a-real-regulatory-review-sense-on-cents-interview-with-bill-singer/

This interview is an eye opener about how and why we can expect nothing but idle posturing by Congress to fool us into believing that they are doing something on behalf of investors. When in fact, they will do very little to help investors.

FINRA's Tactics Appear to Have Shifted

I would like to point out that FINRA has now set their sites on fixed annuity and life insurance sales outside their broker/dealers. Currently, if you are an insurance agent and sell fixed annuities or life insurance outside the compliance of your broker/dealer, you are regulated by the state that you do business in.

FINRA would like to force all those who sell fixed annuities and life insurance to come under the supervision of their member firms (broker/dealers.) Why? Money of course. If they "make" you as an insurance agent run all your business through your broker/dealer, then your broker/dealer will take a percentage off the top. As a result, FINRA stands to make more money.

FINRA has already made it plain that they wanted to regulate registered investment advisers. If the Obama Administration is not considering such an arrangement by labeling it as not being a core issue, then it appears that FINRA may not be getting that extra revenue from registered investment adviser regulation like they thought. In order to keep their share of the pie as large as possible, they have shifted their focus. Did they do that quickly or what?

Insurance agents and their fixed annuity and life insurance business are a new source of revenue for FINRA's broker/dealers. A lot of these FINRA broker/dealers have allowed their FINRA registered representatives to sell fixed annuities and life insurance outside their firms. However, now these broker/dealers are hurting financially as a result of the market meltdown and the fact that consumers are not as engaged in the finances. These FINRA firms must keep producing revenue some how and it appears that they have found the answer. If you are an insurance agent and a FINRA registered representative, then you just were handed your notice by FINRA to get out. Or, you can stay with FINRA and give them more of your income for doing absolutely nothing except making it harder for you to sell fixed annuities and life insurance.

It would not surprise me if they tried to force anyone who sells fixed annuities or life insurance to be a FINRA registered representative. Even if you are not FINRA registered now, their next attack may be to make anyone who sells these products fall under their supervisory jurisdiction.

With FINRA, it always has been and it always will be about the money. Do not let anyone tell you otherwise.