Category Archives: The Regulators

The organizations that regulate the financial services are there to make sure companies, advisors, and representatives adhere to the rules. They are supposed to identify the bad guys and jail them or kick them out the industry. But, don’t count on it! The SEC didn’t catch Madoff in almost 20 years and countless sales representatives have multiple client complaints on their records, but are still actively employed in the industry. The buck still stops with you when it comes to protecting your own assets.

Investors Need Services That Prevent Fraud

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There are several regulators (SEC, FINRA, State Securities Commissioners) that audit financial advisory firms on a regular basis; for example every four or five years. The purpose of the audit is to make sure the firms and their representatives are following the rules. A second goal is to identify problems before they damage investors.

In addition to periodic audits, the regulatory agencies receive thousands of complaints per year from investors who believe they have been damaged by investment firms and their representatives. Many of the complaints are frivolous – that is, investors lost money in down markets and the representative did nothing wrong. But, at the other end of the spectrum is criminal wrongdoing. Continue reading →

Some Version of the Truth!

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In the romantic comedy, Something’s Gotta Give, Jack Nicholson said to Diane Keaton, “I have always told you some version of the truth”. I believe the SEC is also telling the public some version of the truth.

The court system is currently reviewing a $285 million fine and settlement that was agreed to by the SEC and Citigroup when it sold toxic mortgage securities to investors. Citigroup told investors the mortgages were safe investments. Then the company bet money this mortgage pool would fail. If this sounds familiar, Goldman Sachs perpetrated the same scam. Citigroup made $160 million and investors lost hundreds of millions of dollars.

Judge Jed Rakoff rejected the settlement because it did not include an admission of wrongdoing by Citigroup. He wants this case to go to trial. The SEC and Citigroup are fighting his decision.

Why are the SEC and Citigroup on the same side? One should be the prosecutor and one should be the defendant.

In my opinion, the Rakoff decison interrupted a long running scam that damages the public. It is somehow legal for financial service companies to rip-off investors. If they are caught, they are allowed to pay a fine without admitting guilt. Because they do not admit guilt, no crime was committed.

This travesty of justice has two consequences. First, fines are a cost of doing business for companies and most of the fines are offset by profits that were generated by the scams. Second, no company executives are prosecuted for committing fraud. These are the executives at Citigroup who approved the sale of toxic assets and then bet the mortgage product would decline in value. This fraud was committed by high level executives at Citigroup.

The SEC is telling investors some version of the truth when it says the public interest is being served by the payment of fines. If that was true, why aren’t the fines more of a deterrent? The real truth is executives are using company resources to stay out of jail and the SEC lets the get away with it.

Investors Need Preventive Services

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The financial services industry has three primary agencies that regulate its activities: SEC (Registered Investment Advisors), FINRA (Broker/Dealers, Stockbrokers), State Securities Commissioners (Both). The agencies employ thousands of examiners who are responsible for making sure financial service firms follow the rules when they sell investment products and services.

The focus of the agencies is auditing the records and business practices of firms and advisors looking for deceptive sales tactics, fraudulent business practices, and illegal scams. Depending on the type of transgression, the guilty parties are fined, kicked out of the industry, or jailed.

Audits have some deterrent value, but they miss the mark if the goal is to protect investors from unethical advisors and firms. They uncover scams after investor assets are long gone. What investors really need are services that prevent the scams from happening in the first place – when their assets are still intact.

Is more scrutiny of investment advisers needed?

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Obama wants to expand the SEC’s budget by a few hundred million dollars so it can increase the frequency of financial advisory firm audits and expand other oversight functions. This sounds more like political posturing than a real solution to a major problem.

Auditors find problems after the money is long gone. What investors really need is a solution that prevents the money from disappearing in the first place.

One low cost solution would be to require full transparency by financial advisors and the firms they work for. Then provide an easy, free way for investors to validate the accuracy of information that is provided to them by advisors.

This will not happen. Wall Street spends millions on lobbyists fighting regulations that would mandate full transparency. There is a lot of information Wall Street does not want investors to have – for example, information that exposes deceptive sales practices. Bad advisors and scam artists will continue to flourish as long as Wall Street is successful withholding information from investors.

Keep in mind, the SEC and FINRA let this happen. What are your thoughts?

Occupy Wall Street Has It All Wrong!

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It should not be Occupy Wall Street it should be Change Wall Street. And change does not start in New York City it starts in Washington D.C.

“Changers” must identify politicians who protect Wall Street interests and convince them to pass legislation that puts teeth into regulations. Or, vote them out of office.

Stop companies from paying fines for executives without admitting guilt. Greed-ridden corporate executives are guilty of committing crimes that have devastated millions of people and not one of them has gone to jail.

Why should the executives worry? They can rip-off investors with impunity thanks to their protectors in Washington. Like I said change starts in Washington.

Come on people. How are you going to accumulate assets for retirement if you can’t trust the system that invests your money. Use your votes to get rid of corrupt politicians. Elect politicians who will crack down on Wall Street greed and corruption.

The Fed Bailed-out more than Banks

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After congressional coercion, the Fed has finally revealed what it did with $3.3 trillion in emergency aid in 2008 and 2009. It’s clear why the Fed has been so reluctant to reveal what it did with our money. Banks turned to the Fed for help almost daily in the fall of 2008 as the central bank lowered its lending standards, but its actions benefited more than Wall Street financial institutions. Companies like Harley Davison, General Electric, and Toyota all wallowed at the trough filled with taxpayer dollars.

It all adds up to just more corporate welfare. It’s apparent that the government has become firmly on the hook for the cost of bailing out big companies that get into trouble. The too-big-to-fail banks are bigger than ever, and the financial reform law didn’t do anything to curtail reckless risk-taking and hold irresponsible financial institutions accountable for their actions. In the case of companies like AIG and Bear Stearns, stock-holders should have been wiped out, bondholders should have suffered significant losses and upper-level management should have been fired; this would have instilled market discipline and upheld the principles of capitalism. Instead, the exact opposite has happened. Many of those that tout capitalism and free markets are the very same people that accepted vast amounts of government aid.

Will Consumers Get Shafted with the new Financial Reform Bill?

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Before last week’s financial reform bill passed, fee-only Registered Investment Advisors (RIAs) acted as acknowledged fiduciaries. RIAs provide full disclosure to investors about how they are compensated and should have no conflicts of interest when working with investors. In other words, they look out for the investor’s needs first and foremost.

Under the new financial reform bill that was recently passed, it will now allow brokers (stock brokers, sales reps) to sell investors commission-based products as well as proprietary products while acting as a fiduciary. Wait a minute! How can brokers peddling high commission products do this with an investor’s best interests at heart? Odds are that they won’t be able to and investors will once again get the short end of the stick.

This will make the task of sorting out highly qualified and ethical advisors from those who are only looking out for their own wallets, as anyone will be able to call themselves a fiduciary. More on this topic to follow as this unfolds.

Brokers versus Advisers

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Many investors are confused about the term investment advice and the different types of professionals who can provide it. Most investors do not understand the differences between investment adviser representatives or brokers calling themselves financial advisers; and the standard of care they think they are receiving from each.

Fee only investment advisers are legally obligated to act in the best interests of their client (i.e. act as a fiduciary). In contrast, brokers who call themselves financial advisers facilitate securities purchases and sales for their clients, usually for a commission, and are primarily governed by FINRA, which (and this is key) requires that investment recommendations they make to their clients be suitable for that particular client. In broker/client relationship, filled with all sorts of conflicts of interests, suitability is an extremely blurry standard at best.

A report by The RAND Institute for Civil Justice in 2008 found that 63% of investors believe registered representatives are required to act in the best interests of their client (they aren’t), and 70% believe that registered representatives must disclose any conflicts of interest (generally, they don’t)… [TD Ameritrade White Paper].

Due to the influence of special interest, Congress has not taken the initiative to clear up the confusion. Unfortunately for investors, confusing the two can have entirely unintended consequences. A clear line needs to be drawn between them so investors can make more informed decisions. There needs to be a clear distinction between who is a fiduciary and who is a salesperson. Anything less is irresponsible and unacceptable.

Globalization at Its Worst

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Just when you thought the ill stench wafting from Wall Street couldn’t get any worse. A recent U.S. report details how large American banks like Citigroup, Bank of America, and JP Morgan Chase facilitated the laundering of hundreds of millions of dollars on behalf of corrupt foreign officials who were subjects of criminal investigations into charges of money laundering, bribery and extortion, and who publicly associated with people like Libyan leader Col. Muammar el-Qaddafi. Supported by bank statements and internal e-mail messages, the Senate report details how the large banks ignored controls intended to prevent money laundering.

The report details how, between 2004 through 2008, high-risk clients from corrupt countries used American banks, real estate agents and lobbyists “to conceal, protect and utilize their ill-gotten gains” to purchase such items as: several C-130 Hercules military transport planes (with United States government permission), Hummer H2 armored vehicles, Ferraris, a $38.5 million Gulfstream G-5 jet, a $30 million home in Malibu, Calif., and invites to the 2007 “Kandy Halloween Bash” at the Playboy Mansion. It also describes how former President Omar Bongo of Gabon, carried a suitcase containing $1 million in shrink-wrapped bills into New York for his daughter to buy a Manhattan apartment.

Obviously, these banks used absolutely no discretion when deciding who they would do business with as long as the money kept rolling in. Could any of this money have supported state-sponsored terrorism? Where were the large banks planning on drawing the line? And our tax dollars are supporting these shenanigans?

Roadmap to Financial Reform

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It’s conceptually simple: take away any government protection for stockholders, management and creditors of large financial institutions to help shrink their appetite for risk-taking. For instance, in the case of the Bear Stearns debacle stockholders should have been wiped out; management should have been fired; and the bondholders should have suffered significant losses. Instead, stockholders received a renegotiated price of $10 per share; incompetent management was retained; and as it stands, the debt-holders of Bear Stearns stand to receive all interest payments and 100 percent of principal. This latter approach does not instill market discipline or uphold capitalistic ideals.

By not having consequences for taking risk, our current approach to protecting banks facing insolvency will only create moral hazard which implies that financial institutions deemed “too big to fail” can continue to count on public support at critical times. This perceived public “safety net” will only encourage excessive speculation at large commercial banks and will undermine the stability of our financial system unless sensible reform is implemented. There needs to be a mechanism by which any failing institution allowed to receive public aid would be subjected to an orderly dismantling where taxpayers would not be exposed to excessive losses in the event there is a bankruptcy. Creating considerable negative consequences for those involved in risk-taking at banks will go a long way to stabilizing our financial system.