June 4, 2012
On June 6, 2012, the House Financial Services Committee will hold a hearing to examine H.R. 4624, the Investment Adviser Oversight Act of 2012, a bill co-sponsored by Committee Chairman Spencer Bachus (R-AL) and Carolyn McCarthy (D-NY). The Bachus-McCarthy bill proposes to amend the Investment Advisers Act of 1940 by providing for the registration and oversight of national investment adviser associations. This bill would authorize "one or more self-regulatory organizations (SROs) for investment advisors funded by membership fees."
In my recent column "Congress Prepares To Sandbag Investors And Their Financial Advisers With More Wall Street Self Regulation," ("Street Sweeper," May 31, 2012), I characterized the Bachus-McCarthy bill "as little more than a Congressional con game to foist the Financial Industry Regulatory Authority ("FINRA") upon the investing public and the investment advisory community. . ." Not much doubt where I stand on this legislation or how I feel about it.
A Wolf In Sheep's Clothing
FSI is upfront about its advocacy for a "more business-friendly regulatory environment" for its members. Given my libertarian leanings, my well-documented animosity for big government, and my passion for free enterprise, I applaud FSI's candor and respect its robust lobbying on behalf of its members. That being said, Wall Street is not merely a marketplace for investment advisors or stockbrokers but is also a venue for retail investors, institutional investors, private issuers, and public issuers. When the regulation of the financial markets is unfairly skewed in favor of only one constituency, the consequences are often disastrous.As the Investment Adviser Oversight Act of 2012makes its way through the legislative process, supporters and opponents of the bill are going public with their positions. Among those interests pushing for the bill's approval is the Financial Services Institute ("FSI"), which I consider an industry trade group. According to FSI's "About Us" page on its website "everything we do starts and ends with our crystal clear mission: to create a healthier, more business-friendly regulatory environment for independent financial services firms and independent financial advisors . . .'
Although FSI's voice should be heard on the merits of the Bachus-McCarthy bill, industry reformers and public investors would be well advised to view this trade group as a wolf in sheep's clothing. The alternative to self-regulation is not equally ineffective government regulation but a more expansive private-sector regulator - which should provide for a more representative and independent form of regulation. FSI's position needs to be considered because the organization has somehow managed to obtain one of only six witness seats at the June 6th hearing for its President and CEO, Dale Brown.
The Devil We Have
On May 29, 2012, FSI published a letter: FSI Uncut: SRO for RIAS / A Message from FSI Chair Joe Russo, which states, in part:
[T]he option of a brand new SRO or multiple SROs is also troubling. For FSI to back a strategy that could set up one or more new regulators that we don't know and don't have influence with wouldn't be taking full advantage of the relationships we've worked years on strengthening. . . .
. . .
FINRA, as we said from the beginning, isn't perfect. They are actually nowhere near perfect. But, they do have the resources to do the job, and they would be much more affordable for our members from a small business cost standpoint than the SEC user fee proposal.
FSI has a good working relationship with FINRA. There is an FSI member on the FINRA Board, there are 20 FSI members on FINRA district committees, and FSI senior staff has a close working relationship with FINRA senior staff. Certainly, we don't always get what we work for with FINRA -we wish we could say we had a perfect record, but we don't. But we do have many wins in terms of changing proposed rules and regulations coming from FINRA to our members' benefit that we can hang our hat on.
In FINRA becomes the SRO for RIAs, FSI pledges to you that we will stop at nothing to try and ensure the most responsible, efficient, and least intrusive regulator for RIAs as possible while protecting investors. And if FINRA's not doing their job, we're the first you'll hear it from.
We're here to create a healther, more business-frinedly regulatory environment for you, our members. We're here to make your life easier, your business more prosperous, and preserve your clients' access to your much-needed services - period. . .
Contrary to his intent, FSI Chairman Russo's message makes a strong case AGAINST the Bachus-McCarthy bill.
As Chairman Russo asserted in his letter, FSI doesn't want to deal with regulators that "we don't know and don't have influence with" because that would inhibit the trade group from "taking full advantage of the relationships we've worked years on strengthening." From the larger perspective of implementing reforms on Wall Street and ensuring a level playing field, those words are frightening.
In supporting FINRA's designation as the new investment advisory community's SRO, FSI's goal is not to promote an effective regulatory scheme. No, the trade group's ambition is to keep in place its influence and relationships with FINRA. Not exactly the hallmark of a regulatory regime all market particpants should get behind. The exaltation of cronyism seems to be FSI's goal in getting behind the Bachus-McCarthy bill.
Imperfection Is Okay
Russo laments that FINRA "isn't perfect. They are actually nowhere near perfect." Hardly a glowing recommendation. According to Russo, the counterbalance that FINRA offers for its deep flaws is that it has "the resources to do the job, and they would be much more affordable for our members from a small business cost standpoint than the SEC user fee proposal." I mean, seriously? The highlights of this hard-sell pitch is that FINRA does a crappy job regulating but, hey, it has resources (whatever that means) and it's an affordable option?
Imagine going to a used car lot and being shown a mangled wreck, which the salesperson points out still has four wheels, a windshield, and an engine - plus it's cheaper than everything else for sale. Of course, the engine is pushed into the trunk, the rear axle is split, the transmission is shot, the brakes leak, and you're going to get seven miles per gallon. Listen, bub, this car has real fake leather upholstery and, sure, it's nowhere near perfect but for basic transportation and cost, well, you know, it's a cherry.
Wink Wink, Nudge Nudge, Say No More
Wonderful - Wall Street's reputation is in the toilet and now one of the industry's trade groups is putting its influence behind promoting the perpetuation of self regulation and the coronation of FINRA as the investment advisers' SRO. Aware of FINRA's unpopularity among many of its current members, industry reform factions, and public investor advocates, FSI's Russo tries to salvage the sale to his own members by playing the crony card: "FSI has a good working relationship with FINRA. There is an FSI member on the FINRA Board, there are 20 FSI members on FINRA district committees, and FSI senior staff has a close working relationship with FINRA senior staff. . ."
All of you public investors and industry reformers catch that? FSI has its hooks into FINRA. The group and the SRO have an understanding. The trade group has someone on FINRA's Board and another 20 folks on local committees. A cynic might wonder whether those FINRA seats were incentives or rewards but, hey, who knows how many devil's bargains are made everyday on Wall Street? Why just focus on this unsettling bit of boasting by a trade group?
In desperate need of effective Wall Street regulation, Representatives Bachus and McCarthy have launched a bipartisan effort to put FINRA into play as an expanded regulator with jurisdiction over a larger membership. At the very least, one would expect some push-back from an industry that is targeted for a new version of Congressionally mandated regulation (as if Congress has had any laudable results tinkering with the financial services industry). Instead of any meaningful reservations, FSI "pledges" to its members that the trade group "will stop at nothing to try and ensure the … least intrusive regulator for RIAs . . ." Given the trade group's support for FINRA, that's quite the dubious accolade: The least intrusive regulator!
And let's not omit that lovely fillip that FSI Chairman Russo offers to press his point. His trade group is here to "create a healther [sic], more business-frinedly [sic] regulatory environment for you, our members. We're here to make your life easier . . ." Great job Bachus! Super effort McCarthy. The supporters of your bill deem FINRA imperfect and reverentially speak of the SRO as a crony that can be influenced towards taking it easy on those it will supposedly regulate.
Small wonder that I don't trust the Democrats or the Republicans. Not much of a surprise that I don't trust either political party to do anything other than ensure their campaign contributions and the status quo of Washington, DC. Shoddy. Shameful. A political sell-out.
With all due respect to FINRA, I don't think that the regulator's record for the last decade has been anything to point to with pride - first, you'd have to explain where you were with Madoff and Stanford; and then we can discuss some more recent messes such as MF Global or JP Morgan. Maybe we can ask both FINRA and FSI what they think about the SRO having nominated a senior Deutsche Bank executive to FINRA's Board only one day after his firm agreed to pay a $202 million settlement in a Department of Justice case involving allegations of mortgage fraud; see: "Feds Slam Deutsche Bank But Next Day FINRA Nominates Executive To Its Board" ("Street Sweeper," May 15, 2012).
In terms of earning an expanded regulatory role over the RIA community, sorry, but I don't think that FINRA has earned it. Further, the SRO model is so flawed and ineffective that I think it ridiculous for the investing public and industry reformers to be saddled with more of the same. Contrary to FSI Chairman Russo's advocacy, it's just not enough of an endorsement for the rest of us that FINRA has resources, may offer cheaper regulation, and has been disposed to nominate FSI members to its various elected offices.
Where we should demand excellence, we are told to settle for adequate and affordable - and to sort of overlook a history of failures.
NASDAQ didn't mangle the Facebook IPO - no, it just wasn't a perfect offering. The price per share of Facebook didn't drop some 25% - no, the shares are now more affordable. JP Morgan didn't lose a few billion in trades - no, the firm enriched the counterparties on the other side and has more influence with those industry participants.
Enough already with the endless spin.
The Bachus-McCarthy bill stinks to high holy hell and should be consigned there as quickly as possible.