Wall Street Critic Bill Singer Revisits His 2009 Reform Proposals

April 22, 2016

Yesterday, I posted the link on my social media sites to: "Why I (Belatedly) Blew the Whistle on the SEC's Failure to Properly Investigate Goldman Sachs"(Watchthecircus.com, by James A. Kidney, April 21, 2016). If you haven't read Kidney's jeremiad against failed Wall Street regulation, do so -- you will find his commentary spellbinding. 


After reading Kidney's article, I was reminded of my own lengthy battle against the ineptitude and incompetency of those who style themselves as the securities industry's cops. In keeping with that spirit, I've explored the annals of my published writing and resurrected three columns: 
  • "Becoming Part of the Solution" (July 28, 2009); 
  • "The Death of the Salesman" (August 8, 2009); and
  • "Bringing Consistency to Wall Street" (August 14, 2009)
As the dates indicate, the three blogs were written near the depths of the Great Recession. Today, nearly seven years after the publication of those articles, I take pride in noting that many of my edgy ideas have since gained acceptance. 

Becoming Part Of The Solution
July 28, 2009 by Bill Singer

I've noticed a pick-up in the numbers of complaints about all things Wall Street and its proposed reform -- present company included. The din of contrary opinions and naysayers has risen to the level of a roar, and while it would be nice to say something complimentary about all of that grumbling, frankly, it strikes me as just a lot of whining. And, yeah, you're right, I'll include myself among the grousers.

It's time that we started drawing the line -- the one that separates those who are part of the problem from those who are part of the solution. If you just want to complain and have nothing substantive to offer by way of reform, stand over there. If you have some constructive ideas, stand over here.

You know the old saying: You're either part of the solution or you're part of the problem. Well, that's where we have arrived.

As an interesting aside, I'll bet many of you use that solution/problem quote but don't know that it was spoken in 1968 by Eldridge Cleaver, the author of "Soul on Ice" and arch '60s activist and former minister of information for the Black Panther Party. Cleaver became a conservative Republican and Reagan supporter in the 1980s. How times have changed: I'm quoting Eldridge Cleaver.

So, getting back to becoming part of the solution, I will offer an eight-point program to reform Wall Street and its regulatory community. The issues that I set forth represent some ideas that have been formulated during my three decades on the Street, and others that were prompted by this most recent industry meltdown. In this first installment, I merely outline my proposal in bullet-point fashion. We'll get into the details in future columns.

Professionalize Financial Services Providers

Uniform Licensing System

Direct registration by individual not firm

Fully transportable registration from employer to employer

Public database using user-friendly interface


Fiduciary Standard 


Protect against dilution of definition by special interest groups 

Restrict (or eliminate) transaction-based compensation 

Full disclosure of compensation by firm and individual 

Continuing-Education System

Two-year program (Compliance/regulatory component; product updates; third-party, industry groups, regulators, and employer providers)

initial certification of individuals to sell each each designated product

bi-annual update module every two-years (limited to materially new product developments or regulatory events)

Implement a uniform regulatory disclosure system on all customer statements

Establish quarterly updated firm and individual regulatory scores

Disclose current scores for servicing firm and financial professional

Implement "point" system (akin to Driver's License) whereby accumulated points result in pre-determined fines and suspensions. 

-Impose annual fee on member firms for their rating (incentive to limit hiring of troubled professionals) 

-Impose annual fee on individual professionals for their rating


Establish a centralized national auditor

Independent "cage"

Issues uniform confirmations and statements

Confirms holdings of securities and cash

Confirms fair valuation or notes issues


Abolish Self-Regulatory Organizations

Federal and state regulators

Institute independent study on feasibility of a private-sector regulator: composed of industry firms, financial service providers, issuers, public advocates and regulators


End Mandatory Customer and Industry Arbitration

Permit voluntary arbitration

Eliminate industry-sponsored arbitration forums as sole option


Create a Fund for Full Payment to Defrauded Investors

Impose fee on all trades

Impose annual renewal fee on firms and financial services providers

Initially allocate all regulatory fines to this Fund (until fully funded)

Require proof of prevailing decision in court or arbitration 

-Limit fund compensation to compensatory damages and reasonable fees/expenses 

-Require proof of insolvency of respondent or defendant


Implement Bounty Program for Whistleblowers and Tipsters

Model after Qui Tam or False Claims Acts

Offer a percentage (sliding scale of between 10% to 33%) of funds recovered


Create a Systemic Risk Monitor (SRM)

Create an online "cockpit" of concentration of pockets of risks

New products should include application to SRM showing anticipated economic impact and proposals to address any potential systemic risk. 

-SRM may object to issuance of new product 

-Implement rapid administrative process to resolve objections or sustain "hold."

Provide for three-step protocol for product or sector:

1. On "Watch" 

-Impose size and monetary limits 

-Establish "tripwires" for escalation to "Alert" status

2. On "Alert" 

-Permits specific regulatory organizations to take steps to review, limit or suspend increases in float, sales, etc.

3. On "Systemic Risk": 

-Authorize a Systemic Risk Czar to take emergency steps 

-Provides for accelerated appeal process

The Death Of The Salesman
August 7, 2009 by Bill Singer

How do we begin to undo the damage and set things right? In my last column, I outlined an eight-point proposal to reform Wall Street in becoming part of the solution. Assuming there is still time left to make the changes and the political will to see the reforms through, let's start with one of the most basic elements in the Wall Street equation: the folks who sell you stocks and plan for your retirement.

Too Many Titles

First and foremost, I call for the professionalizing of the role of all individuals providing financial services. It has all gotten too confusing for the average investor (and apparently for the befuddled regulators). We are amid an explosion of titles that suggests that all financial-service providers are well-trained and educated (and of similar expertise) to understand what they are recommending to investors. As recent history has sadly demonstrated, there are far too many con artists, fraudsters, scamsters and financial morons out there masquerading as know-it-alls.

Open a newspaper or magazine, plow through online research or listen to those touchy-feely TV commercials, and you are immediately bombarded with titles: stockbroker, registered representative, financial planner, investment adviser, account manager, financial representative, financial associate. Some of those titles are real, but others are fanciful. We don't need fanciful in this day and age. And we certainly need less confusion when trying to invest our savings or arrange for our old age.

We must implement a comprehensive system that certifies competency and ensures that consumers are not overwhelmed by professional designations. It is high time to separate mere teleservice operators from individuals qualified and certified to answer sophisticated financial questions and provide competent advice. While there may be a place for both rookie cold-callers and skilled financial planners on Wall Street, consumers must know which is which when dealing with brokerage firms, investment advisers, financial planners, banks and insurance companies.

The Financial Services Professional (FSP)

In furtherance of that approach, I urge the implementation of a uniform licensing model. For starters, most financial professionals should be required to pass an entry-level examination that tests for basic knowledge of the building-block financial products and the regulations governing their sale. You pass that test, and you are entitled to bill yourself as a Financial Services Professional (FSP).

Once you have that base title, the FSP has to earn the right to sell more sophisticated products, or offer more sophisticated services. Just as folks looking to hold themselves out as Certified Financial Planners (CFPs) must study, gain certification, and abide by professional rules, we should look to extend that form of certification. We should implement a system whereby the right to sell specific financial products requires the passing of product-specific examination with attendant continuing education obligations. If you haven't passed the test and don't maintain your continuing education credits, then you lose the right to use the titles and engage in the product solicitations.

Accordingly, we must create a rigid system by which FSPs disclose to the public their specific product/service qualifications: everyone uses the same title and only that title. You pass the options certification, perhaps you can note on your business card or during presentations that you are an FSP with the additional designation of an Options-FSP -- but that's it. No options specialist or options investment counselor. One size fits all.

At present, hundreds of thousands of registered folks generally are registered with their firm, and that firm then submits the registration applications to a regulator. As such, you try to chase down a given FSP, and you get caught in a maze of where they may or may not be registered, and the confusion of what each organization may or may not disclose to you (and how you have to ask for that information).

The next step is to professionalize the career of FSPs, so that they are modeled after similar schemes for doctors, lawyers and CPAs. I am not suggesting that lawyers, doctors or accountants are more professional or better than folks on Wall Street -- quite to the contrary, there are more than enough bad actors in all walks of life. Nonetheless, just as professionals should be afforded some respect for the significance of their qualifications, those professionals should also be expected to conduct themselves in a manner worthy of that respect.

The point here is to celebrate the death of the salesman and not to pillory the hundreds of thousands of hard working and honest men and women who are presently stockbrokers. My goal here is a simple one: To free those employees from the yoke of their employers, and to encourage them to pursue more professional goals than merely opening up new accounts or generating the largest number of commission dollars for the month. Those employment conditions denigrate the importance of FSPs and reduce them to little more than used care salesmen trying to push clunkers off the lot. The investing public needs more honesty than a fast-talking salesman, and those who labor at the many branch offices around our country aspire for more than that pejorative cartoon of a career. As such, yes, I hope that the job of stockbroker becomes an anachronism within a generation and is replaced by a more sophisticated, more fairly compensated professional.

Continuing Education

Wall Street needs a rigorous, comprehensive continuing education system that updates FSPs on all product-related developments and material changes in regulations. As a lawyer, I am personally required to complete 24 hours of continuing education credits every two years. I pay that cost out of my own pocket and attend whatever seminars I choose. We should create a similar system for FSPs. For this CE program to work, we cannot impose time-wasting obligations on FSPs. If there are no substantive new developments in a specific area, say options, during the ensuing 24 months, then the obligation may be fulfilled by a course that reviews recent regulatory issues involving options and perhaps some guidance on developing trends in risk management. We don't want to turn this into a pure revenue-generating device for regulators or professional associations, and we don't want to make professionals feel as if they are merely going through the motions.

Reform the Registration System

As a lawyer, I sat for the bar in 1984 and have been admitted to the practice of law ever since. My license to practice law exists as long as I satisfy my continuing education requirements every two years (24 hours of courses) and have not engaged in any conduct that would disbar me. I don't lose my license if I quit law firm A and join law firm B, which is essentially what happens to most stockbrokers who find their registrations in limbo during periods of unemployment.

Stockbrokers are only deemed registered when they are employed by a member firm, and then have only 24 months to find subsequent employment or their registration expires. That system has given far too much leverage to the employer and has resulted in registered employees pushing unsuitable house product or the lesser-performing funds of a favored affiliate. The more onerous it is to leave a brokerage firm, the more pliable the stockbroker becomes to the demands of his or her employer-and those demands may well pressure the captive employee to do things that are wrong, if not illegal. Think of it this way: Imagine what would happen if you lost your driver's license every time you sold a car or returned a rental. As long as you pass the eye test for your renewal, your license is renewed-and I don't know of any driver's license with a mere two- year life. Am I comparing apples and oranges -- yeah, you're right. But still, this issue is often at the root of much consumer fraud on Wall Street. It has to be changed.

Unified Disclosure Database

Similarly, the public should be entitled to easy access to a single unified database for all FSPs. Additionally, the information provided should not depend upon whether you contact one regulator or another. We need to create a centralized, public database that is easily accessible via the Internet and has a user-friendly interface backed up by a supportive customer service staff.

As a lawyer, I personally welcome uniformity among all professional databases, including those in my profession, in the medical profession and in the financial services community. What's good and fair for one should be the same for all. Further, whatever disclosure is mandated for those in these regulated professions should also be mandated for those who do the regulating -- and I would also urge the inclusion of all elected officials at local, state and federal levels. What's good for the goose is good for the gander. Sunshine is good for all living things.

Fiduciary Standard

In keeping with my call for uniform disclosure, I urge the adoption of a single Fiduciary Standard for all FSPs. We must demand that FSPs work at their employer's company but always for their clients. We must also insist that FSPs are subject to a strict Fiduciary Standard that exalts the client's best interest above all else.

The current Suitability Standard that has held sway on Wall Street for generations must be abandoned. It's just not good enough -- not anymore -- for a financial professional to only have to find something that's suitable for his or her customer. No, the job -- the profession -- must demand more. It must demand that you find the very best that you can for your client, and that you never, ever consider how much goes into your own pocket when recommending investments.

As a wizened Wall Street veteran, I know that he who controls the drafting of the rules controls the regulation. A fiduciary standard for a CFP may be quite different from that of an investment adviser, and quite different again from that of a stockbroker. Worse, I am already seeing signs from brokerage industry interests and their cronies that the battle for defining the Fiduciary Standard may well be riddled with conflicts of interests and competitive concerns. We may get a Fiduciary Standard that is so watered down as to not be all that different from the current Suitability Standard now in effect at broker-dealers.

This is a fight worth waging. Today, your stockbroker is only required to recommend buys and sells that are suitable for you -- not necessarily in your sole best interest. Other financial professionals are subject to the more stringent Fiduciary Standard -- recommendations are made by folks acting in the role of your fiduciary, with an obligation to find the best bang for your buck and not something that pretty much fits the bill but puts more fee or commission dollars in their pockets.

Compensation

The present compensation system on Wall Street is essentially one based upon the more I sell to you, the more I make. Look where that has dragged us.

As long as Wall Street is largely based upon transaction compensation; i.e., stockbrokers earn a commission for every buy-and-sell ticket, the conflict to churn accounts and to push pricey product will remain. Many brokers avoid the temptation and do right by their clients, but the overwhelming corruption of this compensation system is simply too much to be tolerated.

One alternative is to pay salaries to FSPs in lieu of commission-based compensation. Another option is to pay a percentage of the profits in an account or the increase in assets under management. Some of these alternatives are already the favored practice among some FSPs, but the commission system is stubbornly embedded in the broker-dealer community.

Regardless of the compensation structure, every daily confirmation, every monthly statement and every annual account statement should clearly set forth the full compensation earned by the firm and the servicing professional, and further set that data out as a percentage of the overall cost. Customers should be fully informed of the incentives that existed and that may have prompted the recommendation. Similarly, if a customer wishes to offer additional compensation to a financial service professional, such private arrangements should be permitted provided that they are filed with a regulator and approved.

Bringing Consistency To Wall Street
August 14, 2009 by Bill Singer

During my three decades on Wall Street, I worked as a regulatory lawyer prosecuting brokers and their firms; as an in-house industry lawyer; and as a private practitioner representing both the industry and public customers. Having worked those three sides of the table, I have an unusual perspective of Wall Street's players and their games -- and a keen understanding of where the root causes are for many things that serve to confuse and ultimately defraud unwary investors. Among the worst such mechanisms of obfuscation are the confusing numbers of documents that are routinely sent to public customers by financial services companies.

How Much?

The ability to take a simple fact, such as how much your monthly phone or cable bill is, and to present it in a manner that seems to justify charges far in excess of what that glib salesperson told you they would be, and to set forth the component costs and charges in such a way that few human beings have the life span to break the apparently impervious code, has become an art form.

Nowhere is that art more cultivated and appreciated than within the halls of banks, insurance companies and brokerage firms. And heaven help you if you dare to call up to inquire about any item, much less to actually complain. More likely than not, you are talked to as if you were a crook or moron, and you are given a runaround that is typically replete with disconnected transfers to supposed supervisors and promises of follow-ups that never materialize.

Why is this customer service (or disservice) dangerous -- and no laughing matter? Because many Wall Street frauds are furthered and assisted by trade confirmations and monthly statements that are far too daunting for the average consumer to clearly understand and efforts to seek the industry's help in resolving disputes seem eerily reminiscent of a Kafka novel.

It is time to implement a uniform format for trade confirmations and customer statements, and to impose such a guideline on all companies within a given financial service sector; e.g., the same layout and data for the same document for all banks, for all insurance companies and for all brokerage firms. About the only difference we should tolerate is the logo atop the documents. Period.

Wall Street Point System

Way back in 1996, I suggested in a Dow Jones News Service article, "Lawyer Proposes Disciplinary Point System for Brokers," that Wall Street implement a "point system" whereby stockbrokers would be rated on a scale similar to that used in many states for wayward motorists. For each class of infraction, a Financial Service Professional would earn X points. If an FSP accumulates a given number of points within a defined period of time, certain sanctions would automatically be imposed; e.g., he or she would be required to take remedial classes or he'd have his license suspended or registration revoked.

Coming up with the point system and the grid indicating what earns what may be daunting, but it's not rocket science, and I am confident it can be accomplished. Given that we utilize such a system for drivers in all states, It's not as if my proposal is a radical solution. I'm sure if you gave me an empty room and let me pick some regulators, public investor advocates and industry advocates, we would be able to propose a fair system.

Note that I am not suggesting this point system in lieu of the extensive enforcement and disciplinary rules already on the books of federal, state and self-regulators. I propose that we augment that enforcement and disciplinary system by creating a more simplified early warning system. Moreover, I am urging the implementation of the point system so investors will have an easy means of determining the caliber of the firm and FSP they are dealing with.

In addition to using the point system to better notify customers of the compliance history of their potential broker-dealer (BD) and servicing FSP, I would also use the points to create an additional revenue stream to enhance regulation. For each accumulated point during a 24-month period, a broker-dealer and an FSP should be required to pay a given annual assessment into a fund with its primary purpose as source of a guaranty of an financial award rendered in arbitration or court to any defrauded investor, provided that the prevailing investor demonstrates the inability to collect any compensatory awards against a broker-dealer or FSP.

An indirect benefit of the annual fees per point would be to provide a financial disincentive for a BD to hire or retain FSPs with voluminous points, as such points add to the financial burden upon the BD's own point score.

I would then mandate that the 24-month industry average point score for all similarly situated firms and FSPs be calculated monthly. I would require that such industry averages be prominently posted on the uniform account documents I proposed above, and that the current score for the servicing financial services firm and the FSP be displayed alongside.

I can't think of any data that would be more dramatic on a daily trade confirmation or account statement, than, say, the presentation of a regulatory point system with 0 indicating no issues and 100 indicating disaster. Imagine the impact on a consumer of the stark disclosure that the average firm's regulatory point rating for the past 24 months is 21 on scale of 100, and the average FSP's rating is 32 on a scale of 100, but your broker-dealer's number is 87 and your FSP's is 92. What could be simpler and more effective?

For extra measure, I would require immediately adjacent to the point system disclosure the display of the direct phone number and e-mail address for the compliance officer overseeing your servicing FSP, along with the direct phone number and e-mail address for all state and federal regulators overseeing your servicing broker-dealer and FSP.

The Buck Stops Here -- Literally

Separately, we need to consider the creation of a centralized national auditor -- an independent Wall Street "cage," as it were - where all securities and funds would be held subject to verification and confirmation. We need to take all steps possible to ensure no recurrence of a Madoff scenario whereby customers are sent statements referencing fictitious holdings or false pricing of positions.

Toward accomplishing this critical safeguard, I would create a national clearinghouse that would be charged with ensuring the existence of (and confirming same) of any representation on any statement. This clearinghouse should be required to maintain a national database where customers could log on with a user ID and password to access the confirmed and audited status of their account around the clock. That will act as a critical back-up confirmation. Customers should be warned to immediately report to the national auditor any discrepancies.