As I've started to update RRBDLAW.com for 2008 and am reading through FINRA's January 2008 cases, I noticed two interesting matters: MidSouth Capital and Loeb Partners Corp. Please read my analysis
Cases of Note Squib
In what appears to be a creative, new enforcement trend, FINRA sanctioned MidSouth with a 6 month suspension that prevents the firm from approving certain private securities transactions, and the regulator also sanctioned Loeb with a 30 business-day suspension that prevents the firm from engaging in research analyst activities. In both cases, FINRA tailored those suspensions to fit the perceived violations. Certainly a get-tough approach and one that will likely prove effective in getting the industry's attention.
The recent merger of the New York Stock Exchange's regulatory arm and that of NASD into the newfangled Financial Regulatory Authority (FINRA),was not without opposition. Pointedly, I and other FINRA dissidents/reformers worried that the likely result of that aggregation would be to entrench decades of regulatory bias against smaller firms. It remains to be seen whether those fears were paranoid or justified.
Recently, FINRA permitted robust, contested elections for its Small Firm Advisory Board. Unfortunately that democratization was somewhat half-hearted because the powers that be at FINRA retained their right to appoint a substantial number of SFAB members. However, I'll take the baby steps and the small victories. The turnout of a large number of independent candidates proved beyond any doubt that there is much unrest among the membership. Men and women who were historically excluded from a constructive role at their self-regulators are now clamoring for more involvement. I applaud this reform and hope it will spread.
Now it's time for FINRA to prove me and other critics wrong, and to assure the investing public that self-regulation is more than a few powerful Wall Street firms snapping their fingers and pulling the strings. The current mess in our markets is not the result of pennystock fraud, boiler rooms, or day traders. No, this debacle was bought, packed, wrapped, and delivered to us by the big boys---those household names that the entire regulatory establishment (from self-regulators, to the states, to the SEC) fawned over and curried favor with for far too many years. From those same regulators who shamelessly preached "bigger is better," you now have recession and a marketplace gridlock.
If regulation is ever to return to the partnership between all regulated firms and the regulators, then now is the time to rebuild that ruptured relationship. In upcoming months, FINRA must investigate and disclose the nefarious role that its gargantuan member firms played in bringing our economy to this brink. And let's not be coy--- we're talking about the major banks and brokerage firms that advertise on the same television programs where FINRA runs its own ads.
Not that FINRA is asking me for advice, but after you finally uncover the causes of the subprime meltdown---causes that were all too well known to those of us who work at mid and small sized member firms---I have a great idea for you. Take a look at your MidSouth and Loeb cases. Look at how you went beyond mere fines as a sanction and how you shut down those segments of a company where compliance fell asleep. And for once in the history of our markets, hammer the major firms with the same mallet and on the same anvil that you have been banging away at we smaller fry for far too long.
But you still have one more task. You need to also look within your own ranks and ask how FINRA (and the states and the SEC) missed all the red flags and warnings that the subprime excesses were baking into Wall Street. You get the regular reports of every firm's capital position. You know the assets and liabilities reported by your members, and you knew how large those subprime positions were. Frankly, you should have become far more concerned and far sooner about the valuation of those subprime assets.
It's time that the question is put to you: How did your vaunted systems fail to detect the growing cancer and spreading infection? Were you all too involved in the NYSE/NASD merger to notice? Have you been chasing the mice for so long that you failed to see the looming elephant?
So that's my rant. You have two challenges ahead of you. One, impose the same justice upon the large firms who caused this subprime collapse on Wall Street as you have so routinely imposed upon the little guys. Two, get your own damn house in order! Physician heal thyself.