Didn't Gary Cooper Have A Gun in High Noon?

May 3, 2010

Veteran Wall Street journalist Dan Jamieson recently shed light on yet another troubling example of the impotency of Wall Street's regulatory system. Jamieson called our attention to the industry's double-standard when it comes to regulatory matters involving employers/firms versus employees/registered persons.  In

Jamieson reports that

The SEC's lawsuit against Goldman Sachs' broker-dealer unit and recent revelations about fraud at Stanford Financial Group show how weaknesses in the disciplinary reporting system allow serious problems at firms to go unreported, according to some in the industry.

They also highlight the fact that firms and brokers are held to a different standard, which is "patently unfair," according to Bill Singer, a shareholder in the law firm Stark & Stark. Investors can be harmed by having less information about firms than they have about brokers, he said.

When the Securities and Exchange Commission announced fraud charges against The Goldman Sachs Group Inc. last month over the structuring and marketing of a synthetic mortgage bond, the firm took heat for not disclosing that it had received a Wells notice last June. A Wells notice is a formal warning from a regulator that it intends to file charges.

Goldman Sachs brushed aside the criticisms, saying that it is up to the firm to decide whether proposed charges warrant disclosure, based on whether they constitute material information that could affect the publicly held firm's stock price. . . . 

Members Only

For years, I have complained about the disparate (and preferential) treatment afforded to self-regulatory organization (SRO) member firms by their regulator.  As Jamieson points out, sometimes the deck is stacked in favor of member firms when it comes to reporting requirements. Similarly, member firms enjoy another lopsided advantage: They have the exclusive right to vote on SRO rule proposals and for elective offices, which gives them significant influence over the rule-making process and the direction of the SRO's regulatory policies.  Contrast that influential member firm role with that of the the hundreds of thousands of registered persons employed by those same member firms -- no vote whatsoever is granted to any registered person.  Those who do Wall Street's work are denied the vote on any rule proposal or elective office.  Why is all the power solely vested in the member firms but none with the men and women of the industry?

As far back as August 2002, I wrote an article warning about the dangers of disenfranchising the registered folks who are the backbone of Wall Street: 

In July 2009, Registered Rep. Magazine published a Street Legal column titled:

In 2002, my modest proposal was that NASD (the successor to the Financial Industry Regulatory Authority (FINRA)) should allow registered persons the right to vole on rules proposals limited to regulation specifically impacting their careers; for example, on issues such as outside business activities, private secuvities transactions, U5/CRD disclosures, etc. I find it hard to understand how FINRA justifies denying the vote to registered persons when that same vote is given to member firms. You know, the old goose and gander. 

Let me be quite clear. If you have a principled reason for denying the vote to registered persons, that's okay -- I'll give you that.  However, whatever your reasons for such disenfranchisement, then the same logic must apply to deny the member firms such a vote.  As I see it, either management and labor of Wall Street are equal voting partners when it comes to the self-regulation of the industry, or the self regulatory concept is a sham with little justification other than to provide cover for employer/management interests.  We have seen all to well how corrosive and corrupting such unbridled influence has been! 

Frankly, I have long viewed NASD/FINRA's position of enfranchsing only member firms as unprincipled and indefensible. For me, it's a very simple proposition: Give management and labor each a six-shooter or you don't give a gun to either.  It's about integrity and legitimacy. The present voting policy is unfair, arbitrary, discriminatory, and stinks to high holy hell. It's the immoral equivalent of sending an unarmed Gary Cooper onto the streets at high noon. 

Democracy is rarely pretty.  However, either you trust the electorate to ultimately do what's in everyone's best interest or our entire system of government is morally bankrupt.  Will every registered person do the right thing and vote for sensible Wall Street reform? Of course not -- no more than every member firm does or has in the past. The choice is fairly stark: Grant the employer and the employee both the vote, or dismantle self-regulation.  I can live with either option.  

As a former regulator and a three-decade industry veteran, I believe that when we fail to involve human beings in the political and regulatory process, we promote their alienation from the system and ensure that corrupt bureaucracies flourish unchecked. In response to my 2002 fairplay proposal, the NASD's official spokesperson stated:

Mr. Singer's agenda is clearly out of step with the times, pandering to those who would seek less, not more oversight and accountability. For example, Mr. Singer's proposal that registered representatives vote on all regulatory changes governing their behavior would almost certainly block or delay any effort to enact meaningful reforms. We will resist proposals that would water down industry oversight.


Nearly eight years later, we have seen the folly of allowing only member firms to influence and direct regulatory policy.  Talk about failing to enact meaningful reforms. Talk about watered down industry oversight by NASD and FINRA. Bear Stearns. Lehman. Goldman Sachs -- hey, FINRA, how's that members-only thing working out?

FINRA Reply Still in the Mail -- One Year Later

Of course, part of the problem with reforming Wall Street regulation is that those in power seem intent on perpetuating their failed system.  In March of 2009 I had the audacity to send a letter to the braintrust that was FINRA:

Yeah, you guessed it, over a year later and I never even got the courtesy of a reply. This morning, I learn that FINRA has now taken over the regulatory oversight of the New York Stock Exchange. My, how wonderful.  The more the merrier. If you can't handle less, maybe you can always handle more?