Ring. Ring. Ring. Hello. This is Senator XX, and you have reached my Washington office. I'm sorry, but all of our lines are busy right now. Please leave a detailed message, and we will return your call as soon as humanly possible. Thank you and have a wonderful day.

(Four days later): Hello?

Hi. I have a note here that you called Senator XX's office with some concerns about legislation regarding financial services or... regulation?

That's right. Who are you?

I'm a senior member of Senator XX's legislative staff.

Do you specialize in the financial services area?

Financial and commerce and some regulatory. Our deputy chief of staff spends more time in this area, but she's currently with the senator. But I can document your concerns. What Zip code are you calling from?

92109.

And what is your concern?

Are you aware of the regulatory reforms that are being debated on Capitol Hill right now? I just noticed that Harry Markopolos testified yesterday, and I think he made my job a whole lot easier.

Who?

He's the guy who notified the SEC about the Madoff case—nine years before the guy finally confessed.

Oh, right. I saw something about that. So what's your concern again?

In a nutshell, Congress is trying to figure out how to do two things: prevent another global meltdown caused by toxic securities created by the brokerage industry and do a better job of catching people like Bernie Madoff before billions of investor dollars have vanished. Right now, the most influential lobbyists on this issue are the brokerage firms themselves.

Here's what I think is important. The two issues are actually the same issue, and they can both be resolved by doing exactly the opposite of what the Wall Street lobbyists are proposing.

I'm not sure I'm following you.

I'll send you some information in a minute, but here's my concern. Right now, there are two regulatory organizations that ostensibly protect the public from securities fraud and toxic products. One is the Financial Services Regulatory Association, known as FINRA, whose board is made up of brokerage firm executives, and which was created and funded by the brokerage community itself. The new SEC Commissioner, Mary Schapiro, previously worked as the head of FINRA, and FINRA recently paid her at least $5 million in a severance package in addition to a salary of $2.75 million a year. The other regulator, of course, is the SEC, which regulates thousands of advisors who haven't been involved in any of these scandals because they are required to put the interests of their customers first and foremost.

That's your concern?

My concern is that the brokerage world is asking Congress to transfer all authority to regulate people who provide financial advice over to the regulatory organization they control, and FINRA has come out strongly in favor of this idea. I think that would be exactly the wrong thing to do, and I cannot for the life of me imagine that anybody would believe otherwise after FINRA did nothing to stop the brokerage firms from nearly wrecking the global financial system.

You were talking about people giving investment advice, but how does that relate to the brokerage scandals?

That's the key question. All of the damage, all of the bad products that lead to huge profits and billion-dollar bonus pools, all the misleading information from the analysts-all of it reaches the public through one door: the brokers who recommend them to customers.

I'm not sure I see where Madoff fits in.

Bernie Madoff was a former chair of FINRA's predecessor organization, and his brother Peter was a former vice chair. The Madoff brokerage firm was allegedly bilking the public for at least 10 years under FINRA regulation before Bernie Madoff registered with the SEC in 2005. Yesterday, Markopolos testified that he was afraid to take his evidence to the NASD, which is what FINRA was called back then, because he was convinced that somebody there would tip off Madoff.

If you take only one thing from this conversation, let it be this: FINRA is in the pocket of the brokerage firms, and Madoff was one of them. Everything you hear about how great FINRA would be at regulating the advisory business should be seen through that filter. When they get to structure their own regulation, the big brokerage firms are not going to stop doing what they have done before.