One of the most interesting things to come out of this conversational thread about the regulators (the SEC and FINRA) is the amount of fear advisors are expressing about speaking openly.  There seems to be a belief that our regulatory authorities would respond vindictively to any criticism of their activities; that (to be specific) they would put the critics out of business or deliberately harass them.  In this context, I remember that when Congressional investigators asked Harry Markopolos why he didn't take his considerable evidence about the Bernie Madoff Ponzi scheme to the NASD (now FINRA), he said that he feared for his life.

So I think before anything else happens, the SEC and FINRA should make it VERY clear, to Congress and the public, that it is willing to engage in constructive dialogue with the profession and public about how to do its job better.  If the organizations are not only resistant to change, but actually pursue vendettas against those who talk about ways to improve their efficiency and effectiveness, then Congress and the White House should completely clean house and bring in a more transparent, flexible staff that is focused not on protecting their current procedures, but on protecting the public. 

Is this issue that important?  I think it is.  It shows that the relationship between the SEC and FINRA, on the one hand, and those it regulates, on the other, is sinking to dysfunctional levels.  Both regulators are perceived, by those advisors who meet a fiduciary standard, as being cozy with the brokerage houses, of being extremely inefficient, arbitrary and ineffective in the way they go about protecting the public, of imposing unnecessary burdens on the smaller and least-conflicted providers of advice, and now of hostility and vindictiveness toward anyone who dares to criticize them. 

I should add that both organizations have been spectacularly ineffective at preventing fraud (Stanford, Madoff), predatory and risky behavior (virtually all the brokerage houses) and by some estimates more than a trillion dollars in aggregate investor losses (2008).  In this environment, with this track record, our regulators should welcome with open arms any suggestions from the honest segment of the advisory world.  The fact that they are doing the opposite should be disturbing to all of us. 

The SEC should be making us fearful of breaking the law, not fearful of angering the regulator.

Now let's get to the suggestions.  In the discussion forum, I posted some of the suggestions offered by noted securities attorney Tom Giachetti, which follow a branching approach.  Do clients make out checks to the advisor?  Or the custodian?  If the checks go to the advisor, then this office should be inspected carefully.  If not, the auditor can probably relax a bit.  But, as one person said in the discussion forum, how can the SEC auditor KNOW that all the checks are going to the custodian?

Are there unusual or complicated investments in client portfolios, or contracts with 20-year surrender charges?  If the advisor's clients are invested in mutual funds, ETFs, stocks and bonds, the auditor probably shouldn't be investing a lot of time in this office.

Does the client receive monthly statements from the custodian, and do they match up with what the advisor is sending out?  Are the balances available online?  If so, then get back in the car and head off to ask the same questions at the next stop on your tour.  "Ethical financial advisors invite their clients to check out their accounts online," an advisor wrote to me."  She says that after 28 years and a good compliance record, she is still treated with suspicion by auditors who display no visible evidence of common sense.

One advisor wrote to say that the SEC had two inspectors spending four days apiece in his office, even though he passed these initial screens.  And guess what?  The SEC found nothing of substance to justify all that time and energy.  "The small firms that have always acted as fiduciaries are paying the price of Bernie Madoff in the form of increased compliance," he says.  "The ones who really suffer are the consumers."

Later in his message, he says that "anyone in our industry with any reasonable experience could have walked into the Madoff firm and within one day, at the outside, have known there was trouble.  It wouldn't take eight person-days, and if it did, the auditors are incompetent." 

If I published this person's name, would the SEC target him for reprisals?

Another advisor wonders if every government agency is run this way, looking for ways to justify its existence, expand the number of employees and stifle criticism through intimidation, rather than constantly searching for the most efficient way to follow its mandate. 

If you have other suggestions on how to make the SEC and FINRA audits more efficient (Checking advertising materials to make sure there are no outrageous performance claims?  Contacting custodians beforehand to see if performance statements are being sent out to clients?  Comparing the advisor's client list with the custodian's records?), please send them along.  And also, if you get a chance, send me an estimate of the amount of time a SEC auditor should spend in your office, or Bernie Madoff's, to decide whether you're a danger to your clients.

And finally, is it right for the SEC and FINRA to be a danger to YOU, just because you offer your advice on how best to protect consumers?  I vote "no." 

What do you think?


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