Financial regulatory environment is frustrating

By DAVID MOON, Moon Capital Management, LLC
May 6, 2012

Within only days of the birthday of convicted Ponzi schemer Bernie Madoff, the News Sentinel reported details of two local investment frauds – one of them a two-time defrauder. The details were both fascinating and frustrating.

It is fascinating that people can make the kinds of mistakes and decisions that feed these scoundrels. And it is the regulatory environment in which these horrible thefts occur that is frustrating.

Our firm is registered with the Securities and Exchange Commission and subject to unannounced inspections. I have described an SEC exam as akin to undergoing a week-long colonoscopy when you already know that you are completely healthy.

So how do people like Madoff and East Tennessee’s Jon Hankins and Brian Keith Miller obfuscate their thefts from the SEC for so long?

In Madoff’s and Hankins’ cases, they simply refused to register with the SEC. If they never get into the system, it takes a long time – if ever – for someone from Washington to come knocking on their door with pages of questions, a colonoscope and a laptop.

Miller had been a SunTrust stockbroker and had been allowed to resign after selling unregistered shares of IdleAire, in violation of the rules of the Financial Industry Regulatory Authority (FINRA,) the self-regulating organization (SRO) for brokers.

Congress is now contemplating a system that would remove all investment advisers from SEC jurisdiction and place them under an SRO, likely FINRA.

The Chairman of the House Financial Services Committee, Spencer Bachus, R-Ala., recently introduced this bill.

The day after Bachus introduced his bill, Joel Blumenschein, a board member of FINRA and president of his own securities firm, was suspended by FINRA and fined $30,000 for failure to properly supervise brokers in his firm who engaged in unsuitable stock trades.

FINRA also found that an employee of the firm falsified documents and that Blumenschein provided evasive and contradictory testimony during the investigation.

Although Blumenschein did not admit guilt, he did resign from the FINRA board – but after refusing to for a week.

And Congressman Bachus wants financial advisers to regulate themselves?

The SEC is useful because it causes investment advisers to disclose. It causes us to disclose everything. Free markets require the free flow of information. Blumenschein offered his client a settlement if he would agree not to inform FINRA of the charges against the firm.

That is not free information flow.

The SEC does little to prevent people from entering the investment advisory business, but the agency does work to create a system that provides clients access to operational and disciplinary information about the firms under its jurisdiction. FINRA does the exact opposite, often allowing brokerage firms to settle claims with clients that include secrecy agreements that preclude the client from disclosing their complaints against their broker or his firm.

The Bachus bill is bad for consumers. Registered investment advisors should stay under SEC jurisdiction.

David Moon is president of Moon Capital Management, a Knoxville-based investment management firm. This article originally appeared in the News Sentinel (Knoxville, TN).

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