Posted By: CFP&WM On: Aug 13th, 2012 In: Money Matters

Wall Street’s Self-Regulator Wants More Power And That’s Bad News For The Public

Wall Street‘s self-regulating agency wants to increase its power over more financial advisory firms.

Financial Industry Regulatory Authority’s (FINRA) currently performs financial regulation of member brokerage firms and their employees but now with the endorsement of politicians like Rep. Spencer Bachus it’s pushing to regulate Registered Investment Advisors (RIAs) which are currently regulated directly by the Federal and State Governments.

RIAs, which typically serve as financial advisors to individual investors, are currently required to operate under the highest standard of investor protection called the Fiduciary Standard–putting the client’s interest before their own. Most of Wall Street however operates under the Suitability Standard, which provides a much lower safeguard for investors.

FINRA oversees all the securities dealers in the country and they as a group have no desire to operate under the fiduciary standard. There is a concern that FINRA could over-regulate RIA’s and many small RIA’s would fold, which would harm the public and eliminate completion for its Securities Dealers members. FINRA’s press liaison Nancy Conrad disputes that possibility.

The National Association of Securities Dealers (NASD) a self-regulatory organization changed its name to FINRA in 2007. The change of name obscures the purpose of the organization to this writer and can confuse the public or mislead investors that FINRA is best suited to protect the public from its own members. Some believe that FINRA protecting the public is about as disastrous as the “Fox guarding the hen house”. Again FINRA spokes men states that FINRA

FINRA seems to more accurately protect the interests of the Financial Services Companies as demonstrated by:

  1. FINRA’s CEO opposes the imposition of the current fiduciary standard on it’s Broker Dealer members when he said “…one-size-fits-all approach won’t work for every client, advisor and transaction.” Ms Conrad said that  ”FINRA Chairman and CEO, Rick Ketchum has long supported a fiduciary standard for both securities firms (BDs) and Investment Adviser firms.” Come on, if thats the case why don’t BD Reps operate as a fiduciary now?
  2. FINRA self admits that they have done a poor job with “shortcomings in our examination program”.
  3. FINRA arbitration process seemingly protects the Industry where in over 14,000 FINRA arbitration awards over a ten-year period, investors with large claims against major brokerage firms recovered only 12 percent of the amount claimed.
  4. Another example is who serves on FINRA committees and Board. Bernard Madoff was on the NASD’s Board of Governors and served as Vice Chairman. Mary Schapiro the former FINRA CEO, appointed Mark Madoff, one of Bernard Madoff’s sons, to a regulatory body that reviews disciplinary decisions made by FINRA. Madoff’s niece, Shana Madoff who was a “Compliance Officer” of Madoff until the firm’s collapse was a member of a compliance advisory committee of FINRA. Conrad states that ” Our organization has demonstrated time and time again that it is not afraid to discipline firms or individuals for wrongdoing, regardless of their service on FINRA’s Board.”
  5. Please see the following as to how poorly those companies who have an employee on the FINRA Board have done at regulating their own business practices and employees. Yet the public should believe by FINRA which is governed by its Board of Directors with members for these offending firms are qualified to oversee FINRA which regulates the other Securities Dealers and soon to be RIA’s?

These company violations include willful violation of State and Federal Laws, failure to supervise its own employees, lack of procedural safeguards, submitting false information to the Regulators, improper sales and on and on.

Morgan Stanley Smith Barney Violations- Board Member Gregory J. Fleming

  • 2002 Illegal rewards for selling affiliated mutual funds $2.25 fine
  • 2003 Conflicts of interest research analysts $75 million payment
  • 2003 Inappropriate influence and improper “spinning”- $400 million fine
  • 2003 Censure & penalty for illegal marketing and IPO’s $100 million
  • 2004 Failure to deliver documents to investors- $13 million fine
  • 2005 IPO Violations  $40 million
  • 2005 Failure to disclose info to mutual fund clients $6.25 million
  • 2005 Willful violation of the Advisors act of 1940 $208 million
  • 2005 Failure to supervise its sales force $5 million
  • 2006 Failure to maintain and enforce policies $10 million
  • 2007 Failures for best execution $7 million
  • 2007 Failure to supervise sales peoples deceptive actions $15 million
  • 2007 Provided false information to regulators $12million
  • 2007 Failure to provide customers with required information $17 million
  • 2005 Improper sales of securities $8.5 million
  • 2008 Inappropriate ales of auction vrate securities  $35 million
  • 2008 Misled tens of thousands of investors $100 million
  • 2009 Failed to supervise sales people $5.4 million

All of the above can be confirmed in greater detail here.

MSSB has had other issues such as: race discrimination lawsuit, discrimination against women another to sex discrimination suit, and charging excessive fees to the Indiana State Teachers Association (ISTA) Insurance Trust.

Edward Jones
Violations- Board member James D. Weddle

  • 1990’s Failure to disclose revenue sharing to clients $7.5 million
  • 2000 Sale of unregistered stock
  • 2002 Transactions without the proper registration
  • 2003 Fail to disclose incentives to sell mutual funds -$75 million
  • 2003 failure to supervise a financial advisor
  • 2004 failed to properly deal with a complaint a complaint.
  • 2008 failed to reasonably supervise the financial advisor
  • 2009 failed to reasonably supervise its financial advisor
  • 2010 Misappropriation of Client Funds $449,000
  • 2009 Failed to supervise the activities of advisor.
  • 2003 Failure to supervise a financial advisor
  • 2002 Advisor recommendation of margin use to client
  • 2000 Failed to supervise a financial advisor
  • 2003 Improperly included its markup/markdown
  • 2006 Mishandling of NAV transfer programs $25,250,000
  • 2004 Willfully violated rules with sale of 529 plans
  • 2008 Failed to report transactions on time
  • 2006 Failing to timely deliver of official statements to clients
  • 2009 Failing to establish and enforce a supervisory system, $200,000.
  • 2004 Failing to establish and maintain a supervisory system, $200,000.
  • 2004 Failure to achieve compliance with its Article V reporting obligations.
  • 2005 Improper sales of municipal securities to clients
  • 2003 Employing those that failed statutory qualification- $100,000

For the complete listing view the Form ADV.

Violations- Board member Seth H. Waugh

  • 2002 Fail recordkeeping requirements of the SEC – $1,650,000.
  • 2004 Research analyst conflicts of interest – $50 million,
  • 2006 Engaged in market-timing and late trading of mutual funds,
  • 2004 Sale of initial public offerings violations $5 million
  • 2004 Research report conflict disclosures – $950,000
  • 2007 Failure to ensure delivery of prospectuses – $1.25 million
  • 2009 Misled customers about auction rate securities- Had to buy back ARS
  • 2009 Failed to establish supervisory IPO procedures – $100,000

For more details review Deutsche Bank Securities Inc. ADV Form.

LPL Financial Violations- Board Member Mark S. Casady

  • 2004 Illegal breakpoint sales – $1,116,402
  • 2008 Failed to have procedures to protect customer records and $275,000
  • 2011 Procedures regarding its review of e-mail-fine of $100,000
  • 2011 Procedures on transmittals of cash and securities-$100,000
  • 2010 Lack of supervision of variable annuity exchanges Fine $175,000
  • 2008 Use of UITs, censure and fine of $125,000
  • 2006 Supervision of variable annuity exchanges. Fine $300,000
  • 2005 Mutual fund sales – $2,400,000
  • 2005 Failure to supervise supervision wire transfers, fine $75,000
  • 2005 Preferential treatment for some Mutual funds. fine $3,602,398
  • 2004 FINRA reporting obligations,  a censure and fine of $450,000
  • 2004 Mutual fund breakpoint discounts, censure and fine $2,232,805.

For complete information go to the firms ADV form.

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