Investor's Watchdog.com: Stock, finance and investment protection for investors

The SEC and FINRA (the Financial Industry Regulatory Authority) have announced an initiative to assist broker-dealer compliance officers.  According to the SEC’s press release the SEC and FINRA will be holding a seminar at SEC headquarters and regional seminars nationwide in which they hope to help compliance officers “ensure effective communication about compliance risks, maintain effective compliance controls, and foster strong compliance programs within their firms.”   

While more education can’t hurt, and FINRA certainly needs all the good publicity it can get given the damage that its membership (brokerage firms) does to the investing public daily, no investor should take any comfort in this development.  Think about what the need for such a program means.  It means that current compliance is below par.  It always has been, and will continue that way even after these seminars.   

Consider it from the point of view of someone running one of the major wirehouses on Wall Street.  You are the head of a publicly traded company.  Your job is to maximize return to the shareholders.  More money in the door means a higher stock price. 

Let’s say you are deciding whether to do something that would bring a massive new source of revenue into the firm, but which the compliance department says is just beyond the line of propriety.  Here’s your thinking.  On the one hand, we might get away with it.  The SEC is a small agency.  Motivated.  Dedicated.  Smart.  But small.  Its broker-dealer examination staff is a small division within that small agency.  If no one makes any noise, the chances that we’ll get caught by the SEC are very small. 

Then there is FINRA.  FINRA is a new name for what used to be called the National Association of Securities Dealers.  The old name was more accurate.  FINRA is really a trade group for stockbrokers.  So, we might get away with it.  If so, we get all that money.   

On the other hand, we might get caught.  If we get caught, the worst that will happen to us is a fine that will seem stiff to the public but which will be so small in comparison to the revenue we bring in that it doesn’t even bear considering.  They might get an injunction against us telling us to stop it.  But no one is going to jail, and the violation will pass from the public consciousness before the weekend.  Then we’ll be able to get back to looking for the next scheme to pump up firm revenue.   

What to do?  What to do?    

The problem is not that the compliance directors don’t know the rules.  The problem is that the leaders of brokerage firms favor strong producers (commission generators) over diligent compliance efforts (investor protection).  When the two conflict, more money always beats less money.   

Investors must take independent action to protect themselves.Counting on the regulators for protection is insanely optimistic.  Trusting the securities industry buys a one way, express ticket to a Medicaid nursing home.