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SEC Snags the Understudy But Ignores the Big Players

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Who says the SEC, under the new leadership of former FINRA chief, Mary Schapiro, is asleep at the switch?

It recently filed a civil complaint against Sean David Morton, a self-styled stock market "psychic." Mr. Morton allegedly persuaded 100 investors to give him $6 million to invest, based on his claim that he had "...called all the highs and lows of the market giving exact dates for rises and crashes over the last 14 years."

That would be an impressive record, if true. According to George S. Canellos, director of the SEC's New York Regional Office, "Morton's self-proclaimed psychic powers were nothing more than a scam to attract investors and steal their money."

This aggressive action by the SEC would lead one to believe that it is unlawful to tell investors you can predict the markets and provide them with outsized returns.

Wait a second!

Isn't that what brokers and active fund managers do every day? Here's an example selected at random:

According to an article dated December 18, 2009, Richard Bernstein, the CEO of Richard Bernstein Capital Management, formulated his top 10 predictions for 2010. He predicted the direction of the stock and bond markets, the performance of the dollar, which asset classes would be top performers and other issues of keen interest to investors. I assume the purpose of doing this is to generate assets for his firm.

The difference, of course, is that Mr. Bernstein is not misrepresenting anything about his past predictions, but should advisers be permitted to make predictions without disclosing their track record?

Standard and Poors just published a study showing the dismal track record of active managers. Over the last five years, the S&P 500 outperformed 60.8% of actively managed large-cap U.S. equity funds. The results were worse for mid-cap and small cap funds when their performance was compared to their benchmark index.

Actively managed fixed income funds (with the exception of emerging market debt) fared much worse. Over 70% failed to beat their benchmarks.

Given this track record, which is fully consistent with long term data, shouldn't the SEC place some constraints on members of the securities industry who purport to be able to predict the future? Does it make sense to snag the understudy and ignore the leading players?

Is the securities industry "too big to fail" or should we just get rid of it and "start all over again"?

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