Oprah tweets. So does the President. Maybe the SEC should follow their lead.
Madoff, Stanford, and Pang--financial fraud is everywhere. Twitter, it seems to me, is the perfect way to protect investors from con artists. The updates are a fast way, if you'll pardon the expression, to take down the twits. Let's use micro-blogging to eliminate "omni-frauding."
Think about it. If regulators tweet, they will deliver real-time information. Their messages will be succinct, 140 characters or less.
"Ponzi artist sighted in Manhattan's Lipstick Building. Grab your wallet." Even with the 140-character limitation, Twitter offers more than enough room to add, "Watch out for the guy who owns a yacht named Bull." I can't help but wonder:
What on-line alerts does the government offer now?
With this question in mind, I reviewed websites hosted by FINRA and the SEC. FINRA stands for Financial Industry Regulatory Authority. In simple, non-legal English, it regulates brokerage firms. It also trains, tests, and licenses stockbrokers. The SEC needs no introduction. This agency, we all know, enforces the laws governing securities.
Surely, FINRA and the SEC provide background on the people who manage our money?
My findings alarm me. Both agencies post on-line information about financial advisers. But as I consider the SEC's omissions, there's only one word that captures the effectiveness of the government's oversight.
We know what happened to the tyrannosaurs. To view velociraptors, we need to rent Jurassic Park. These days, there are no brontosauruses munching leaves in our backyards.
See where I'm headed?
Both agency websites lack snazzy illustrations. The pages are dull and dated. The clutter makes my eyes water and teeth hurt. I'm okay with the graphics from the last century. I can't imagine Ponzi victims uploading videos, for example, which notify other investors. Nor, in all honesty, can I envision fraud alerts limited to 140 characters.
Graphic design is hardly the problem. Taken together, the online tools from FINRA and the SEC suggest a lack of coordination. The regulators aren't keeping pace with the industries they watch. And that, I fear, means extinction for their web tools in the current form.
If anything, FINRA and the SEC are compounding a problem. They're regulating unevenly. The result is that bad guys have a place to hide--or to reinvent themselves.
Whoa. What does that mean?
Let's start with FINRA's BrokerCheck. I've attached the link. Plug in the last name of your stockbroker and slog through the crowded screens. Much of the information is useless.
Do we care whether investment representatives are registered in forty-eighty US states? So what if a stockbroker passed three "General Industry/Product Exams" or two "State Securities Law Exams." Does this information help our due diligence?
Again, I'm willing to overlook the data dump.
As you review FINRA's website, you will find a "View Full PDF Report" button. Click it. I pulled up FINRA's report on Madoff, which is broken into six sections. There's one on "broker qualifications," for example, which over-weights information about the regulatory exams he passed.
Are $65 billion frauds covered in the course material?
The real meat is located in a section entitled, "Disclosure of Customer Disputes, Disciplinary, and Regulatory Events." If your stockbroker -- or prospective hire -- ran into trouble with another client, you'll find the information here. It's excellent source material for asking questions.
Not all types of financial advisers are listed, though. That's the problem, the first hint of trouble. FINRA includes an FAQ button, which asks:
"Why did I get 'no search results' for the broker or brokerage firm I was checking?"
The agency answers for us. There are three possible explanations: we misspelled the stockbroker's name; the stockbroker has not been registered with FINRA for two years (which suggests his or her license lapsed); or our financial adviser is not registered.
Uh-oh. What does that mean?
Financial advisers, who work for fees rather than commissions, aren't required to maintain licenses. The rationale confuses me, but that's a discussion for another day. Bottom line: there are two different standards. FINRA watches stockbrokers. They don't watch financial advisers, who work without licenses.
Instead, FINRA provides a link to the SEC. They send us packing. We click and travel to another agency that offers what we need.
Okay. Let's see what the SEC has.
Our landing page reminds me of Catch 22. Toward the center of the screen, the SEC acknowledges, "Currently, you can only search for investment adviser firms on this website. In the future, this website also will provide the ability to search for certain personnel of investment adviser firms." That's when a Eureka moment hit me.
Danger, Will Robinson.
A bad stockbroker can go underground. The steps are simple. Leave the brokerage firm. Join a registered investment adviser, where there are no requirements to maintain a license. After two years or so, the licenses lapse and with them -- the easy access to public records about bad behavior.
The SEC, in fairness, provides information about investment advisory firms. It's easy enough to find information about the firm's compliance. But bad people can join good firms. They can orchestrate their frauds from the shadows -- free from online SEC references to past problems.
So much for the government's help with due diligence.
Personally, I prefer fees over commission-driven compensation models. Financial services have headed in that direction for some time. Fee-driven models are more transparent. No doubt, such transparency will drive the existing momentum.
But that said, I don't like FINRA's and the SEC's double standards one bit. They over-regulate stockbrokers and under-regulate other advisers that require attention.
When will our regulatory watchdogs improve the on-line tools they offer?