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MAKING CENTS OUT OF THE NEWS
Blog #22
(July 21st, 2011)
You Can’t Regulate Crooks
By Tom McAllister, CFP®
It was no big surprise when, about a month ago, folks from the Indiana Securities Division paid me a visit. Regulators come around every three to four years to make sure I am in basic compliance with the rules and regulations of my trade. They helpfully pointed out a few oversights, but it appears that I’m operating a “clean shop.”
In preparation for the visit, I completed and filed a new form ADV Part 2A disclosure document as required by the Securities and Exchange Commission. This new form featured less “legalese” and more straight English language and was intended to be simpler to file. I did not find it so, spending about ten hours pulling it together ahead of the June 30 deadline. You may now find this document on tommcallister.com, and I urge you to do so. (By the way, every one of these weekly blogs, going back three years now, may also be found on that site, along with my quarterly One Man’s Opinions.)
I have two anniversaries coming up. The first of next month marks the completion of my 49th year as an investment professional. The 15th of August marks the 36th anniversary of my entering the world of the self-employed with McAllister Financial Planning. I am very grateful to my clients, current and past, for this track record. I have never had a client complaint, either as a stockbroker or as a Certified Financial Planner and investment advisor. I am very thankful for this, knowing that everyone in my business makes mistakes. (There have, in fact, been a couple of instances which called for a financial reimbursement to my client. As I used to tell my brokers when I was a NYSE branch manager, “There is a reason we have an error account. If you make one, use it!”)
I attribute a large part of this clean record to the immense body of knowledge I have gained from 34 years of continuous volunteer service to NASD/FINRA, (now called the Financial Industry Regulatory Authority), our broker dealer regulator. The records show I am in first or second place for the most years of continuous service to the securities industry. A good friend and former NASD Board member told me when I started this run, “Tom, you will love it. It is like a Masters degree in our business!” He was right. I’ve collected the equivalent of four or five “Masters” by now, including my three years national service to the Certified Financial Planner board. I am honored to have been able to serve and grateful for the learning experiences.
All this self congratulation has a point. I’ve been subject to regulation and involved in industry regulation for long enough to come to the conclusion: You cannot regulate crooks! The passage of the new Dodd-Frank Act by the Congress was in response to the near meltdown of our economy in the fall of 2008. That regulation has produced the usual “unintended consequences” the government creates whenever it attempts to “fight the last war.” Dodd-Frank has proven yet again that unnecessary regulation annoys the good guys and does not stop the bad guys.
Will all the stress and cost tens of thousands of securities firm personnel spent in order to file the new form ADV Part 2A make a substantial difference to the investing public? Unfortunately, I think the answer is “no”. Will this new form stop the next Madoff, Stanford, or Art Nadel? Absolutely not! However, future crooks (and there will always be crooks) may well boast the most eloquently drafted written disclosure documents produced with high priced legal help.
What the Congress and the SEC do not and (based upon recently enacted rules and regulations) will not ever realize is that there is no way to regulate the crooks. The vast majority of securities regulation was created in reaction to the unfortunate results perpetrated by those crooks, yet it has had precious little effect on the crooks themselves!
What the increasing burden of more rules and more forms has accomplished is to further frustrate the 99.9% of the advisory community who work diligently every day to do what they believe is in the best interests of their clients. The additional rules and regulations add absolutely no value to the services we provide. The unintended consequences include further depletion of the precious time and resources our advisors should be spending to benefit their clients.
The latest proposal is to create a “self-regulatory” authority to oversee investment adviser activities. For the record, Bernie Madoff stole $20 billion or more and never registered as an investment advisor! Yes, his broker/dealer was an over-the-counter trader and a member of NASD/FINRA. But Madoff’s crooked activities took place outside the broker dealer, on a different floor of the building. The SEC was repeatedly warned of the possibility that something was seriously wrong with Madoff, but their response was to review the audits of the broker/dealer and find nothing wrong. Forgive me for sounding cynical, because self-regulation certainly has its place in the securities industry. However, most of the crooks simply will not join!
Last, in an all-too-typical knee-jerk regulatory reaction as a result of the Madoff situation and others, the SEC has readopted a requirement that securities firms must have an annual “surprise examination of their books” by a CPA firm. Anyone taking odds as to how many crooks will voluntarily undergo a surprise exam by an outside CPA firm?
While I have come to expect periodic “surprise” visits by regulators, the only thing that would really surprise me is for the crooks to be caught by surprise!
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