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FINRA Story

Larry Doyle’s been reporting on the Financial Industry Regulatory Authority (FINRA) for over a year. His efforts are beginning to pay off. Recently, investigators from the government watchdog unit, the Project on Government Oversight, referenced Larry’s work in a letter sent to banking, finance, and oversight sub-committees up on the Hill regarding FINRA. Here’s three important posts by Larry that help tell the FINRA story. – Ilene 

Barron’s Highlights FINRA’s Stench 

Obama Appoints Three Financial Regulators in Chicago

Courtesy of Larry Doyle at Sense on Cents, posted on March 6, 2010 

The stench surrounding FINRA is attracting real attention.

The executives of Wall Street’s self-regulatory organization FINRA should not think that the recent dismissal of one legal complaint is reason for celebration. Why? Those who care for transparency measure success not in terms of judicial victories but to a much greater extent by public pressure and awareness. On that note, at long last real progress in creating transparency into FINRA is occurring.

From the highly regarded government watchdog Project on Government Oversight to now the leading weekend business periodical Barron’s, FINRA’s stench is attracting attention from more than the blogosphere and a few selected journalists (Bloomberg’s Susan Antilla, The Washington Examiner’s and Baltimore Sun’sMarta Mossburg, and also Barron’s Jim McTague).

The news in an article this weekend by Barron’s is not news to regular readers of Sense on Cents, but to most of America FINRA remains a foreign entity. Those days are changing. 

Barron’s excoriates Wall Street’s self-regulator today in writing, FINRA, First Heal Thyself:

IN 2007-08, regulators at FINRA were so distracted with empire-building and lining their pockets, they overlooked the world’s two largest Ponzi schemers: Bernie Madoff and, allegedly, R. Allen Stanford. So what’s the deeply flawed Financial Industry Regulatory Authority up to now? Building itself an even bigger empire.

The quasigovernmental body, which advertises itself as the white knight of 90 million investors, is lobbying Congress for the power to regulate 11,000 investment advisors who now fall under the jurisdiction of the Securities and Exchange Commission and state securities regulators. The states regulate those with less than $25 million in assets, but want Congress to bump that to $100 million. Why? The SEC does such a poor job, it visits an average of one advisor every nine to 11 years!

Finra currently regulates Nasdaq and New York Stock Exchange brokers and securities dealers, and pays its executive staff high-on-the-hog salaries, despite abysmal performances. This is the same behavior that contributed to the failure of big financial firms that operated under Finra’s purview. If Congress accedes to its power grab, the kingdom of Finra will be able to fatten its coffers with millions more dollars in fees from its new charges. Given Finra’s sorry enforcement record, there’s little reason to believe investors would be any better off.

Why would investment advisors want to shell out money for the privilege of being regulated when the SEC does it free? The state regulators oppose Finra’s grab because they say there’s no adequate oversight of the organization.

“They aren’t accountable to anyone but their own members,” says Texas Securities Commissioner Denise Voigt Crawford. As for being investor-friendly, she points to their “abhorrent” mandatory system of dispute resolution by arbitration, a process she says is stacked in favor of the firms.

FINRA’S STORY is that had it been regulating investment-advisory firms in 2007, it might have caught on to Madoff. Although Madoff’s brokerage business was regulated by Finra, his investment-advisory business, where the fraud took place, was regulated by the equally hapless SEC….

The nonprofit Project on Government Oversight says an internal Finra review shows Finra missed key opportunities to uncover alleged fraud by Stanford, in part because it is too cozy with Wall Street.

Finra is what is known in the securities world as a self-regulatory organization, or SRO. Congress wrote a provision in the Securities and Exchange Act of 1934 permitting exchanges to create SROs to regulate member conduct and punish scofflaws. The SEC conducts regular inspections of Finra. But there are no regular oversight hearings by the Congress.

In 2006, the NYSE and the Nasdaq each had an SRO. In 2007, the two exchanges agreed to create Finra, to realize cost efficiencies and regulatory harmony. The merger required emendation of the Nasdaq market’s bylaws by some 5,000 members.

Its SRO decided to prod the change by offering members $35,000 apiece from $2 billion in members’ equity it had amassed as a result of the public listing of the Nasdaq stock market between 2001 and 2006. The SRO had owned shares of Nasdaq stock. In a prospectus and in road shows, Finra contended that the Internal Revenue Service threatened to yank its nonprofit status if it paid Nasdaq’s members $35,000 each.

Several broker-dealers subsequently sued Finra, alleging the officers had lied and subsequently had used some of the money to give themselves exorbitant pay raises. Mary Schapiro, who led Finra then, received $7.3 million in salary and accumulated benefits when she left; now chairman of the SEC, Schapiro makes $158,500 a year. This month, Judge Jed Rakoff of the U.S. District Court for the Southern District of New York dismissed the lawsuits, not on their merits, but because under the law, Finra and its officers enjoy “absolute immunity” from private actions challenging their official conduct as regulators. The judge’s action startled the investment-advisory community.

“I don’t think Finra is accountable to anyone,” says David Tittsworth, executive director of the Investment Advisor Association in Washington…

Perhaps the board at FINRA will be much more aggressive in not only opening up the books and records of FINRA going forward but will grow a conscience and provide further transparency about activities in the past.

FINRA must not only be transparent but they also must be accountable. If the executives, both past and present, are not held accountable, then the board must be held accountable.

America is now finally being introduced to the organization that I believe is the nexus of the Wall Street-Washington incest. Thank you Jim McTague and Barron’s for drawing further attention to FINRA’s stench which needs to be aired out.

Related Sense on Cents Commentary

To access all of my writing on FINRA over the last 14 months, click here. I also appeared on a Fox Business segment covering FINRA last September. That post is truly enlightening: “Attorney Claims Wall Street’s Cop, FINRA, Invested in Madoff.” [below]  That’s right. Watch the 18 minute clip embedded in that post. Your view on Wall Street and its oversight or lack thereof may be forever changed.

Attorney Representing Amerivet Securities Makes Claim FINRA Insider Confirms Investment in Madoff

Posted by Larry Doyle on Sept. 4, 2009

Did we just find the smoking gun which indicates that FINRA (Financial Industry Regulatory Authority) actually invested in the Madoff Ponzi scheme?

I was on a panel last evening on America’s Nightly Scoreboard on Fox Business News (the entire transcript can be found at this link). The topic was one which regular readers of Sense on Cents are most familiar, that being FINRA.

The show is hosted by David Asman. Panelists included Richard Greenfield, an attorney representing Amerivet Securities in its suit against FINRA; former SEC chair Harvey Pitt; Madoff Victims Coalition head Ronnie Sue Ambrosino and her husband Dominic; and yours truly.

I commend the host of the show, David Asman, for being thorough, professional, balanced, and aggressive in addressing the topic. We covered a number of angles including:

1. Amerivet Securities complaint vs. FINRA

2. Mary Schapiro’s tenure and compensation at FINRA

3. FINRA’s investment portfolio, including its sale of auction-rate securities.

4. Did FINRA invest in Bernard Madoff’s Ponzi scheme?

There were a few bombshells that came out of our discussion, including a claim by Mr. Greenfield, the Amerivet Securities attorney, that “somebody well-placed within the organization (FINRA) that told us, in no uncertain terms, there was an investment with Madoff.”

Additionally, former SEC chairman Harvey Pitt provided a qualified endorsement of FINRA opening its books and records in an acknowledgement of the need for greater transparency.

I am happy to provide the transcript of the dialogue which encompassed these two momentous statements:

ASMAN: Harvey, for example, I used to work at the “Wall Street Journal” and we had very strict restrictions about what we could buy, how long we could hold stocks if we bought it, and how we had to disclose it and that sort of thing. It doesn’t seem at least that those disclosure policies apply to FINRA, at least in the case finding out whether they invested with Madoff.

PITT: I don’t — there has been a fair amount of, shall we say, opacity with respect to what the investment activities are and the like. In a real sense, I think that’s probably ill-advised for an enterprise that has regulatory responsibilities.

But so putting that to one side, I do think that people are entitled to know where their money is coming from, where their money is going, what it is being spent and the like. The fact of the matter is the SEC does oversee all these operations. It does overlook all these things. FINRA has been under the microscope at the SEC for many, many years, long before Mary Schapiro got to the SEC.

ASMAN: I want to bring in other parties. But I want to go back to Counselor Greenfield.

Richard Greenfield, how did you get information suggesting that indeed FINRA was investing with Madoff?

GREENFIELD: Well, we got the information, number one, in two different ways. Number one, it has been rumored through many people on Wall Street that there was an investment either through a feeder fund or some other means. Secondly, we also got information from somebody well-placed within the organization that told us, in no uncertain terms, there was an investment with Madoff.

ASMAN: OK. All right. So I think it’s fair to say that FINRA owes the public some answers here.

So joining us now with — are some people who are demanding answers. Larry Doyle, a Wall Street veteran, 23 years, who currently operates his own web site, Sense on Cents — “sense” with an “S” and “cents” with a “C” — which is geared to help people navigate the landscape.

Ronnie Sue and Dominic Ambrosino, good friends of “Scoreboard”, they are Madoff victims who are mobilizing a campaign for greater transparency.

Thanks for coming in.

RONNIE SUE AMBROSINO: Thank you.

ASMAN: Larry, first to you. What do you think about Harvey’s description of the situation?

LARRY DOYLE, WALL STREET VETERAN & SENSE ON CENTS WEB SITE OWNER: I would say two things in regard to the former chairman’s statement. First and foremost, Madoff did not become a registered investment advisor until 2006. FINRA obviously wasn’t formed until 2007. FINRA’s parent, that being, FINRA was formed from the regulatory arms of the New York Stock Exchange, and the NASD.

ASMAN: Right.

DOYLE: The fact is, the NASD did have oversight of Madoff, and so there is an obligation by, to look into the NASD’s activities because, at that point, it was just a broker-dealer.

ASMAN: Have you formulated your own opinion whether there was a conflict of interest here?

DOYLE: Without a doubt. Without a doubt. The fact of the matter is FINRA is a big-money organization. We know they invested in hedge funds, fund of funds, private equity. And they also had a significant investment in auction rate securities, which is sector of the market that has been designated as a fraud by federal judges. The fact of the matter is we know, and have learned from FINRA, that FINRA exited their auction rates securities position, $647 million worth, in mid 2007, as the market was failing, and when they were supposed to be protecting investors.

Further along in the dialogue, we engage in the need for FINRA to open its books and records:

ASMAN: That is great point, Ronnie Sue.

And, Larry, it goes to the point that a lot of people are looking from the outside at what goes on inside in Wall Street and Washington. It’s that Wall Street, Washington nexus. They see all these folks kind of related with each other. The SEC related with FINRA, and related with NASD. You look at Mary Schapiro’s career and you see that. They can miss things because they’re only talking to each other.

DOYLE: I think the term there is incestuous. So the fact of the matter is Washington has an opportunity through this financial regulatory reform to bring total transparency.

ASMAN: How would you do that? Open the records of FINRA?

DOYLE: Open the books. What — what individual in America right now wouldn’t make — doesn’t it make sense for FINRA to be forced to open their books and records, full and total transparency? The markets demand it. The economy demands it. Ronnie Sue and Dominic demand it. For market confidence.

ASMAN: Harvey, if we demand it of banks, why not FINRA or for that matter, why not the Fed? We have a lot of people in Congress saying everybody needs to open the books, everybody needs to be transparent?

PITT: Well I think there’s no question that we need far more transparency throughout the regulatory environment, both for those regulated and those doing the regulation. That, I think, is a very clear proposition, and one that I’m hopeful will be addressed in whatever new legislation comes about.

ASMAN: So we have to leave.

But, Harvey, does that mean you’re in favor of FINRA opening the books so we can find out if they invested in Madoff?

PITT: I’m in favor of there being far more transparency, permitting privacy concerns to allow certain information to be withheld, as long as somebody is overseeing what they’re doing.

I am thrilled that these issues which Sense on Cents has been focused on for the last 8 months are coming into the public light. That said, there remains plenty of work left to do to generate the truth, transparency, and integrity that our markets, economy, and country so badly need.

You can help by spreading this story amongst friends and colleagues. While the Amerivet complaint vs. FINRA will be addressed in the Washington D.C. courts, the fact is the issues revolving around FINRA and regulatory transparency need to be highlighted in the court of public opinion.

What do you think?

Attorney Claims Wall Street’s Cop, FINRA, Invested in Madoff

Posted by Larry on Sept. 15, 2009

On the heels of President Obama’s speech on Wall Street in which he called for meaningful financial regulatory reform, I welcome submitting to him and the American public the following video clips. These clips are from Fox Business News “America’s Nightly Scoreboard” with David Asman on September 3rd.

While President Obama and Congress may believe financial regulatory reform needs to focus on the SEC, the Federal Reserve and assorted other governmental agencies, I would remind the President and his Congressional colleagues that Wall Street is regulated not only by the SEC but to a great extent by the self-regulatory organization known as FINRA (Financial Industry Regulatory Authority).

This discussion on “America’s Nightly Scoreboard” is separated into two parts.

Highlights from the videos include:

1. Richard Greenfield, an attorney representing Amerivet Securities, makes the claim that FINRA under the leadership of Mary Schapiro failed to protect investors.

2. Former SEC chair Harvey Pitt defends Shapiro and FINRA

3. Greenfield indicates that a FINRA insider claims FINRA invested in Madoff!!

4. In Part II of the video clips, your host here at Sense on Cents joins the panel and provides details as to why FINRA, via its parent the NASD, did have responsibility to oversee Madoff. I also comment on the nature of the relationship between Wall Street and Washington, FINRA’s investment and timely liquidation of its Auction-Rate Securities position, and the need for total transparency at FINRA.

4. Head of the Madoff Victims Coalition for Investor Protection, Ronnie Sue Ambrosino, weighs in that the entire regulatory structure from the SEC to FINRA to SIPC (Securities Investor Protection Corporation) have failed to protect investors.

In my humble opinion, the conclusion of this show highlights the screaming need for FINRA to open its books and records for a full and thorough independent analysis and review. In so doing, hopefully investors specifically and the American public at large can regain a degree of confidence in the badly shattered Wall Street regulatory process.

If you care about the markets and our country, I beseech you to watch this 18 minute video in its entirety.

Thoughts, comments, questions always welcome and appreciated.

LD

Part 1

Part 2 


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