Lack of SEC enforcement called cuplrit in lax oversight

Scandals in the financial markets over the past several years are the result of enforcement failures and a lack of regulators with industry-specific knowledge, not a need for increased regulation. That was a common theme ex-pressed by participants at an InvestmentNews regulatory round table in Washington on Feb 5. "I don't see a clear regulatory gap in a Ponzi scheme," said Duane Thompson, managing director of the Washington office of the Financial Planning Association of Denver, referring to the alleged scheme linked to Bernard L. Madoff Securities LLC of New York. "There was ample time available for [the Financial Industry Regulatory Authority Inc. of Washington and New York] and for the [Securities and Exchange Commission] to further look into the books and records of Bernie Madoff," he said.
Diahann Lassus, chairwoman of the National Association of Personal Financial Advisors of Arlington Heights, Ill., agreed. "A lot of the issues are on the enforcement side," she said. Ms. Lassus is president of Lassus Wherley & Associates PC of New Providence, N.J., which manages $250 million. She and others participating in the round table agreed that regulators need different "skill sets" and more knowledge of the industry. Rep. Scott Garrett, R-N.J., the ranking minority member of the subcommittee on capital markets, which is part of the House Financial Services Committee, said that the lack of expertise among SEC regulators has been a problem in the agency's inability to detect major frauds.
Many employees at the SEC have had little experience before joining the agency, he said. "I think that's a problem," Mr. Garrett said. He said expects to see comprehensive financial services regulatory reform legislation "sooner rather than later," and that is "probably to the detriment as opposed to the good." Mr. Garrett's fear "is that we will actually see legislation proposed before we even know what the gaps were and whether they needed to be filled in the first place."

COMPARABLE PROCESSES

While investment advisers and broker-dealers still disagree about what regulatory standards should apply to them, agreement emerged at the round table that the inspection and auditing process ought to be comparable for the two types of firms. The FPA and NAPFA continue to push for having fiduciary standards for all financial advisers, while the Securities Industry and Financial Markets Association of New York and Washington and the Financial Services Institute Inc. of Atlanta argue that the suitability rules that brokers must follow provide good protections for consumers. Fiduciary standards, which require disclosures of possible conflicts of interest, are more stringent than the rules brokers must follow, officials with the FPA and NAPFA argued.
But Kevin Carroll, managing director and associate general counsel in SIFMA's Washington office, believes investors do not find the term "fiduciary" helpful. "It's a legalistic term and it actually contributes to investor confusion," he said. Suitability standards followed by brokers are clearer, Mr. Carroll said. They include knowing customer objectives, taking care to keep financial plans updated, and acting fairly and honestly, he said.
Mr. Thompson and Ms. Lassus argued against putting advisers under the detailed rules that brokers must abide by to ensure their sales recommendations are suitable for clients. "You have more restrictions when you're a financial planner and you're dually registered with a broker-dealer [and an investment advisory firm]," Mr. Thompson said. Many of the FPA's 28,000 members are dually registered as both investment advisers and broker-dealers. "We've had members who wanted to use the words 'mutual fund' in a newsletter and the compliance officer has told them no. So they ended up using 'investment company,'" which is less understandable for many clients, Mr. Thompson said. "Just as attorneys and doctors don't have somebody looking over their shoulder unless they make a mistake, I think that's what you need as far as establishing the kind of standards that the public has long expected out of their financial service," he said. "Layers and layers of compliance requirements" for registered investment advisers will not help the profession, Ms. Lassus said. "What it's going to do is reduce the service time that we have for our clients." At the same time, Ms. Lassus acknowledged the need for more regulation. "Do we need more oversight from the SEC?" she said. "Probably." David Bellaire, general counsel and director of government affairs at the FSI, agreed that investment advisers should not be expected to adopt all the rules that brokers are required to follow. The FSI represents independent broker-dealer firms. "I'm not arguing for the rule books being exactly the same," Mr. Bellaire said. "What I'm suggesting is that the enforcement and inspection process needs to [be] very similar. If you're running an investment adviser [firm], it doesn't make sense to me that you don't get audited for year after year." Mr. Bellaire agreed with Mr. Thompson and Ms. Lassus that the standards should be similar. But he said that imposition of any type of standard would have done nothing to detect a Madoff scheme. "It wouldn't have mattered whether Bernie Madoff was held to a fiduciary standard or a suitability standard," Mr. Bellaire said. "He was a crook, and when you have crooks, you need supervision." E-mail Sara Hansard at shansard@investmentnews.com.