I really should be past being surprised at misconduct in the securities industry, but when it extends to supposed regulators, it is a clear sign that the entire system is hopelessly beyond redemption.
The case example is FINRA. Some excerpts from its website:
The Financial Industry Regulatory Authority (FINRA), is the largest non-governmental regulator for all securities firms doing business in the United States. All told, FINRA oversees nearly 5,000 brokerage firms, about 173,000 branch offices and approximately 653,000 registered securities representatives.
Created in July 2007 through the consolidation of NASD and the member regulation, enforcement and arbitration functions of the New York Stock Exchange, FINRA is dedicated to investor protection and market integrity through effective and efficient regulation and complementary compliance and technology-based services….
In today’s fast-paced and complex global economy, FINRA is a trusted advocate for investors, dedicated to keeping the markets fair, ensuring investor choice and proactively addressing emerging regulatory issues before they harm investors or the markets.
If you believe the last sentence, I have a bridge I’d like to sell you.
As of year end 2007, FINRA had a roughly $3 billion balance sheet (see page 28 of the pdf) of which $862 million was invested in auction rate securities (see the second paragraph on page 48). As readers may recall, ARS had been sold aggerssively to retail investors, and were presented as being “as safe as cash”, thus positioning them as a higher yield alternative to Treasuries or money market funds.
According to Dan Solin, FINRA sold them six months before the auction rate securities market froze. Since the market had been experiencing rising levels of dealer inventory, it is quite probable that FINRA knew of imminent problems (why did it cease holding ARS altogether rather than merely lightening up?) As Solin tells us:
We now learn that FINRA itself bought more that $860 million of ARS. Unlike investors who are stuck with these bonds, FINRA dumped all its holdings less than six months before the market for them froze up.
What remarkable foresight!
FINRA is the ultimate insider. Is it really possible it did not know the market for ARS was in deep trouble when it got rid of its ARS?
In October, 2007, Mary Schapiro, formerly the head of FINRA, gave a speech in which she said that “individuals bought auction-rate securities even as institutional investors were dumping their shares.” Shapiro posed “the question” as follows: “Was that information freely shared with individual investors?”
At the time, FINRA’s own sale of its ARS was not publicly disclosed.
Ultimately, it will fall to the SEC to investigate the propriety of FINRA’s conduct. That could present a problem. Mary Schapiro is now the head of the SEC. How vigorously will she investigate her own behavior?
Quis custōdiet ipsōs custōdēs?