Now It’s Official: Securities Industry Regulator Takes Care of Self, Not Investors

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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?

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  1. I72.Qzh4ueFnxDjedPsQ8JOQ4iDzXRhEpCvKpw--

    You say “leave the public holding the bag” like that’s a bad thing!

  2. In Debt We Trust

    TD, How close is the connection to variable rate annuities and ARS? From my understanding, mutual funds, life insurance co.’s, and shady lawyers sold A LOT of these products to boomers in the past few years. Too bad they forgot to disclose that variable rate is tied to a financial co.’s mkt performance in things like stocks, bonds, and ….ARS?

  3. Francois

    I so wish that Sen Feingold will be able to pass his bill declaring mandatory arbitration illegal. That would mean the end of FINRA, the most useless piece of institutional crap on the financial horizon.

    I cannot wait to hear the lame ass excuses of the ineffable Mary Schapiro, yet another bad economic choice by the current administration.

  4. Sukh Hayre

    Who cops the cops, is all I asked of you. – Tragically Hip – The Trickle Down

  5. Otto Rock

    I actually burst out laughing when i got to the ARS selling part.

    I mean, what else can you do but laugh at these jokers? My spleen emptied months ago.

  6. danps

    Hi Yves. As far as misconduct goes where would you rate the Depository Trust and Clearing Corporation? After reading this:

    “DTCC is where stock trades are processed — more than $1.5 quadrillion worth of them every year. That’s 30 times larger than the entire gross product of the entire planet. According to the Wikipedia entry on the DTCC, authored largely by Gary Weiss, the DTCC ‘streamlines processes that are critical to the safety and soundness of the world’s capital markets.’ Indeed, the DTCC is one of the world’s most important financial institutions. But what the Wikipedia entry does not mention is that the DTCC is also among the least transparent organizations on earth. No joke: America’s founding fathers would take up arms if they knew that anything like the DTCC could exist in this country. There are funds exceeding 30 times global output flowing through a sealed black box that is not understood even by the SEC officials who are supposed to regulate it. One former SEC official describes his colleagues visiting the DTCC and asking, ‘So, what is it you guys do here, again?’ A former DTCC employee confirms that the SEC would occasionally send junior people, and summarizes their oversight as follows: ‘The SEC staffers would say, ‘What do you do?’ and ‘How do you do it?’ After we would explain to the SEC folks what the DTCC did, the SEC people would say, ‘OK, are you doing it?’’ These meetings would occur about once per year, and take no more than two or three hours. That was the oversight provided by regulators to the sealed black box corporation through which 30 times the economic output of the entire world flows.”

    I wonder about it as well. I did a quick search and didn’t see much here at Naked Capitalism referencing the DTCC. Do you think its part in miscondunduct has been underrreported?

  7. wintermute

    How can a regulator (FINBRA) ever legitimately have $3bn on its balance sheet? How can it have a balance sheet at all??

    It is ridiculous. A regulator should just be a government department – which has however few employees necessary to execute their overisght work. End of story.

    Regulators should never be corporations in their own right as this is will create conflicts of interest of “banana republic” proportions. As we have now seen.

  8. LeeAnne


    “DTCC is where stock trades are processed — more than $1.5 quadrillion worth of them every year. That’s 30 times larger than the entire gross product of the entire planet.”

    Tax every one of these transactions NOW.

  9. danps

    Hi LeeAnne. The Deep Capture link I included claims the malfeasance the DTCC is engaged in has mostly to do with phantom stock – a way to engage in (ostensibly illegal) naked short selling. I think just getting more transparency there would be a good first step. And in any event the lobbyists would probably claim that taxing all trades would cause capitalism itself to grind to a halt. As opposed to its current high flying state.

  10. wintermute

    All stock trades are already taxed. It is called the SEC fee and is applied to sell sides. Currently set at about $25 per million consideration. Was this level for many years ($25-35$) and dropped sharply to $7 and was recently increased again.

    Problem with taxes on stock trades is that global exchange competition is so high with the internet and DMA that liquidity can move to other jurisdictions fast.

  11. Ricochet Smith

    wintermute 10:36
    How can the investing public be “protected” when the watchdogs have $3B available for investment? Who chartered this with this kind of conflict of interests.
    Get the fox out of the henhouse. Where are Frank and Dodd when we really need them???

  12. VV111y

    Awesome post. Thanks Yves.
    Actually I need to thank you for all the other awesome posts too…

  13. LeeAnne


    “Problem with taxes on stock trades is that global exchange competition is so high with the internet and DMA that liquidity can move to other jurisdictions fast.”

    is this not the reason given for the dismantling of all investor protecitonlaws and regulation?

  14. wintermute

    No LeeAnne – I am 100% behind investor protection. The problem is not one of lack of regulation – it is one where hundreds of regulations exist – but are selectively enforced or not at all. Basically there is an inverted pyramid. The smallest investor is most stringently regulated – the largest banks, primary dealers, get away with blue murder. Regulation is massively failing in Western markets to the detriment of the small investor, the 401k holder, the worker who wants his or her money to work for them.

    Please do read a few of Karl Denninger’s articles. He is superbly informed and daily takes the government, treasury, fed and congress to task about failed regulation and unenforced financial laws.


  15. Hugh

    I’m with Francois on this.

    Mary Schapiro was a really awful pick to head the SEC. She was chosen precisely because she was seen as a non-confrontational, business friendly figure. Now even in the best of times this really would not be the kind of person you would want to be a serious regulator but after the financial meltdown it was as cynical as it was absurd. Let us remember that she was at FINRA and its predecessor in a senior position since 2002 and ran it from 2006 until she went to the SEC this year.

    Like Geithner at the New York Fed she had a ringside seat to all the speculative fever, bubbles, and collapses and yet seemed to miss the dangers and reacted feebly if at all to the messy aftermath.

    So some funny insider trading went on at FINRA. Given Schapiro’s rep as a lax regulator, can any of us be surprised?

  16. Hugh

    Re fees on stock trades, I agree with LeeAnne. Whenever someone doesn’t like some specific regulation or constraint, the argument always is that this business will flee and go somewhere else. After the meltdown though, you have to wonder where that somewhere else might be. Greater not less regulation seems to be the paradigm in world markets.

    The other thing to keep in mind is that a lot of market volume is generated by a relatively small number of players. Do these volumes serve any useful purpose? Do they increase market clarity or do they distort market pricing?

    We have seen the results of unrestrained speculation. Why should we not wish to dampen it, and isn’t adding a volatility tax through increased fees (that could go to the government) a means of doing this?

  17. Larry Doyle

    Mr. Solin got this info from a Bloomberg story last week but does not provide proper attribution.

    I have been writing about FINRA-ARS angle for three months, brought the news to Bloomberg who investigated and reported it last week.

    If you want the ENTIRE story please read,

    FINRA Is Supposed To Police The Market

    In addition to FINRA’s investment in ARS,
    they have/had hundreds of millions invested in hedge funds, fund of funds, and private equity.

  18. Larry Doyle

    I have been writing about the FINRA-ARS fiasco since late January. I initially wrote, "Let's Really Question Ms. Schapiro” on January 16, 2009 (’s-really-question-ms-schapiro…/). In this piece, I unearth the fact that FINRA had hundreds of millions invested in ARS, hedge funds, fund of funds, and private equity via their most recent Annual Report. I have continued to write extensively on this topic while working with Bloomberg who further investigated and reported this news on April 29th ( I am, in fact, quoted in Bloomberg’s article. With all due respect to Mr. Solin, he must have picked up the Bloomberg story but does not properly attribute their work.

    After the Bloomberg story, I wrote "FINRA Is Supposed to Police the Market" ( which explores the Bloomberg story, as well as provides a link to my comprehensive piece on the FINRA-ARS scandal, “Does the Palace Guard Have No Clothes?” (

    In my humple opinion, the links to my posts at Sense on Cents lay out all the info and the questions that still need to be answered by FINRA and Ms. Schapiro. I launched my blog, Sense on Cents, in February and previously wrote at NoQuarter, where I am still a contributing writer.

    Happy to chat if you'd like as this story is spreading rapidly. I worked on the street for 23 yrs trading and selling MBS. Finished as National Sales manager for Securitized Products at JPM in 2006.

    Larry Doyle

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