The SEC is back. Or so the agency would like Wall Street to believe. But the new teeth are false. For all its roar, the Securities and Exchange Commission remains out of touch with the practices of its quarry.
Nothing illustrates this better than the ominous if vague letter SEC Chair Mary Schapiro sent late last month to brokerage chiefs warning against the dangers of up-front bonuses and "enhanced commissions" for financial advisors switching firms. "Recent press articles have reported that some broker-dealer firms may be engaging in a vigorous recruiting program," she intoned.
As any teen-ager might say, "Uh, du-uh."
Not only have recent press reports been describing in excruciating detail the ever-changing twists on compensation for brokers who jump ship – but so have press reports in various trade publications from last year, the year before that, and well, the entire decade or so before that.
Back in 1996, there was the SEC's own Tully Commission, headed by former Merrill Lynch CEO Dan Tully. The group studied the perils of upfront money and promoted the virtues of fee-based business, not so coincidentally, then a key new area for the pride of the herd.
Former SEC Chair Arthur Levitt considered banning upfront money, but backed down, arguing instead for transparency. All this happened while Schapiro ran the Financial Industry Regulatory Authority (Finra), so that makes her letter even more puzzling.
More recently, as the SEC letter put it, stories have focused on how financial advisors are in hot demand because until the market rally in March they were virtually the only profit centers on Wall Street. And here's the real rub: A recruitment story that throws around big numbers is at least superficially easier to understand and politically more useful than stories detailing the ins and outs of financial instruments backed by subprime mortgages.
Even the SEC lawyers who couldn't understand the reports by Bernie Madoff whistleblowers like Henry Markopoulos could probably understand how the comp packages work. No fancy derivatives involved. (And, please note, not a single customer working with registered reps on Wall Street lost any money to Madoff – they didn't give any client assets to him.)
Contrary to regulators' fears and warnings, abuse isn't exactly rampant on Wall Street.
While not every single reps is completely and necessarily pure, abuse isn't exactly rampant: According to Finra data, in 2008 the self-policing agency received 5,405 complaints against a workforce of 664,975 reps – less than one percentage point. 363 individuals were expelled from the industry and 321 were suspended; in all, 1,073 disciplinary actions were taken.
Believe it or not, even Goldman Sachs and Bank of America get the same A+ rating that Procter & Gamble sports from the Better Business Bureau. Last year, securities lawyers grumbled to reporters that more people weren't suing their brokers after the misery of the last two years. "Tougher compliance and improved industry practices" are part of the reason, according to one story. In 2003, Finra complaints peaked at 8,945 following a market plunge.
Who are the advisors getting these big deals anyway?
The advisors who command the big bucks are top-tier entrepreneurs with a loyal following. They typically manage at least $50 million to $70 million in client assets. And if they lose assets, they relinquish much of the advantage of the multi-year contracts.
