With the impending resignation of Securities and Exchange Commission Chairwoman Mary Jo White, I am hopeful that the too often extremely aggressive tactics against hard-working and well-meaning advisors during her tenure will come to an end. I commend White for her service. She is an extremely smart lawyer who took a significant pay cut to serve her country. But former prosecutors prosecute, and too often small firms were the victims of bullying from the SEC intimidating them to comply when it was not necessary nor, in my opinion, appropriate: “No, there is no law or regulation requiring same, but it is our position that you must do X, and if you don’t, there will be consequences.” That’s akin to a president who becomes infatuated with executive orders because he knows better than the public what is good for America. Too many firms capitulated rather than fight the bully. To the next chairperson (it will not be me), please be mindful of this.
When White indicated in one of her initial speeches shortly after her appointment that she wanted the SEC to be “felt and feared,” she meant it. Unfortunately, that tone was misplaced relative to advisors. The advisory community is on the buy side; it did not create the products that led to the explosive 2008-2009 market meltdown. On the contrary, that was the result of the Street’s sell side. If history proves correct, without proper vetting and approval, and revised compensation protocols, it will unfortunately reoccur.
To their and my dismay, small to medium-sized advisory firms were painted with the same broad brush as were the sell-side firms. It was White’s charge (per President Barack Obama’s mandate) to clean up Wall Street. Note to President Obama and the SEC: Small to medium-sized advisory firms are not Wall Street. I wish the commission understood that, and developed an understanding of the differences between behemoth banks and investment banks, and the average investment advisory firm. These small to medium-sized ’40 Act firms have never enjoyed the SEC’s understanding of their practices. There was and is a significant disconnect, which I hope will be recognized by the next chairperson.
When is the last time the SEC caught a criminal before before the public was abused? I submit to you, never! Given all of the increased regulations, how did the Wells Fargo sales scandal happen? My mantra: “Follow the money.”
What to Do
Given the technology at our disposal, regulators should replace the vast majority of “once a decade” on-site reviews with technology-based exams conducted much more frequently to confirm that investor money is where it is supposed to be — at a qualified custodian.
The vast majority of investment-related scandals are attributable to money not being where it is supposed to be (e.g., Madoff, Stanford and countless other Ponzi schemes). No investor has suffered catastrophic losses as result of John or Suzy not reporting their personal securities transactions in a timely manner (why does that matter for a firm that is a mutual fund or ETF allocator?), or the failure of an advisor to update his or her business continuity plan (for which, I submit, there is still no rule requirement).
So what is the answer? Common sense. No more one-size-fits-all exams. Hire forensic accountants. Fire or reassign to the sell side many of the current examination staff caught in the minutiae of inconsequential issues. We still live in a capitalist democracy, and if you stink as a money manager, clients will leave. To the advisory community, let’s just make sure that the money is where it is supposed to be. If we do that on an ongoing basis, there will be far fewer scandals, and government will have effectively discharged its obligation to its citizens.
--- Read Ex-Prosecutor Emerges as Top Trump Pick for SEC Chief on ThinkAdvisor.