You Can’t Regulate Crooks

What our politicians (and the SEC, which too often buckles to the political pressure of our “esteemed” elected officials) do not and—based upon recently enacted rules and regulations—will never realize, is that you can’t regulate crooks. Rather, the result of the vast majority of regulation (which is usually reactive to the unfortunate events perpetrated by crooks) is to further frustrate the 99.9% of the advisory community that works diligently every day to do, what they believe, is in the best interests of their clients. The unfortunate result of unscrupulous activity is to propound additional rules and regulations on the advisory community that add no value to the services they provide. Rather, the unintended, but real result is to further deplete precious time and resources that advisors could and should be spending on the benefit of their clients.

The custody-related issues set forth on the amended Part 1 continue to confuse the vast majority of the advisory community—which I can empirically confirm from my many speaking engagements throughout the United States over the past six months. Advisors are now burdened with confusing custody rules that I dare to say the adverse impact of which (on both advisors and their clients) the SEC still does not fully appreciate. As a result of Madoff, a fraud that should have been discovered, but went for years undetected, by both the SEC and FINRA—the SRO that dreams of becoming the “uber” regulator of all things financial (a grave mistake that I will address in a future column), the SEC re-adopted the CPA annual surprise examination. This is the same SEC that removed the requirement in 2002, advising at the time that it added little to no safeguard against criminal enterprises. The SEC was correct then and should have stuck to its knitting. Now, as a result of Madoff, the SEC determined that an annual surprise exam is now a critical exercise to stop crooks! How many crooks will undergo a surprise exam by an independent CPA firm?

It’s getting late, and the flight attendant has just cut me off of my libations. So, I will just go back to dreaming of what it would be like (and what would be different) if I were SEC chairman.