Who's Minding the Store?

Most investors don't realize that the securities industry is one of the most highly regulated industries in America. The entities responsible for regulating investments, the exchanges and the individuals who work within the securities industry are the Securities and Exchange Commission (SEC), the National Association of Securities Dealers (NASD), and the exchanges themselves, such as the American Stock Exchange, the New York Stock Exchange and the Chicago Mercantile Exchange. Also, each state has its own securities board or commission. The 1933 and 1934 Securities Acts were somewhat of a reaction to the stock market crash of 1929. These and subsequent regulations also resulted from the recognition that Americans are very trusting individuals. Though investors have varying levels of sophistication and knowledge, they generally rely on their investment advisors and brokers much in the same way as they rely on their doctors, lawyers and CPAs and other licensed individuals. From this license flows a presumption that the individuals conduct is being monitored and supervised by a higher authority.

Herein lies the problem. Since when has an American been better off because the government was in charge? The sad reality, my fellow investors, is that these regulatory agencies are no better in getting things done than the Department of Education or Energy or any of those other dinosaurs. So if you not only have been completely trusting of stockbrokers and financial advisors, but if you also have been assuming that any misdeeds are caught and punished by the various regulatory agencies, you need to wake up.

One only need to read the Wall Street Journal or a number of other financial publications over the last 10 years or so to become inundated with financial scandal, greed, and rampant violations - enough to make ones head spin. Dont for a second think that its just the penny stock firms or bucket shop operations. Probably the single, largest fraud perpetrated on the investing public, to the tune of billions on dollars, was Prudential Securities - you know, The Rock? This scandal not only was masterminded over a 10 year period, it included thousands of brokers, numerous compliance, supervisory and legal personnel, and it went to the very top of the firm. The Prudential scandal happened right under the nose of the SEC, and it took place after the SEC was already on notice of similar wrongdoing on Prudentials part.

Much of the regulation of stockbrokers is left in the hands of the NASD, which is like putting the fox in  charge of the hen house. The NASD is referred to as a self regulatory agency. Why does it have that title? Because the NASD members and the ones who pay their salaries are the very people who the NASD is supposed to be watching over. If that doesnt create a conflict of interest, I dont know what does. The NASD has been over-worked, under-paid and under-staffed for years. Those who work there will be the first to admit it. The NASD has never been willing to slap the hands that feed it to any serious extent. In the last few years, it finally came to light what those of us in the industry knew for years - that the NASDAQ trading system was somewhat fixed and stacked against the small investor (the NASD is responsible for the NASDAQ system). It was so bad that the SEC ended up condemning not only many of the NASDAQ trading systems, but the NASD itself for its failure to properly monitor the system.

Whose in charge of licensing stockbrokers? You bet - its the NASD again. A Wall Street Journal article on January 9 of this year highlighted a scam where stockbrokers were being paid to take the tests of individuals seeking to become licensed stockbrokers (this practice had been going on for years). Also, if you bring a claim against a broker or brokerage firm, you will probably have to do it in arbitration, as opposed to court (the subject of a future article). The NASD, in addition to being responsible for monitoring and licensing stockbrokers, is also responsible for a large percentage of these securities arbitrations. Keep in mind - it is the NASDs own members who are being prosecuted in these cases.

The SEC is not much better in terms of evildoer watchdog. Recently, Prudential was sued by investors (I am one of the attorneys for the investors) for miscalculating the remedy for 8,000 investors in the Claims Resolution Process. This was the process set up by the SEC as punishment for Prudentials massive investor fraud. But who showed up at the federal court arguing on Prudentials behalf? The SEC - because the SEC had egg on its face for letting Prudential get away with miscalculating the remedy for the very same investors who the SEC ordered Prudential to pay. The SEC has also botched a number of investigations against some of the more unscrupulous brokers in country - by the time the SEC finally filed their cases, the statute of limitations had run. The cases were dropped and these very brokers continue to work with no limitations.

Even a blind squirrel occasionally finds an acorn. The NASD and the SEC do sometimes catch and properly punish wrongdoers. But the regulators announced effort to truly clean up the securities business mostly fails in this area. Even some of the most serious wrongdoers are assessed fines that have little to do with the amount of damages theyve caused to investors or the profits theyve pocketed for themselves. If there are suspensions, they are usually measured in days, weeks or months - not years. Some of the more newsworthy examples that you might remember are those of Ivan Boesky and Michael Milliken. Im sure there are many people who would be willing to sit in a country club jail for a year and pay a $50 million fine if they could net $100 million for their wrongdoing. $100 million a year is not bad pay, even if you are sitting in jail. This type of punishment sure doesnt do anything to discourage wrongdoing.

Contact Ms. Stoneman, Stoneman Law Offices -Texas & Colorado. (719) 783-0303 Free Consultation - Representing Clients Nationwide

Tracy Pride Stoneman is an attorney specializing in investment related complaints. 

Preparation of this article was assisted by Douglas J. Schulz, a registered investment advisor and former stockbroker in Colorado Springs