Under normal circumstances, we try not to burden our clients with the details of the regulatory issues we deal with, except to periodically send you notification of our status and any changes in the way we do business. Our focus is on your financial well-being rather than the intricacies of the financial regulatory environment. 

But recently, something has come up in the regulatory world that could directly impact your financial well-being in a very negative way.  House Finance Committee Chairman Spencer Bachus, who has been under an ethics investigation for insider trading, and Rep. Carolyn McCarthy have sponsored a piece of legislation called The Investment Oversight Act of 2012.  It is being described as a better way to protect consumers.  In fact, it is designed to put all registered investment advisors (RIAs) – that is, all advisors who are required to put the interests of their clients first when they give financial advice – under the authority of the self-regulating organization (SRO) that controls wire house brokers. 

This, of course, is the same regulatory organization – the Financial Industry Regulatory Authority (FINRA) – that failed to prevent Wall Street from selling toxic mortgage pools and derivatives into the financial system, leading up to the near-collapse of the economy in 2008.  Bernie Madoff was regulated by FINRA from the day he opened his Ponzi scheme for business.  Mr. Madoff actually served as chairman as well as sitting on the board of governors of this organization back when it was called the National Association of Securities Dealers.  Worst of all, Countrywide Mortgage, which sold more fraudulent subprime mortgages than any other company and was fined by the government for civil fraud, was overseen by FINRA.  During the entire period of Countrywide’s wrongdoing, FINRA never noticed that 40% of the subprime mortgages were fraudulent.  We do not consider this oversight.  As you can see, the record of FINRA protecting the financial consumer (you) is pretty BAD!

The innocent-looking piece of legislation introduced by Bachus and McCarthy would actually give us a world where companies like ours would be subject to much more regulation, by an organization that doesn’t enforce as stringent a standard for protecting clients’ interests.  The issue here is that brokers, who are currently overseen by FINRA, are allowed to sell products that benefit them and their organizations more than their clients as long as the client is either informed (even in fine print) or is deemed able to afford such an investment.  This standard is known as the suitability standard.   Currently, RIAs such as Colman Knight are overseen by governmental agencies that are more vested in protecting the public (state regulatory organizations and/or the SEC), and they are held to the higher fiduciary standard, in which their advice must always serve the best interest of the client. The current system in which RIA’s are held to the fiduciary standard has been working better for clients than the FINRA suitability standard that goes along with oversight of broker-dealers. 

Under normal circumstances, we might have confidence that our Congressional representatives will see through this ruse and do the right thing for their constituents.  Unfortunately, a lot of lobbying money is being spent to brokerize the financial world, i.e. make all advisors subject to a less stringent suitability standard rather than a fiduciary standard.  Among the top ten contributors to the lead sponsor of the bill (Rep. Bachus) are commercial banks (a total of $213,650 in 2011-12), insurance companies ($191,010), securities and investment firms ($184,277), finance/credit companies ($90,438) and “miscellaneous finance” companies ($89,250).  All of these contributors are FINRA members with the possible exception of some of the “miscellaneous finance” companies.

In the 2011-2012 election cycle, Rep. Bachus was the candidate who received the most funding from commercial banks, finance/credit companies and mortgage bankers and brokers.  It is very clear that his best efforts are not directed at protecting consumers from the people who are paying for his re-election.

Please view this article as a heads-up that the entire structure of our financial system may be about to change – we believe for the worse.  If you are anywhere near as concerned (and angry) as we are about this naked effort to brokerize our financial system, then you might want to contact your elected officials, as we have.  Our message is very simple, and I have included it here to make it easier for you to cut and paste and add your own thoughts:

I want to express my strong opposition to the recently proposed Bachus-McCarthy bill, also known as the Investment Oversight Act of 2012. 

This piece of legislation has the potential to do significant harm to your constituents who take out mortgages, buy stocks, bonds or mutual funds as well as small business constituents who provide investment advice (registered investment advisors, certified public accountants) by subjecting them to a wrongly-targeted layer of bureaucratic regulation.  It is ironic that Congressman Spencer Bachus, who often states that he opposes bureaucratic regulation, is the lead sponsor of just such a bill!    FINRA is strongly aligned with investment banking and broker-dealer interests, and it has proven to be extremely ineffective at protecting consumers.  FINRA is the organization that regulates Wall Street, and it failed to prevent the 2008 scandals, including the sale of toxic investment products and the sale of subprime mortgages to consumers.  Bernie Madoff was under FINRA regulatory jurisdiction for his entire career yet FINRA was unable to find any fault with his company and was chaired by him when it was the NASD.

Please, if and when you have an opportunity to vote on this measure, vigorously oppose this effort to build yet another bloated regulatory bureaucracy in Washington.  There are far better alternatives to enhancing consumer protection than allowing Wall Street’s regulator to expand its authority over the many small businesses that provide fair and transparent advice to consumers. Preferable alternatives would be to provide more funding to the SEC for oversight (even through increased fees to investment advisors) or to task a self-regulating organization such as the Certified Financial Planner board to provide oversight.  The standards already enforced by these organizations are superior to the standards applied to broker-dealers under FINRA.  I believe the standards do not need to be changed, but enforcement should be stepped up, and it should be by an organization with clients’ interests at heart and a strong reputation for uncovering wrongdoing. FINRA fails both of these criteria. 

Thank you for your time.

You are important to us, as is your financial well-being.  Whenever we see it threatened, we feel the need to take action, and please know that we are monitoring this situation with the full attention that it deserves.