The current Occupy Wall Street protests taking place in New York and around the world bring up a familiar theme:  the investment markets are set up to reward the greed of an elite, well-connected few at the expense of the average citizen.  Economic inequality is a stark reminder of the scale of the benefits to those who either through hard work or playing the system are rewarded.  Few begrudge the Steve Jobs, Bill Gates, Mark Zuckerbergs and James Camerons of the world who through cleverness and perserverance have brought real benefit to themselves and the world.  On the other hand, the Bernie Madoffs, Raj Rajaratnams, Charles Keatings and Jeffrey Skillings are all convicted criminals who used the system to harm us financially.  The government seems to be ineffective at regulating the rampant greed and dishonesty that led to these crimes, much less the shenanigans that brought down the US financial system in 2008 and were the cause for the US government to take on more than $4 trillion in additional debt.  What can be done?

For starters, the fox shouldn’t be guarding the hen house.  One of the most famous foxes, Bernard Madoff, was an officer of the NASD (National Association of Securities Dealers), and even served as its chairman.  Bernie was involved in the creation of the NASDAQ, which originally stood for National Association of Securities Dealers Automated Quotations.  His role involved the computer system used to make trades by all the member brokerage firms.  The NASD and its members were fined for rigging the bid and ask price.  So when a member sold a client a stock, the bid price was slightly higher and when the member broker bought a stock from the client the ask price was slightly lower.  As a result the members were fined 2.1 trillion dollars in 1996.  Since the event was more than a decade after Madoff ceased his role with NASD (and interestingly, moved on to an advisory role on the SEC’s fraud committee), the statute of limitations applied and the SEC, Federal Reserve and prosecutors never delved deeply enough to learn who initiated the fraud.   Although we do not know this as a fact, we would not be surprised, if dear old Bernie Madoff was involved in that scam too!

The NASD’s reputation was tarnished after this debacle, and in 2007, the NASD changed its name to protect the guilty.  The new name of the same organization to oversee all securities firms doing business in the US:  FINRA (Financial Industry Regulatory Authority).  The securities industry used a page from the playbook employed by ValuJet after one of its planes exploded in mid air because it illegally carried oxygen tanks in its hold.  The company changed its name to AirTran Airways and is successfully operating today with the same management.  So getting back to FINRA.  It also is operating with many of the same players that existed when it was NASD, most of whom are insiders in the financial industry.  The problem is that, although approved by the SEC, it remains quite separate and with an agenda of protecting the financial industry rather than protecting the public served by that industry.  A solution to the “fox guarding the hen house” situation would be to have a self-regulating organization (SRO) that is more directly reportable to the public served by FINRA and the SEC, without being populated by industry insiders.

So, here we have daily protests in the street over a small cadre of elite insiders receiving a greater slice of the pie for no reason other than their connections to powerful people influencing Congress and the executive office and we are once again placing the same foxes to guard the new and improved henhouse.  NASD created such damage to the country that the member firms were fined trillions of dollars.  The NASD changes its name to FINRA and under the Obama Administration the president of FINRA, Mary Shapiro, becomes the head of the SEC.  Now the SEC and Congress are contemplating having the SEC only regulate the largest financial entities (we know how well that worked in 2008) and empowering FINRA to regulate everyone else.  So the same FINRA that regulated Bernie Madoff for sixteen years is being anointed by a select elite group of insiders who have significant influence to have this same organization regulate all financial advisors.  The protestors are right to be in the streets, and effective regulation of the financial markets should be one of their primary aims!