FINRA and Disputing “Chasing Windmills”
With over $14 billion in retirement accounts, Wall Street (the SEC’s FINRA) is charged with protecting IRA investors, from sales personnel steering their retirement assets into inappropriate products and/or high fee products and enforcing all securities laws, passed by Congress.
The financial services industry inappropriately labeled sales personnel selling investment product, “advisors” and their sales talk “advice”. Current regulations permit financial services firms to have a sales force that sells product in the best interest of the Wall Street firm, even though it may harm the savings of the retirement investor.
The Department of Labor wrote, as published in the Federal Register, April 8, 2016:
“Non-fiduciaries may give imprudent and disloyal advice; steer plans and IRA owners to investments based on their own, rather than their customers’ financial interests; and act on conflicts of interest in ways that would be prohibited if the same persons were fiduciaries.”
The Department of Labor also wrote in the Federal Register, April 8:
“The Department has also sought to preserve beneficial business models for delivery of investment advice.”
What is a Beneficial Business Model – Is it Deemed Mutually Beneficial?
How does one define a “beneficial business model”? A report by the White House in February 2015, “The Effects of Conflicted Investment Advice on Retirement Savings” demonstrated this “business model” is costing America’s middle class $17 billion annually, needlessly.
Can one deem that a “beneficial business model”? It is to the financial services industry.
Following the Great Depression, Congress enacted the Investment Company Act of 1940 to protect investors. That law, one can deem enforces a beneficial business model. What is not beneficial is the delivery of the ’40 Act investment product, through a sales distribution channel, inappropriately deemed “advice” by the financial services industry, as defined in this PIABA report.
The result of the April 8, 2016 DOL rule making is exceedingly complex regulations that will be next to impossible to interpret and enforce and for the average retirement investor to understand. Further, it will be substantially enforced by the securities industry self-regulatory organization (SRO), FINRA. FINRA is “overseen” by the Securities and Exchange Commission (SEC).
The changes, which do not take effect until April 2017, fail for the exact reason the financial crisis put the global economy on the verge of collapse and created havoc with stock markets, retirement assets and loss of home and jobs to the middle class. A timely “confession” by a former SEC attorney, at the SEC, post the financial crisis, sheds critical perspective on the value of transparency in civil and criminal proceedings and the value of a non-conflicted regulator.
Are Securities Regulators Failing the American People? Who is Responsible for this Failure?
There is a growing percentage of the population, as evidenced by Senator Sanders campaign, very concerned with the role Wall Street is playing in shaping our economy and youth’s future.
The new IRA ‘fiduciary’ regulations will be effectively overseen by the Securities and Exchange Commission, who has oversight of FINRA, the self-regulatory organization, that will be enforcing the new “fiduciary rules” through mandatory arbitration. If a contract is signed, a best interests contract exemption (BICE), an individual retirement investor would have access to an independent legal process, in the Federal/State courts, not subject to mandatory arbitration. However, it appears from industry comments, the bulk of IRA accounts, will still be subject to mandatory arbitration, overseen by FINRA—and that is their goal.
To understand the impact of such conflicts, a critical piece worth reading and discussing is “Why the SEC did not Hit Goldman Sachs Harder at the New Yorker, April 21, 2016, by Pro Publica’s Jesse Eisinger, author, “Why Haven’t Bankers Been Punished? Just Read these SEC Emails.
Yves Smith Naked Capitalism, April 24, 2016: “Why I Belatedly Blew the Whistle on the SEC’s Failure to Properly Investigate Goldman Sachs.” highlights key points from former SEC attorney James Kidney’s “confession”:
“Not only is the issue of how the financial sector enforcement agencies handled the wrongs of the Great Recession an important political issue, but it is important to history. It is important that the facts not be shielded from the public so that we can all learn for the future. And it is a melancholy thought that, presented with the opportunity for a rigorous investigation and airing of facts in civil or criminal proceedings gone, history will be denied a fairer story of both the financial crisis itself and how the government responded.”
“Dear citizen, just remember this: complexity favors fraud, and certainly favors Wall Street and corporate America. You can’t understand the rules and neither can Congress or all but the most dedicated experts. That’s a lot of room to disguise misdeeds.”
“Complexity Favors Fraud”
IRA’s were quietly introduced in IRS ruling making in 1974. Over the past four decades, the American middle class has lost their pension, and 401k matches have dropped from the initial 15% match to the current 5% match or nothing. Stock options and profit sharing have often been eliminated for middle level earners. Wages are stagnant. For every $1 invested in an IRA or 401k plan, Wall Street takes 1/3 to 1/2 for their own “business model” worth preserving, says the DOL.
Retirees have been sold billions of dollars of annuities with high fees, sometimes 8%- 10% sales commission, taken right from their life savings. Retirees were placed blindly in Target Funds that lost 40% of their value in 2008. There was no exercise of “prudence”.
School teachers and non-profits have had their retirement placed in 403b accounts that carry redundant “mortality expense” charges that only serve to benefit Wall Street, while needlessly depleting the savings of our teachers and those in non-profit service. They are pushed high-fee annuities at retirement from these accounts, that further reduces their income.
Securities laws are broken every day and the IRA investor has no avenue to recoup the small insidious losses that impact their livelihood in a large way, but are meaningless to the SEC. The broker dealers know the losses harming the IRA investor, due to their multiple securities law breaches, do not arise to a class action status. The broker dealers are clever, smart and have figured this out –to take little by little from each IRA, assuming the “little guy” will not notice and the “little guy” has absolutely no avenue to showcase these securities law breaches that are costing so much to middle class American’s futures.
A quick examination of the claims over the past decades at FINRA, show thousands of widows trying to recover their life savings to these exorbitant commissions, unethical behavior and the sale to them of other inappropriate products. Almost every time, the widow is denied a return of these outlandish commissions on inappropriate products, by the typically all male, FINRA panel of former stockbrokers.
The widow’s tragedy is hidden behind the SEC’s curtain, FINRA does not permit any transparency. FINRA is not subject to the Freedom of Information Act. Written rulings by these principally all male, former stockbrokers, is not allowed, unless all parties agree. Of course, a Wall Street firm does not agree to disclosure of the “findings” by the conflicted Wall Street panel. The panel of arbitrators knows very well if they rule against Wall Street, in favor of the widow, the Wall Street firms will ban them from future arbitration panels and they will lose their arbitration panel income, which comes in handy for spending income during their retirement, to the detriment of the widow. There are only a limited number of securities lawyers nationwide that will defend these “widows and orphans”. Why? These smart lawyers know they will lose in a FINRA arbitration, since it is a rigged game and there is no transparency. They cannot recoup their legal fees.
A Lot of Room to Disguise Misdeeds
The Department of Labor met its stated objective in its fiduciary rule making to preserve a “beneficial business model” that benefits Wall Street.
Wall Street, FINRA, is giddy with the new rule. George Friedman, former FINRA Director of Arbitration, writes in this recent Securities Arbitration Commentator, “But it seems FINRA had it right all along. Sweet, sweet vindication. Thank you, Department of Labor!”
Mr. Friedman wrote in the Commentator, linked to above,
“During my 14 years as FINRA’s Director of Arbitration, I frequently chafed at what I perceived to be unfair, inaccurate, and unwarranted attacks on the Authority’s arbitration program. I related to Don Quixote, tilting at windmills in defending a program that to me was without doubt the fairest existing consumer arbitration program.”
Mr. Friedman needs to interview all the widows that needlessly lost large percentages of their life savings over the past four decades and ask them if they believed FINRA’s process was fair and just. Are there not significant benefits that accrue to a society to have these “widow’s” legal concerns aired publicly in courts? Could the annual $17 billion in needless conflicted losses to America’s retirement savers been reduced if FINRA arbitrations had been public over the last 40 years, with the advent of IRA’s in 1974?
“Airing of facts in civil or criminal proceedings” is mandatory for a democracy. Former SEC attorney James Kidney believes so, after his career at the SEC, during the time of investigation of the 2008 financial crisis.
With the SEC, FINRA, mandatory arbitration and the new DOL fiduciary guidance, there’s “a lot of room to disguise misdeeds.” There are a lot of future “widows” that will suffer needlessly. This is President Obama’s legacy.