Sense on Cents

In light of the disaster that is Wall Street, I do not know if I am simply dumbfounded or merely dismayed by the softball questioning of prospective SEC chairwoman Mary Schapiro yesterday.

With the dissolution of the investment banking model, the massive injections of government capital, and potential indictments of major Wall Street icons in the offing, I looked forward to some very juicy testimony. The results were beyond disappointing. The public deserves so much better.

Mary Schapiro may end up being the best SEC commissioner ever, but let’s make her earn a few stripes before anointing her. It’s not as if there isn’t enough material. Let me provide a little background before I propose my line of questioning for Ms. Schapiro.

FINRA, the Financial Industry Regulatory Authority, was formed as a result of the merger between the regulatory arms of the NYSE and NASD. While there is another securities industry watchdog, SIFMA (Securities Industry and Financial Markets Association), that body is more a trade association or good cop.

FINRA is supposed to be the real watchdog or the bad cop.

Before I dig into any organization, I always look for its mission and means of funding. FINRA has the following mission:

1. industry regulation
2. industry dispute resolution
3. industry investor education foundation

As the largest non-governmental regulator of securities firms, FINRA regulates activities of the United States’ securities industry for all registered dealers on all exchanges and over-the-counter markets.
It is a tax-exempt membership corporation. Up to this point everything seems copacetic.

As I looked into FINRA’s Annual Report published for year end 2007, I was blown away. FINRA has assets of close to $3 billion, liabilities of $850 million, and shareholder equity of $2.1 billion dollars.

How many instructional and educational videos can you make with that kind of money?

The WSJ did yeoman work yesterday in highlighting that under Ms. Schapiro, the number of cases and collection of fines by FINRA has diminished by 30% and 36% respectively. The WSJ did not expose any info, though, from FINRA’s financials. The $2.1 billion in equity in this tax exempt entity that paid Ms. Schapiro $3 million dollars is invested in a variety of sectors, including common equities, fixed income, private equity, hedge funds, and fund of funds!!! Additionally, as of the end of 2006, FINRA acknowledged that the assumed portfolio held a cool $647 million dollars in Auction Rate Securities!!!

For those not familiar with Auction Rate Securities, this sector of the market totally imploded last Spring leaving institutional and individual investors holding the bag. While many institutional investors were made somewhat whole via settlements from the larger broker-dealers, many individual investors remain holding the bag as smaller broker-dealers, who did not necessarily underwrite these securities but did distribute them, have not been forced to make clients whole. WOW!!!

Are you kidding me!!?? The main regulator of the financial industry happens to be an investor in securities which virtually every Attorney General in the country is going after every Wall Street institution for improper marketing and distribution!! Are we looking at gross negligence, ignorance, incompetence or all of the above?? The question that MUST be answered is what has FINRA done with these Auction Rate Securities. Do they still own them? Did they liquidate them? If so, when and at what price? How was the sale negotiated? So many questions.

Over and above that, given that Ms. Schapiro is the chief executive of FINRA, don’t you think it would have been appropriate for her to address which hedge funds, fund of funds, and private equity shops were in FINRA’s portfolio? FINRA’s Annual Report categorically states its’ investment committee addresses any potential conflicts of interest. The public deserved to have this topic openly addressed during Ms. Schapiro’s hearing. WHY? For the simple reason that FINRA is feeding from the very same trough it is supposed to be regulating.

I am not impugning Ms. Schapiro’s integrity or reputation. However, the public deserves to know the full extent of the relationship between the inmates and the warden, especially if they were growing some vegetables in the same garden.

Why wasn’t this line of questioning aggressively postured, especially in light of the massive capital injections?

To be perfectly frank, seeing Senator Dodd questioning Ms. Schapiro leaves me scratching my head. Where is the real leadership, who will ask the hard questions and demand answers?

LD

This entry was posted on Friday, January 16th, 2009 at 2:54 PM and is filed under Christopher Dodd, Current Affairs, Economy, FINRA, Mary Schapiro, SEC. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.