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Posts Tagged ‘FINRA’s investment in hedge funds’

FINRA 2008 Annual Report: A Special Type of Hubris

Posted by Larry Doyle on June 29th, 2009 3:14 PM |

At first blush, I viewed the text of the Financial Industry Regulatory Authority’s (FINRA’s) 2008 Annual Report as nothing more than standard corporate fare.  With the benefit of a few days to ponder FINRA’s delivery, I am actually amazed, although never surprised, by the gall of this regulatory organization. In fact, I can only describe FINRA as displaying a special type of hubris in addressing the fraud encompassing Auction-Rate Securities.

I personally believe it is very important for a financial self-regulatory organization, such as FINRA, to be totally transparent in every regard. Why? Very simply, transparency promotes confidence and FINRA’s position as a financial regulator should begin and end with that goal.

Against that backdrop, FINRA should not directly manage any of their own funds. To do so is an open invitation for conflicts of interest. FINRA’s own investment portfolio, managed by an Investment Committee, generated a negative 26% return in 2008. In April 2009, the FINRA portfolio shifted to a lower volatility approach but in 2008 it continued to have exposure to hedge funds, fund of funds, and private equity. As much as I believe this is a very big deal, it pales in comparison to the major issue I, and others, have with FINRA: their involvement with Auction-Rate Securities. Let’s dive into this part of the report and comment as appropriate.

FINRA sets the table:

Throughout the financial crisis, FINRA has worked closely with other regulators, particularly the Securities and Exchange Commission and the Federal Reserve, to examine firm activities for compliance with FINRA rules and federal securities laws, investigate wrongdoing and, when rules were broken, enforcing those rules.

As well they should. However, Finra obviously did not work too closely with the SEC to detect the fraud ongoing with Bernie Madoff. In fact, Finra’s only reference to the Madoff situation is one sentence highlighting the fact that the current financial regulatory structure does not overlap the efforts overseeing broker-dealers with those of investment advisors.

FINRA continues to make their case in stating:

The instability in the markets, and at a number of financial institutions, heightened investor fears. FINRA helped to allay those fears, and foster confidence, by working to ensure the protection of customer assets at troubled institutions.

How can they make this statement with a straight face knowing that thousands of investors and tens of billions of dollars remain frozen in Auction-Rate Securities? A number of Wall Street institutions continue to collect fees from these securities. Hubris? You think?

FINRA continues:

Vigorous enforcement of rules and regulations is a cornerstone of FINRA’s work to protect investors. In 2008, FINRA focused its efforts in several areas of investor harm—including excessive commissions, unsuitable mutual fund share class recommendations and sales, penny stock sales and auction rate securities recommendations and sales.

The hubris grows.

Let’s move forward. FINRA boldly and specifically addresses the Auction-Rate Securities market.  I would have thought FINRA may have ducked this topic given the fact that they had sold $647 million ARS in 2007. The fact that they have willingly ‘opened this can of worms’ leaves them subject to fair and open questions. FINRA puts forth: (more…)

What Were Ms. Schapiro’s Hedge Fund Investments at FINRA?

Posted by Larry Doyle on May 4th, 2009 8:08 AM |

As Obama looks to send a message to the American public that he will clean up Wall Street, hedge funds are “under the microscope.” Who in Washington will be delegated to lead the charge? None other than SEC head, Mary Schapiro. Bloomberg reports, SEC Chief Schapiro Wants Authority to Make Hedge-Fund Rules.

Hedge funds have become dirty words. When Washington wants to convey excessive Wall Street greed, politicians and regulators now regularly slip “hedge funds” into their statement.

As with any industry, hedge funds run the gamut in terms of business practices and ethics. It is well documented, though, that Washington solicits and receives excessive campaign contributions from the hedge fund community.

I agree that the hedge fund industry deserves greater scrutiny. A trillion dollar industry unregulated is a breeding ground for problems.

Bloomberg reports:

“It’s probably not enough just to register hedge funds” with the SEC, Schapiro said in an interview on Bloomberg Television’s “Political Capital with Al Hunt,” airing this weekend. “It may well be necessary to put in place particular kinds of rules.”

Treasury Secretary Timothy Geithner’s plan to overhaul financial oversight in response to the worst economic crisis since the Great Depression would force hedge funds to register with the SEC, subjecting firms to new disclosure requirements and inspections by agency staff. Schapiro said the SEC’s authority should be broader, so it can impose further restrictions on funds as “situations evolve.”

President Barack Obama yesterday blamed hedge funds that had lent Chrysler LLC money for triggering the automaker’s bankruptcy. Obama said the funds were “speculators” that refused the administration’s buyout offers because they were holding out for an “unjustified taxpayer bailout.”

Schapiro said “it’s certainly possible” that the SEC would consider forcing hedge funds to publicly disclose short- sale positions, imposing restrictions on leverage and restricting what the firms can invest in.

Does anybody have an issue with increased disclosure and oversight? Transparency is critically important in making sure the playing field for all investors is kept fair and level.

Ms. Schapiro does have experience with hedge funds prior to this engagement, though. As I have highlighted, Ms. Schapiro, as head of FINRA, oversaw investments within FINRA’s internal portfolio which included hedge funds, fund of funds, and private equity.

From the 2007 FINRA Annual Report:

FINRA also has investments in hedge funds and funds of hedge funds that it accounts for under the equity method and includes in other investments in the consolidated balance sheets. As of December 31, 2007, the Company had hedge fund investments of $431.2 million.

Ms. Schapiro should be compelled to share with the investing public in which hedge funds FINRA invested.

Will those funds withstand the rigor of newly proposed SEC regulation? At the very least we may learn whether Ms. Schapiro was a good steward of FINRA funds. Beyond that, we may learn a lot more.

If the Obama administration is serious about developing new regulations for Wall Street, let’s make sure the transparency includes Ms. Schapiro’s tenure at FINRA and details of FINRA’s investment portfolio!!

LD

“FINRA Is Supposed To Police The Market”

Posted by Larry Doyle on April 29th, 2009 6:52 AM |

I have written extensively about FINRA’s ownership of Auction Rate Securities over the last few months. This morning Bloomberg reports, FINRA Oversees Auction-Rate Arbitrations After Exiting Market.

The Bloomberg article (I am humbled by Bloomberg quoting me in the story) answers a number of questions I have raised, while also opening the door to other issues needing to be addressed:

1. Was FINRA blinded – if not totally conflicted – in addressing the trading, selling, and marketing of Auction Rate Securities? Try 862 million times.

2. Was FINRA lucky, prescient, or well informed in the timing of the sale of their own Auction Rate Securities? We may never know but given that their first “guidance for investors” was not published until after the market had totally frozen, they certainly did not provide much investor protection as is their mandate.

3. I have also written, and Bloomberg highlights, that FINRA had money invested in hedge funds. In light of market developments, I think the public has a right to know which hedge funds. Will FINRA release that information?

4. I unearthed all the information of FINRA’s investment activities from its 2007 Annual Report published in April 2008. I am still waiting for FINRA to release its 2008 Annual Report and wonder why it seems to be delayed.

5. As we move forward with likely regulatory changes for Wall Street, I believe the very nature of a self-regulatory organization funded by the banks it is charged to oversee presents massive conflicts of interest. This specific situation of FINRA’s investment in ARS is indicative of those conflicts. Will Congress have the courage to address these conflicts and serve the public interest in the process?

“To me it smacks of incompetence and negligence,” said Larry Doyle, who worked 23 years on Wall Street and runs a Web site called Sense on Cents. “Finra is supposed to police the market.”

I view FINRA as akin to the palace guard. The question remains, Does The Palace Guard Have No Clothes?

LD






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