Progress For Investors and Main Street?
The people of Massachusetts have spoken. Change. It’s not happening fast enough. That sentiment was strong enough to elect an obscure, and a little known State Senator whose only claim to fame is a mostly nude centerfold in Cosmopolitan magazine. Oh poor Ted Kennedy must be rolling in his grave.
Well … these change seekers are not going to be particularly happy with Barney Frank and his steerage of H.R. 4173, which includes the Investor Protection Act of 2009. Is this really the best he can do? It’s the classic inside the beltway compromise. The lobbyists for the financial services industry sure had their say. At best, any protection for main street investors is subtle and at worst pyrrhic.
This is a horrible conclusion to a story that should have turned out much better. One glaring example of this weak compromise is a provision seeking to curtail the lock that brokerage and securities firms have over any customer dispute:
Home field advantage
We all know its potential importance. What football team wants to travel to hostile stadium for a crucial game? Well its worse for investors trying to recover for valid claims against their brokerage firms. Not only must they play on the enemy’s turf but the enemy also gets to select the referee.
As it currently stands, brokerage firms require customers by standard agreements to arbitrate their disputes over broker misconduct (like putting grandma in a deferred annuity that has limited liquidity and no tax benefits while reaping an excessive commission).
The forum is the Financial Industry Regulatory Authority (FIRNA). The arbitrators are too often sympathetic to the industry and their attorneys. So, in this season of change what does the great champion of the common man push for? A ban on these one sided arbitrations? Well no not exactly. The reform we’re seeing in this area is a “punt” at best. The legislation grants new powers to the SEC to control, limit and even prohibit the use of mandatory arbitration agreements in brokerage contracts. The SEC? The same SEC that missed Madoff even when he was delivered on a silver platter by the insights of Mr. Markopoulos? The same SEC that dawdled and debated as the financial sector headed toward the abyss?
Take it from me – from someone who spent some time at the SEC and saw how slowly it works – nothing will change for years; and by the time it does, the result will be more of the same.
More is needed faster.
Private Pursuit of Accomplices:
On the Senate side there is more room to be optimistic. In nearly all of the Ponzi schemes and widespread frauds of the last several years, the bad guys could not do it alone. They were all helped by the blind-eyed or negligent banker and accountant who, recklessly or with actual knowledge, placed investors in harm’s way and too many times was integral in creating or hiding a fraud. Arlen Specter to the rescue. The Pennsylvania Senator has introduced a bill which states that those individuals who knowingly or recklessly provide assistance to fraudsters whose actions are in violation of securities regulations will be held responsible as if they were committing fraud themselves.
Lawyers and accountants who may unwittingly enable fraud will still be exempt from legal pursuit, but banks, traders, and other individuals whose actions have led to the loss of billions of investors’ dollars in the past may soon be held responsible.
Significant and fervent legal action against accomplices of securities fraud will lead to reform of industry practices. The expected provisions in the Senate bill will enable trial lawyers to protect consumers by forcing the industry to regulate itself for fear of prosecution by a vigorous private bar.
The Future
After a long healthcare battle, recent struggles with terrorism, and a battle with a still fledgling economy, we hope that Congress does not lose its steam in pursuing fairness and justice for American investors. We at The Corporate Observer know that the best reform is increased involvement of investors in the financial system. If the Senate passes the reforms that we are seeking, the investors of America can look to the future of investing with increased confidence in their own ability to pursue fraud and protect themselves from unjust practices.
