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Regulatory Wire: CREW report criticizes the SEC and blasts its chairman, Mary L. Schapiro, for being slow to fight fraud

Measures against the Bernie Madoffs, Kenneth Starrs called insufficient; accountants on extensible business reporting language; and a strong letter from NASSA

Friday, June 4, 2010 – 5:02 AM by Brian O'Connell
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The SEC says fraud costs $40 billion a year

Call it foot-dragging or call it the usual case of a government bureaucracy reliably moving at a snail’s pace.

But whatever you call it, don’t call it progress against the types of financial fraud cases that have cost investors billions of dollars in recent years – and which, with the arrest of New York-based advisor Kenneth Starr, are in the headlines once again. See: What the ADV of Kenneth I. Starr reveals and what to make of it

A new report from the Citizens for Responsibility and Ethics in Washington (CREW) called Reform at the SEC: Fiction or Reality? cites the Securities and Exchange Commission’s “slow pace” and “limited progress” on promised financial fraud enforcement reforms.

“Despite its historic failure to prevent Bernie Madoff’s staggering fraud, the SEC is dragging its feet on some of the most urgent structural reforms needed,” said CREW’s Executive Director Melanie Sloan. “The SEC may be headed in the right direction, but not at the speed Americans have the right to expect given the agency’s monumental failures.”

Central database has not materialized

The CREW study blasts SEC Chairman Mary L. Schapiro, in particular. The consumer advocacy group says in the 18 months since the Madoff scandal broke, promised reforms like the creation of a central database to manage tips, complaints and referrals, to the establishment of specialized units better able to analyze highly specialized and complex areas of security law, have not materialized.

The study comes out eight months after an October 2009 request from CREW to the SEC to release documents that would help the consumer group gauge the progress of the SEC’s promised reforms in seven key areas.

What are CREW’s findings? While the agency has made some progress in areas like bulking up on staffing, and the first steps in building a key central database to monitor investment fraud tips, overall progress in building a solid defense against the types of swindles that made Bernie Madoff a household name has been weak.

“The slow pace of reform is hard to fathom,” said Sloan. “If we’ve learned anything from the agency’s failure to stop Bernie Madoff and subsequent swindlers, it’s that the country needs an aggressive SEC working to protect Americans’ hard earned dollars.”

The SEC reports that civil securities fraud totals approximately $40 billion per year.

Here are some of CREW’s findings:

  • The SEC has begun the development of a central database to manage tips, complaints, and referrals, but is many months away from its completion;
  • The SEC has made considerable progress in establishing specialized units, but staffing them has consumed an inordinate amount of time and the units are months away from being fully staffed;
  • Implementation of the SEC’s promised Industry and Market Fellows Program, which would allow the agency to keep pace with Wall Street, is under way but as of the end of April, the agency had yet to hire any industry expert fellows for the Enforcement Division, which lacks this critical expertise;
  • The SEC has made some progress in streamlining the management structure of the Enforcement Division by eliminating the branch chief positions, but many of the former branch directors have been deployed to other management positions, a move that runs counter to the promised streamlining;
  • The SEC has now hired a small number of the promised senior specialized examiners, a process that has consumed many months;
  • The SEC has now adopted a protocol integrating examinations teams from multiple units into a single unit, but it is impossible to measure the effectiveness of this report as the SEC cannot identify how many, if any, joint examinations it has conducted;
  • The SEC has made the most progress in beefing up and expanding its training programs agency-wide;
  • The SEC has changed its policy on tolling agreements to require the approval of the Director of the Enforcement Division and claims to have entered into 18 tolling agreements under this new policy. But because the SEC does not record the number of tolling agreements in its databases, there is no way to ascertain how this number compares to the number of tolling agreements under the old policy.

Click here for the entire report.

Cali CPAs promote extensible business reporting language

California Society of CPAs, which represents 34,000 CPAs, recently weighed in on financial services reform. They say the joint Senate-House bill should include language that keeps investment advisors and brokers in the same fiduciary area code.

“It’s definitely a controversial issue,” noted Leonard Wright, a San Diego attorney and a representative for the California Society of CPAs. “In my mind, accounts should always have fiduciary responsibility. I think most CPAs would say that if you hold a professional designation, you should be a fiduciary.”

Wright also believes that the joint U.S. Senate-House committee on financial reform should look at the marketplace for guidance, specifically how financial professionals get paid. “If you’re paid on a fee basis, the payment structure is more complicated, and that should be factored into any talk of fiduciary reform,” he added. “Commission-based pricing is different and less complicated. In terms of standards of care, payment structures should be examined closely.”

CalCPA is also heavily touting the extensible business reporting language (XBRL) technical standard for financial business reporting. While the SEC supports XBRL, it’s gaining little traction in the debate over H.R. 4173 underway in Washington.

According to Wright, XBRL would standardize business reporting, making financial documents and reports more easily searchable and transparent. Investors would benefit from easier-to-understand financial documents, dated and tagged for greater transparency. “With XBRL, you’re taking a lot of confusion and guesswork away from both the investor and the advisor,” he said. “After all, how can an advisor do his or her job when they may not have sufficient information to value a given investment? XBRL would make that much easier.”

NASAA issues letter touting financial reform fiduciary standard

The North American Securities Administrators Association is out with a strongly-worded letter to the U.S. Senate and House leaders overseeing the reconciliation phase of the financial reform bill.

The letter, signed by NASAA President Denise Voigt Crawford, urges Congressman Barney Frank (D-Mass.) and Christopher Dodd (D-Ct.), Chairman of the House Financial Services Committee and the Chairman of the Senate Banking Committee, respectively, to hone in on fiduciary reform.
Touching on the fiduciary fight, Crawford points out that Sec. 7103, passed by the House last December, is the single most important investor provision in the bill and should replace the Senate passed study.


Crawford adds that the joint Senate-House committee cannot afford to risk any more deterioration in trust from “outraged” average Americans, unless Congress takes firm action to impose uniform fiduciary standards to “all financial professionals who provide investment advice about securities to investors.”

The NASAA maintains that adhering to the House standard, and not the study-and-review provision in the Senate’s HR 4173, won’t harm customer choice, as some fiduciary reform critics have maintained. “Customers who want to buy stocks and bonds can continue to do so while those who want investment advice will have access to that information as well,” wrote Crawford. “ It will eliminate a regulatory gap that has long exposed investors to abusive sales practices such as incentive programs that encourage brokers to push more costly and poorer performing products over others.”

The letter also points out that insurance agents who make recommendations to senior citizens to buy securities could only do so if it was in the best interest of their senior clients and, for products such as variable annuities, would be required to disclose the fees and commissions they are paid for the transaction. “In short, it will ensure that brokers and agents put their clients’ interests ahead of their own,” the letter said.

Click here to read the entire letter.

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