A Personal Memoir On Regulation

      After a decade in large corporations, I started a financial services business. Before conducting any business, I formed a broker-dealer firm to comply with regulations for sale of investments. Within weeks of registering, I was subjected to a surprise SEC examination and found in violation of a few paperwork regulations A full blown investigation ensued which took 3 years and $150,000 (today’s dollars) to settle. In the end, I was formally censured by the SEC, which became part of my permanent record. All this occurred before I had even one client or had sold even one product.

      Fast forward many years and my growing business now was regulated by the SEC, NASD, FINRA and 20 states. Agents from one of the states arrived for a surprise inspection; after poking around for several days, they discovered (horrors) that a newly hired broker had made a single $5,000 sale a few days before his registration in that state had become effective. This broker had been duly registered with the SEC and NASD and we had submitted his state registration over 3 weeks previous but it had not been timely processed. This became a cause celebre; my firm was reprimanded, fined and subjected to further examinations; another indelible violation was on my record.

      In my career these were the only two regulatory hiccups; yet I was tarred with the same broad brush as truly dishonest brokers who caused great harm. My cost and sanctions were more severe than if I never had registered in the first place. Regulations are so numerous, complex and arcane it is impossible to be in full compliance and I was perpetually at the mercy of any benighted regulator with a chip on his shoulder. My firm with 50 brokers was subject to the same regulations as industry behemoths, which could afford to hire a veritable legion of high-priced compliance professionals.

    Despite all the lunacy, I would not object to the onerous regulatory regimen if it actually protected investors. Instead, regulation confuses and harms investors. It gives them a false sense of security that the government is looking out for them; whereas, in reality, the rules are the same as always, i.e. investors must know what they are doing and who they are doing it with. Investors can’t distinguish good brokers from dangerous ones because everyone in the industry for awhile has a record of violations. And, of course, the not inconsequential cost of regulation is passed on to clients.

     Prospectuses were required to provide investors full informative disclosure but have been subverted to become nothing more than insurance policies for promoters. The list of risk factors is endless; yet most investments that go bad do so because of unknown and/or unknowable risks not among the factors listed. The prose has become turgid with horrors such as indecipherable 257 word sentences explaining tax consequences.

     Regulators behave in accordance with the tenets of public sector economics, i.e. they respond to personal incentives and not to the interests of investors. There has been a long train of frauds, abuses and Ponzi schemes such as Madoff that have gone on for decades despite ongoing SEC and FINRA examinations and even after regulators were tipped off about the wrongdoing and given a road map to uncover the fraud.

     The goal of regulators is not about promoting honest, ethical, moral, client-friendly or even lawful behavior. It is only about mindless compliance with ever-changing and expanding esoteric and complex rules promulgated by politicized, bureaucrats and requiring a phalanx of specialists to interpret and to enforce. Moreover, the regulations are only tangentially, if at all, related to serving the interests of the public.

     I close with one final outrage. I retired in 2009 and have not been licensed since then. Nevertheless, by virtue of continuing to receive compensation as a retired broker, I remain subject to regulation until the day I die and beyond. After I cross that final bar, my heirs remain subject to regulation. It never ends; even the grave is no respite.

   My lifetime of experience convinces me government regulation is a vast Kafkaesque wasteland that benefits no one except the regulators. And the band plays on!