The Driving Force Behind an Irrational Compliance Structure

Bob VeresOver the years, I’ve had quite a few off-the-record conversations with people at the Securities & Exchange Commission, asking them about the escalating compliance obligations that they impose on financial planners. They’ve told me, confidentially, a very consistent story, which goes something like this.

1. Brokerage firms initiate a terrible, awful scandal. (Think: Fabulous Fab boasting about selling junk tranches of CMOs, or brokerage house analysts extolling the virtues of this or that company to their investors while writing internal memos describing the same companies as garbage, or being caught offering generous incentives to sell in-house investments when there are far better alternative products.)

2. The SEC catches onto the scandal only after it blows up in the press. The SEC top brass is embarrassed and angry, and tells the auditors and enforcement staff to come down hard.

3. The SEC enforcement staff tells the brokerage firms about the harsh measures they’re going to take to force them to start dealing fairly with the public.

4. The brokerage firm executives (and their teams of high-priced lawyers) agree to some (heavily modified) measures, but then say that the SEC shouldn’t give those independent financial planners (”rogue brokers,” in their parlance) a free pass. ”Be fair. Make them live under the same rules we do.”

5. The SEC institutes draconian, intrusive regulations on the brokerage firms (who were caught fleecing the public) and on the independent RIA firms (who were not).

6. The brokerage firms win, because they’ve made it harder for the RIA firms that compete with them to do business, while all they (the brokerage firms) have to do is hire a few additional lawyers to fill out the paperwork. Scale works greatly to their advantage in the compliance world.