Why more investor protection is needed, not less

May 27, 2011

Government isn’t the enemy when it comes to investor protection. Less is not more.

GOP Congressmen and its money-trust allies, though, are busy trying to dismember the Dodd-Frank financial reform law despite the evidence that investor protection had been underfunded when ordinary people needed it the most.

The last decade has been scarred by a stock and housing meltdown, the tail-end of the dotcom blow-up and two recessions. Most Americans are behind on saving for retirement. One would think that investor protection would near the top of the Congressional agenda (in addition to job creation).

Yet it’s clear from regulators that investor protection has become steadily more porous as the financial industry has grown.

A little-read U.S. Securities and Exchange Commission study on broker-dealers and advisers published earlier this year bluntly told the story:

“The growth of the investment advisory industry over the past six years has not been matched by a corresponding growth in Commission resources,” the study states as part of a Dodd-Frank regulation.

While the amount managed by registered investment advisers grew 59 percent from $24 trillion to $38 trillion (from Oct. 1, 2004 through Sept. 30, 2010), SEC inspection resources fell almost 4 percent during that period.

The high-water mark for examinations of investment advisers should have been during the worst bubble years (2006-2008), but the SEC reported that the number of its inspections peaked in 2005 at 1,530. There were only about 1,000 inspections last year. That’s a decrease of almost 30 percent. And this was just for policing some 11,000 registered investment advisers.

The number of broker-dealer examinations also declined during the perilous years in which investors lost trillions in their retirement funds. The staff for SEC broker-dealer examinations was down to 380 last year from 405 in 2006. As a result, examinations dropped to 490 last year from 764 in 2006.

Fewer watchdogs means fewer bad brokers and advisers are caught and expelled from the industry. Enforcement actions against broker-dealers dropped by more than half from 2004 to 2010.

Dodd-Frank called for the SEC to hire 800 more staffers; House GOP members are trying to cut off the funding to do that. Almost acting in lockstep with the financial trust, the GOP is also attempting to neuter the Consumer Financial Protection Board and fiduciary duty that would make brokers place investors’ interests first.

Awash with campaign contributions from the money trust, House GOP members are openly hostile to any Dodd-Frank regulations that hope to protect consumers.

“Regulators exist to serve the banks,” Rep. Spencer Bachus, the chairman of the House Financial Services Committee told an Alabama newspaper late last year.

I’m not surprised that the money trust wants to delay or dump the provisions of the Dodd-Frank financial reform law. It will cost them billions to do right by investors and credit customers.

I’ll admit that the financial industry is more regulated than ever and even the most sweeping law since the New Deal won’t keep all dishonest brokers and advisers out of the system. There is no perfect set of financial regulations and the government will never be able to effectively keep up with an industry that large and complex.

Yet making the argument that less investor protection is better for their customers — or that there are enough financial watchdogs on the beat now — is patently wrong.

Conflicts of interest are embedded in everything from your 401(k) to the most complex structured product. Do you know why certain funds are in your 401(k) plan, even though they are poorly performing and expensive? Is there some “pay-for-play” involved? You many never know without more federal oversight and disclosure.

There are more investments than ever and they are more complicated. From structured certificates of deposit to variable annuities, there’s little chance you’ll understand what’s really going on — or how you can lose money. In fact, there are more ways to lose money than ever before. The money trust wants to keep it that way. They like to keep their black boxes closed tightly.

You can’t be on your guard all the time. There are plenty of financial rules, but without enforcement, the bullies are running the show.


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These Congressmen are just what investors don’t need in todays times. Regulators can’t control their own government entities much less the more intelligent bankers and brokers in the USA and world. It’s apparent to most that Congress is in bed with corporations. Just hang on….it’s going to be a bumpy ride.

Posted by Wassup | Report as abusive

Regulators were intentionally constrained by the appointment of anti-regulation ideologues to head financial regulatory agencies. Staff who attempted were regulate were fired or stiffled. Congress intentionally restricted funding, just as the GOP is now doing. The US government is literally owned by the financial industry with the GOP doing its bidding. Bankers and brokers are not more intelligent. They resemble Osama bin Laden in that they devout their lives to figuring out how to game and bring down the system to their own advantage. America is self destructing due to greed and corruption. It is no longer a real country.

Posted by Greenspan2 | Report as abusive

Consumer protections will never really ever be much good. The bottom line is that Americans should have never been hoodwinked into believing that most stocks are a sound long term investment. When I was graduating from high school back in 1970, most stocks were for risk takers with money to gamble with. People were more conservative with their money back then. The Casino mentality of today did not exist. Many average investors today are either reckless or stupid or both. The other side of the coin is the enormous amount of money that investment insiders make these days. Totally disgusting. But wow, I’m sure glad they put that bad girl Martha Stewart in jail….lol….what ludicrous justice.

Posted by 123456951 | Report as abusive

The response to the suggestion that we make our markets work for retail investors is deeply pessimistic. Yes, the money trust will always be looking to game the system to their end; yes, we will have to fight the influence of that money on our representatives; but, what choice do we have? Should we give up and not have functioning capital markets in America? This is a hard fight, but it is an important one and one that Americans cannot leave to whither in the bitter fields of our growing apathy. We have to stop being so apathetic. If you are concerned about this, as a first step, sign this petition http://act.boldprogressives.org/cms/sign  /petition_warren

Posted by TomInWisco | Report as abusive

Would it not be easier to just regulate the amount of dividends they have to pay. Investors demand exuberant paybacks companies strip themselves in order to pay it. Curb these exuberant payouts and companies will be less likely to go out of business they could afford to pay their workers they could afford to be more competitive because it won’t be chained to there investors..

Posted by EN3 | Report as abusive

All one can say for sure is the withdraw of certain regulations have always been reflected in Bubble bursts subject to those regs abandoned after the regs were pulled from the market.

This tends to make me believe, those that yell for less regulation in financial systems, have an agenda,,, an agenda that will result in Main Street hearing a large pop, while Wall Street send more employees to millionaires row.

Now if jail time was on the books, and I mean serious time, then no, we don’t need no stinking regs. But since jail time is not a option any longer for the bulk of the financial system operators, we beter at least have some way of seeing the problems up front.. as the back door escape from risk of tradtional punishment for misdeeds is now open for all except the out and out thieves.

Posted by Chivelry | Report as abusive

En3, when times are tough, dividends are offered by the “not-strogest” or the strongest, but in traditional terms, too fearful of expansion.
The largest by “share” dividend awards, are the insders and financiers, that keep the company going. Divis are decieded by insiders-as state laws permits. State endowed Corprate laws have to be changed,, all of the States. Then worry about the company moving overseas. I guess what i’m saying is, Corps rule.
Company are always stripped anymore. The financial system is all about taking what is already built or attained and pulling the value out of it.. for some, and leaving a job, at best, for the employees.
Another red flag is the “buyback”. Seldom is the buyback in the open market. In essence, the profits stored up in the company go to the “insiders”… again.
Competition is only needed till the company is massively indebted. Then serves no purpose to those that started it, brought it public.. other than to say, then bottom feeding starts, by Investors into ruining any remaining equity structure.
The only way out for workers and those that drink the koolaid of belief these companys at any stage or size is worth hanging arournd financially is changing the laws that comprise what is Corprate rights to anything they wish. Such as staggered Director Boards and being able to spend company money in promoting and lobbing anyone they wish. Those two thing make it possible to delay challenging Director Divi decisions for two or more years, and puts the expense of the challenge on the backs of non-insiders… whom have , in some situations, virtually unlimited money to fight the insiders.

But, for “Consumer protections will never really ever be much good” the most good will be in the worst case scenarios. Example-Car tittle lenders that take protection under “hock shop” rules. Many a consumer does not know, is not told, and has little documentation, showing a 1000$ dollar loan, 12% and maybe more.. monthly! not APR, monthly! With late fees that double the payment on day 32 for the previous month. Before you say what idiot falls for that, ask how Lenders can, and why should it be allowed.
WHy should Auto sales outfits be exempt from telling the truth? Yes’ we all should take anything a sales person says with a grain of salt, but why are they allowed to say anything without reprise, like the Federal Institutes that have the mandate to say whatever is in the intrest of accomplishing their stated goal?

Posted by Chivelry | Report as abusive

Investing is about measured risk-taking. There is always a risk/return balance. Add more “protection” and your return goes down. There can be no such thing as a “protected” high-yield investment.

Posted by mheld45 | Report as abusive

Before congress does another thing, a penny per stock fee on sale or buy for stocks above $10/share, 1/2 cent $5-9.99 and 1/4 cent for under $5 should be the first step. Institutional investors take billions in equity away from corporations and small investor returns by computerized trading. Look at any stock see the breakpoints on sale then buyback at lower price going virtually back to the original level. High powered computers have algorithms working round the clock to steal equity from companies using this method.

Posted by JamesChirico | Report as abusive

@Greenspan 2

“America is self destructing due to greed and corruption. It is no longer a real country”

Yep, it’s the biggest casino on the planet and the bankers (no pun intended) can make up any rules they want. The relentless pursuit of ever-growing profits is unsustainable. The resultant financial disasters leave bigger and bigger voids that cannot be remedied.

God bless America.

Posted by doctorjay317 | Report as abusive

The congressmen advocating less regulation are PWAP’s “People Without A Plan”. All they know is what the lobbiests tell them. How many accidents does a drunk driver have to have before they take him off the road. All they know is let the financial community run wild and take money from social security and medicare.
I agree with doctorjay317.

Posted by fred5407 | Report as abusive