SEC Targets Brokers in Latest Crackdown
By Staff News & Analysis - December 06, 2011

'Enforcement wave' heading for advisers … The SEC's move to step up enforcement actions against investment advisers is only the tip of the iceberg, according to one former SEC official. Advertisement Related to this story "An enforcement wave is coming," said Jordan Thomas, a partner at Labaton Sucharow LLP and former assistant director at the Securities and Exchange Commission's asset management unit. "The world is about to change for investment advisers." Last week was a good example of the SEC's newfound aggressiveness. Three advisory firms were charged with having inadequate or nonexistent compliance programs and agreed to pay a total of $262,000 in fines and reimbursements. – Investment News

Dominant Social Theme: The SEC will make sure the laws are obeyed and people are protected.

Free-Market Analysis: The SEC is getting ready to crack down on US investment firms. This is surely a kind of sub-dominant social theme of the elite – that more enforcement from Washington, DC is going to help those in danger of being damaged by crooked brokers and advisors.

These efforts come on the heels of other aggressive actions by the SEC as regards different parts of its mandate. We covered this recently in an article entitled, "SEC to Beef Up Penalties in Defense of the Little Guy."

SEC Pushes to Toughen Penalties for Offenders … The Securities and Exchange Commission, bruised by a judge's rejection of a proposed settlement with Citigroup Inc., sought the power to impose much- larger penalties on financial firms and individuals that commit fraud … SEC Chairman Mary Schapiro, in a letter sent to senators late Monday, asked Congress to pursue legislation that changes the legal formulas used by the agency to calculate penalties. Ms. Schapiro's proposals would allow the SEC to impose fines up to nine times greater than the maximum currently allowed by U.S. law. – WSJ

In that article we pointed out, as we have before, that regulation doesn't work because it can't work. Every regulation is, in fact, a price fix that merely further distorts the economy. It is business cycle distortions that set off great episodes of greed and corruption. When everyone else is getting rich around you, it's difficult not to succumb to greed as well.

The reality is that the Western economic cycle is driven by central banking and this creates a tremendous societal distortion. Eventually, the boom fades and there is hell to pay. There are no jobs, white collar or otherwise. At this part of the cycle, after the damage has been done, the regulatory authority steps in to make its crackdown on "crooked" brokers and dealers.

Government protects its own. At the moment, the SEC is being urged on by the courts. Having been chastised over its lack of effectiveness in sniffing out the Madoff Ponzi scheme, the SEC bureaucracy is desperate to look as if it is being effective and "tough." It is upping the level of its "enforcement" and US investment advisors are apparently going to pay a price for the SEC's dysfunction.

In fact, Robert Khuzami, director of the SEC's enforcement division, stated as much. He told a Senate panel that the commission had decided to pursue investment advisers who "lie" on their registrations by attacking and then reaching the "out of court" deals that the SEC enjoys, which provide revenue. Here's some more from the Investment News article, above:

In a speech last week, Mr. Khuzami, a former federal prosecutor, compared the effort to former New York Mayor Rudy Giuliani's program in the 1990s that targeted people committing small infractions to prevent them from growing into dangerous criminals.

"For Rudy, it was a focus on subway turnstile jumpers and squee-gee men," Mr. Khuzami said. "For us, it's advisers who lie about graduating Phi Beta Kappa, conceal their association in a past failed business venture or inflate their assets under management, who might well be the same persons who outright steal your money when the markets turn against them."

The SEC's latest enforcement moves come shortly after the agency reported that it filed a record 146 actions against investment advisers in fiscal 2011, a 30% increase over the previous year. Those efforts were part of 735 enforcement actions overall, also a record, that produced $2.8 billion in penalties and repayments to investors.

… In addition, Congress is considering establishing a self-regulatory organization for investment advisers. The SEC has acknowledged that it examines only about 8% of the nearly 12,000 registered advisers annually. In the face of this pressure, the asset management unit is making its presence felt.

Wasn't the time for regulations to work earlier in the decade? They didn't of course because they never do. When the money is flowing and economies are inflating, people get greedy. Oversight diminishes because people believe it is getting in their way. Regulators bow to industry demands. When everyone is getting rich, it is difficult to accuse people of not being law-abiding, as they are making a profit for themselves and others. It is a "new era" after all.

During central bank, money-from-nothing euphorias, there is always a "new era" and an explanation for why it exists. And there will always be politicians (Bill Clinton comes to mind) ready to proclaim the business cycle in finally dead. Advances in industry or technology have finally killed it. Full employment is about to be realized. And then, just as these pronouncements come generally into vogue, the Crash arrives … And then, inevitably, the "regulators" go to work …

Their "work" does nothing at all in terms of the larger scenario. The money is gone by then. The crooks that go to jail will have no impact on the next generation of unscrupulous people. The entire event is a kind of staged public relations program desgined to keep people in the thrall of the basic government meme … that government is a protective enterprise and on that wards off "anarchy" (which is merely the absence of government).

It is very much of a waste of time, money and man-hours. The upcoming hearings on Wall Street corruption, if they do arrive, won't prevent the abuses that will be committed during the next monetary inflation and won't have any effect on the now-thinner wallets of those who were already swept up in the money mania of the 2000s.

Politiicans and regulators will claim, sooner or later, that they have "recovered" billions for badlly duped people. But really these reparations are minimal in an environment where the US Federal Reserve can print trillions at a clip. It is simply another promotion, another theme … that the regulatory structure works after allwhen.

After Thoughts

Every financial regulation has a distortive effect that further concentrates power at the top and makes market place "fairness" even more elusive. The fairest market is a free one, not one dominated by government bureaucrats.