Investor Protection: Super-regulator Needed

Investor protection is like a row of leaky buckets in the U.S. Each one of them is extremely porous and needs to be fixed.

What if we went to one bucket, metaphorically speaking?

In earlier posts, I suggested that a super-regulator be in charge of anything involving investor protection. This isn't more government, it's consolidating and strengthening what we already have. Here's a few priorities for policymakers in 2013:

1) There's needs to be a "Dodd-Frank II" that finishes the business of the original financial reform law. This would forever end the "too big-to-fail" doctrine for big banks and create separate entities for federally insured banking activities and speculative trading activities. Maybe it should be called "Glass-Steagall II," echoing the original and effective intent of the New Deal-era law that separated Wall Street investment banks from Main Street banking.

2) DFII would do what the Consumer Financial Protection Bureau does for banking and credit consumers. It would create a super-agency that rolls up the investor protection functions of the Securities and Exchange Commission, Commodity Futures Trading Commission, National Futures Association, FINRA and Securities Investors Protection Corp.  That's one big, tough cop on the beat for investors.

3) Investment house customers would be covered by an FDIC-equivalent no-questions-asked insurance. At present, SIPC insurance isn't adequate; commodities and registered investment adviser customers are routinely getting fleeced.

4) The super-regulator would perform regular, meaningful audits of institutions and brokerage houses. If they see something fishy on the books, they can shut down the firm the way the FDIC closes an insolvent bank over a weekend. Investors would be protected by insurance in item #3 and the closed company would be merged with a stronger one. Maybe this would be a better way of catching the Stanfords and Madoffs of the world before they run off with customer funds.

5) The super-regulator would also have the power to take fudgy vehicles like structured retail products off the market. And like the CFPB, it would also have the ability to write meaningful, plain-language disclosures that tell customers on the front page of a prospectus "If you invest in this product, you could lose a lot of money." It would be as plain as a cigarette or alcohol-label warning. At present, step-ladder buyers get better cautions.

While I don't expect much movement on this in 2013, it closes the important business started in Dodd-Frank. Some progress is on the horizon, but it's slow in coming. Here's the latest from the Network for Investor Action (NIAP), which has been valiantly fighting to make victims of the Stanford and Madoff scams whole:

"Per his letter to both NIAP and the Stanford Victims Coalition in October, Congressman Scott Garrett has introduced HR 6695 -- an amended version of HR757 -- as a “marker bill” in order to get new SIPC legislation on the calendar early in the next session. Cognizant of the enormous frustration and cynicism of the victims, the Congressman has pledged a stepped-up effort. With several obstacles out of the way – particularly a few Congressional members not supportive of the legislation – and with a new Congress charged by the voters with getting things done, prospects for passage of SIPC legislation have never been better for us."

NIAP has teamed with another victims' group to form the Investor Protection Alliance, which would bolster and expand SIPC, among other things.

"The new Investor Protection Alliance – a partnership begun by NIAP and the Stanford Victims Coalition (SVC) – adds significant clout and makes much easier a broader geographic coalition of supportive congressional members (the Stanford fraud impacted thousands in the South, from Florida to Texas)."

While I laud these groups and countless others organized around specific scams, there still also needs to be a non-governmental organization dedicated to universal  investor protection across all non-banking financial services.

When I asked Ralph Nader earlier in the year, he didn't know of such an investor rights group, but suggested that one be formed and funded from securities transactions. It would be similar to citizens utility boards, which are effective non-profits organized on the state level to fight utility company abuses. How about an investors' protection board?

I don't know if the super-regulator or investor board will eliminate MF Global, Peregrine and Madoff-type scams, but it will add an extra level on vigilance that can force some of these operators to stay honest -- if someone is regularly checking their books.

Happy New Year! I hope you enjoy a healthy, happy and prosperous 2013.