NEW YORK - In a recent interview, new SEC Chairman Christopher Cox said his "natural bent is toward the retail investor and the little guy"--music to the ears of the millions of ordinary individual investors who are no better protected than they were a decade ago.
Despite Sarbanes-Oxley and a rash of CEO convictions, little progress has truly been made to protect investors from the corrupt practices of brokers to whom they entrust their money. The much-lauded, big-dollar settlements sound impressive but amount to wrist slaps when compared with the staggering profits reaped by firms that peddle dubious securities to investors.
To that end, I propose the following measures to improve the integrity of the financial markets:
Overhauling The Arbitration System
Currently, as a condition to buying securities from brokerages, investors waive their rights to a jury trial should something go awry and, instead, agree to submit claims to industry arbitration panels. This stacks the deck against investors before any dollars change hands.
At the NYSE and the NASD, investors' cases are heard by a three-member panel with one "industry" arbitrator and two "public" arbitrators. All too frequently, public arbitrators have financial ties to the securities industry or are dependent upon securities arbitration for their livelihood. These arbitrators often develop a bias that results in little or no award to investors in meritorious cases, despite the strong claims they file.
To be truly fair, the SEC should also eliminate the requirement for a securities industry arbitrator on every panel. Public arbitrators are completely capable of understanding the workings of the securities markets and can adequately assess the interactions between brokers and their customers. The SEC should also require that arbitration panels reflect a diversity of backgrounds, such as jury pools do. Current arbitration panels are typically comprised of older white men.
Bolstering NASD Rule 2130
In April 2004, the NASD adopted Rule 2130, which required any disciplinary rulings against a broker to be posted in its Central Registration Depository. Via the CRD, the NASD maintains the qualification, employment and disclosure histories of registered securities employees of member firms. As the cliche dictates, where there's a will, there's a way. And sure enough, Wall Street has found a way to circumvent the rule's intent.
Nearly 90% of customer arbitration cases are settled, and in the 16 months since Rule 2130 was passed, brokerage firms have invariably insisted that investors acquiesce to having the brokers' misdeeds expunged from their CRDs as a settlement condition. Indeed, the practice is so pervasive that some investors won't name the broker as a respondent for fear of impeding a potential settlement.
Simply put, the SEC should require that the NASD bolster Rule 2130 and close this unintended loophole.
Regulation Of Clearing Brokers
The SEC must implement regulations that hold clearing brokers accountable for the stock trades they process. There are countless examples of clearing brokers allowing withdrawals and wire transfers to be illegally drawn from an investor's account, but they have rarely been held responsible for their role as middleman in these transactions. Commercial banks are responsible for the checks they allow to be fraudulently cashed, and clearing brokers should face the same standard.
Investor Education Fund
The $55 million investor education fund amassed by the SEC and New York Attorney General Eliot Spitzer has been disastrous. The fund's executive director and board members resigned this year, and the SEC has since asked a federal judge for permission to turn the money over to an NASD nonprofit grant-making foundation.
Even if the amount calculates to just 55 cents per investor, disbanding the fund is misguided, as the need for the "dissemination of neutral, unbiased information" has never been greater. Investor advocates--rather than government bureaucrats--should be appointed to oversee investor education and the preservation of these funds, in order to facilitate those initiatives.
In an interview last week, Cox indicated that the Office of Investor Education and Assistance would be much more heavily involved than it has been. A good first step.
Increasing SIPC Limits
The Securities Investor Protection Corporation was created in 1970 to allow investors to recover a maximum of $40,000 in cash and $100,000 in securities when these funds were lost as the result of broker theft. In 1980, the respective amounts were increased to $100,000 in cash and $400,000 in securities.
Another increase in these limits is long overdue. In the last 25 years, we have seen steady inflation and an onslaught of millions of investors entering the market. Who knows--an increase may even be something of a deterrent, as the SIPC is funded by Wall Street firms themselves.
Cox has given every indication that he will work for the individual investor. But at the end of the day, you judge a man by his actions, not his words. That's why there's every hope that he will take the opportunity to blaze a trail where no SEC chairman has gone before: to the side of the individual investor.
Jacob H. Zamansky heads Zamansky & Associates, a leading plaintiffs' securities-arbitration firm. Zamansky represented a New York pediatrician who claimed he was misled by the stock research of former Merrill Lynch analyst Henry Blodget. The successful resolution of the case led to a conflicts of interest investigation by New York Attorney General Elliot Spitzer, which resulted in a $1.4 billion Global Wall Street Settlement. Prior to starting his own firm, Zamansky worked at Skadden Arps. He received his JD from Temple University.
