Q: What do US regulators tend to look for when they visit a firm?

A: They look at what work you should be doing as a compliance officer and the kind of people to whom you delegate stuff. If the regulators find that you have delegated things to an unregistered designated manager and unqualified people, it says how much you care about compliance. It will bring trouble to your firm. That’s what they look for first. They also think that your advertising is extremely important. They will look to see whether it gives people a good idea about what you really do. This is something they are bound to hold you to.

If FINRA, the Financial Industry Regulatory Authority, contacts you about some information they want and you provide it late, this is not going to bode well. They’ll become very unhappy. Communication with regulators is very important. They look at detail. If you’ve been sanctioned by a regulator and you’re not that big a firm, for instance if you’re in the second year of business and you have a fine, this is not good. Your reputation is all you’re going on because it’s intellectual property and the people in this business know each other.

Q: What tips do you have for organising an AML programme?

A: The act . I am on very friendly terms with two people at FINRA.

Q: Are they cagey about what they tell you?

A: No. They say to me that they have two reasons for telling me things about their work: (a) it helps them to do their jobs more easily and (b) I’m fighting the good fight. One of them said to me “you’re pre-empting any problems before we get there, and that’s good. You’re making our jobs easier. We want to see firms doing the right thing.”

Q: What other differences are there between the SEC and FINRA?

A: The examiners are salaried and those salaries have to be paid for but any profits that FINRA makes get disseminated back to the brokerage firms . The SEC is different. If you work for them you get more benefits because you are working for the US Government. There are problems there, though, as the legislative branch has been imposing budgetary cuts since the credit crunch, so it’s a double-edged sword. Some people have not had a raise in salary in a year. And when the SEC comes in to do an audit, you have less time to prepare and more people come. FINRA typically sends one person.

Q: When the SEC site presents a message from ‘the staff’, what does that mean? Surely everybody there is a staff-member.

A: These are the people who deal with the information on the site, i.e. the public relations people. It’s really another way of saying ‘this is what’s going on’.

Q: For years, compliance experts in the UK have been wondering why lawyers keep going into the SEC, out into private practice and back in again, while British regulators tend not to. What stops them is the fact that they can earn three times as much in private practice as they do as regulators. I heard that it’s illegal in the US for law firms to pay the salaries of their alumni as they go back for another stint as regulators but they get round this by (illegally) promising to ‘see them right’ after 3 years of not earning very much and that it’s worth it for the law firms because they get early warning of what’s coming next. What are your thoughts about that?

A: Yes, it’s the revolving door. Matt Taibbi, the journalist, has explained this. Lawyers from investment banks are writing the laws they intend to break. The revolving door creates a monstrosity. ‘Too big to fail’ exists because of corporate cronyism. They’ve taken this job in private practice to lobby the very people who are regulating their firms. I’d love to believe it’s not happening, but it is.

Q: What would you do to remedy the situation?

A: I would create a ‘regulator watchdog’ which examines the regulators for propriety. We have the Committee of 70, a political watchdog group and research and election information source for the Philadelphia metropolitan area. They make sure that everything is going the way it should, so I’d have a separate watchdog like that. Second, I’d say that if you’re with the regulator, you can’t go and take a position with regulated people. The revolving door should be shut. I love my industry. Despite these problems, we’re doing great things and making markets as fair as they can be.

Q: You must have witnessed a lot of securities fraud against high-net-worth people. In the US, for an individual to be considered an accredited investor, he must have a net worth of at least $1 million  not including the value of his primary residence. Then he’s permitted to invest in certain types of highly risky investments such as seed money, hedge funds and private placements, but they aren’t all sophisticated enough to be allowed to do that, are they? Elvis, for example, was a HNW individual who was very good at music but finance wasn’t his field of expertise and he was constantly being ripped off by the card-sharp who managed him, who was himself terrible at handling money. You could argue that Elvis was a vulnerable HNW and that there are many like him today.

A: Yes, if you have the wherewithal to create wealth, you can still be vulnerable. HNWs are the most common victims of fraud, especially the elder ones. These are the ones we need to protect. It’s all about suitability. FINRA is going to ask firms for proof of suitability. It’s coming up in a year. It’s the CARDS (Comprehensive Automated Risk Data System) initiative and it’s for everybody, but especially HNWs. CARDS will involve account reporting requirements that would allow FINRA to collect, on a standardised, automated and regular basis, account information, as well as account activity and security identification information that a firm maintains as part of its books and records. It will allow FINRA to run analyses that identify ‘red flags’ to do with sales practice misconduct.  The $1m should be moved to $3-5 million. Also, you shouldn’t be allowed to sell a 90-year-old a variable annuity that has a death feature!

SEC and FINRA suitability rules are numerous. When an HNW individual comes to a securities house, you must ask ‘why weren’t they handling their own accounts and wealth?’ They’re coming to a financial planner because they don’t know what to do. I dislike the term ‘HNW’ and like the term ‘accredited investors.’ The SEC and FINRA do have an HNW category and they regulate them more lightly but every bit of advertising you want to do to senior citizens has to go by FINRA. If you are doing it, you’ll get a visit every year. A lot of people prey on these people. It is a mistake to treat someone as an HNW, unless he’s been trading options all his life. They still try! You can even receive an SEC reward for stopping a fraudster, although not if you’re a compliance person, because then you’re just doing your job.