A senior official at the Financial Industry Regulatory Authority (FINRA) testified before the US Senate Banking Committee on August 17 that Robert Allen Stanford's alleged fraud highlights the need to plug regulatory gaps. Daniel Sibears, who serves as executive vice president of member regulation programs for FINRA, argued that the creation of a separate regulatory organization for investment advisers would augment the Securities and Exchange Commission's ability to oversee those financial firms and enhance protections customers of investment advisers.
The SEC charged Stanford and his "complex web" of companies with orchestrating a multi-billion dollar fraud involving misleading sales of certificates of deposit and a proprietary mutual fund wrap program. Sibears stated that Stanford's broker-dealer was the subject of several complaints and FINRA disciplinary actions in recent years. However, limitations to FINRA's jurisdiction prevented it from effectively following up on the complaints and tips it received.
For example, FINRA received a number of claims from a former Stanford employee in the course of an arbitration initiated by Stanford. The allegations were not investigated at the time due to a FINRA policy of only investigating customer complaints, a policy that has since been changed. Sibears explained that, even had FINRA's policy been different at the time the allegations were made, FINRA's and the SEC's inability to compel the necessary evidence from the foreign bank affiliate "would have served as a barrier to investigating the allegations."
Sibears noted that Stanford's advisory arm also operated outside FINRA's jurisdiction. "Such limitations are frustrating in practice," Sibears testified. "No regulator can be happy with the status quo."
FINRA Chief Executive Officer Rick Ketchum has repeatedly pushed for a separate investment adviser regulatory organization. The Obama administration proposals and congressional discussions have focused on subjecting broker-dealers providing investment advice to the same fiduciary standards as investment advisers, and not on additional oversight or changing the regulatory regime for existing investment advisers.
Sibears prepared testimony: available here (PDF)
Story: FINRA official says Stanford case highlights need to fill regulatory gaps, 41 Sec. Reg. L. Rep. 1567 (Aug. 24, 2009)