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FINRA Is Supposed To Police The Market

By Larry Johnson on April 29, 2009 at 5:50 PM in Current Affairs, Economy, FINRA

Larry Doyle first wrote about the fact that FINRA had invested in Auction Rate Securities on January 16, 2009. At that point, and in light of the softball questioning accorded Mary Schapiro in her nomination process as new head of the SEC, Larry wrote, “Let’s Really Question Ms. Schapiro.”

Larry pursued this story with a number of major media outlets and is thrilled to have Bloomberg News break the story. Larry highlights this morning, “FINRA Is Supposed to Police the Market.” This current piece (published below) covers Bloomberg’s story, which includes quotes from Ms. Schapiro and investors still frozen with Auction Rate Securities. Larry’s piece also includes a link to his entire coverage of this ongoing story (“Does The Palace Guard Have No Clothes?“).

Larry highlights the need for Congress to address the inherent conflicts embedded in a self-regulatory organization (SRO) overseeing Wall Street.

Kudos, Larry!!!!

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I have written extensively about FINRA’s ownership of Auction Rate Securities over the last few months. This morning Bloomberg reports, FINRA Oversees Auction-Rate Arbitrations After Exiting Market.

This Bloomberg article (I am humbled by Bloomberg quoting me in the story) answers a number of questions I have raised, while also opening the door to other issues needing to be addressed:

1. Was FINRA blinded – if not totally conflicted – in addressing the trading, selling, and marketing of Auction Rate Securities? Try 862 million times.

2. Was FINRA lucky, prescient, or well informed in the timing of the sale of their own Auction Rate Securities? We may never know but given that their first “guidance for investors” was not published until after the market had totally frozen, they certainly did not provide much investor protection as is their mandate.

3. I have also written, and Bloomberg highlights, that FINRA had money invested in hedge funds. In light of market developments, I think the public has a right to know which hedge funds. Will FINRA release that information?

4. I unearthed all the information of FINRA’s investment activities from its 2007 Annual Report published in April 2008. I am still waiting for FINRA to release its 2008 Annual Report and wonder why it seems to be delayed.

5. As we move forward with likely regulatory changes for Wall Street, I believe the very nature of a self-regulatory organization funded by the banks it is charged to oversee presents massive conflicts of interest. This specific situation of FINRA’s investment in ARS is indicative of those conflicts. Will Congress have the courage to address these conflicts and serve the public interest in the process?

“To me it smacks of incompetence and negligence,” said Larry Doyle, who worked 23 years on Wall Street and runs a Web site called Sense on Cents. “Finra is supposed to police the market.”

I view FINRA as akin to the palace guard. The question remains, Does The Palace Guard Have No Clothes?

LD