Consumer fraud prevention

It is a sad fact of life that every investment market is infested with criminals eager to separate the potential investor from his or her money.  The derivatives market is not an exception.  Cold calls from glib, high-pressured, fraudsters too often dupe victims who can ill afford even small losses -- retirees living on fixed incomes, for example.  Hallmarks of these scams are offers of extremely high, guaranteed returns in investments that must be funded immediately to capitalize on favorable market conditions.  These scams often purport to take advantage of anticipated changes in market conditions that are widely known and commonly discounted by the markets, such as high gasoline prices during summer holidays or higher heating oil prices during the winter. 

The CFTC has a useful web-page under the "Consumer Protection" tab on its home page.  The link is http://www.cftc.gov/ConsumerProtection/FraudAwarenessPrevention/index.htm#warnings
I strongly recommend that anyone who has been solicited to participate in a derivatives investment vehicle read and understand this information first.

The CFTC consumer protection tab also contains useful information about companies and individuals who have been sanctioned by the Commission and other resources that can be used to help verify the bona fides of someone soliciting your investment.

Agencies need leadership

As the second Obama Administration is being prepared, we have numerous qualified candidates to assume direction of our critical financial regulatory agencies.  I hope that when these candidates are vetted, however, their ability to supply internal leadership to the agencies they will join is carefully considered.  We are fairly well aware of the qualifications needed regarding a candidate's ability to contribute publicly to the agencies' missions.  But the agencies themselves are in a high degree of flux and their effectiveness, especially in times of uncertain budgetary support, turns largely on the culture instilled by top management.

Many of the agencies have had their authority vastly expanded in the last several years, and some of them did not even exist until recently.  Bidding against the private sector for top talent will make recruiting and retaining high quality staff extremely difficult.  Maintaining morale and a sense of purpose is difficult when constricted budgets limit even the most basic support --travel and continuing education, for example.  Being a public advocate for the mission of an agency while also leading agency personnel is a huge challenge -- probably too great for all but the most exceptional leaders.  But good leaders are also good at choosing capable lieutenants, giving them scope to operate, and holding them accountable for results. 

I suggest that those who judge the potential of our incoming crop of agency officials will ask probing questions about how the candidates will instill and maintain a commitment to the agency mission by those in the ranks who will do the most to accomplish it.

Update:  Concerning my post of October 7, discussing the need for more flexible remedies for violations of the law, the University of Maryland Carey Law School has posted video of its recent, superb 2012 Ward Kershaw Symposium, "Too Big to Jail: Roadblocks to Regulatory Enforcement," available at this link.

What is the value of internal compliance systems?

Internal systems of compliance monitoring have recently presented us with an alarming collection of spectacular failures.  For one example among many, the compliance office at Barclays was alerted to irregularities in the Bank's submissions to the calculation of LIBOR, and a senior compliance officer promised to raise the issue with senior management, but did not do so. 

Internal compliance systems suffer from intrinsic conflicts of interest.  Like the Chancellor of England, who served as the "King's conscience," compliance officers serve as the conscience of the company.  But the King could, and sometimes did, behead the Chancellor -- a lesson that is not lost on modern compliance officers.  On the other hand, truly independent monitors of corporate probity are cumbersome, expensive, and may lack expertise and inside knowledge of the corporation. 

Until corporate incentives -- mainly, but not exclusively, executive compensation -- are more closely aligned with ethical practices and legal constraints, the role of the corporate compliance program will be relegated to overseeing routine technical matters and correction of lower-level ethical lapses.  Stronger protections for whistleblowers, carefully targeted criminal prosecutions, meaningful statutory revisions to the financial system, and similar techniques, must all be brought to bear in a coordinated manner if these incentives are to be changed in an effective way.  It remains to be seen if recent efforts in these areas are sufficient and sufficiently timely.  

It is not in the nature of organizational compliance programs to be crowns of laurels, but neither can we tolerate them being corporate fig leaves.