Tuesday, September 1, 2009

SEC Chairpersons Need Non-financial Private Sector Experience: A Private Cash For Clunkers Program Would Violate SEC Rules

Mary Schapiro, the SEC Chairperson, needs to get out and get some private sector, non-financial firm experience. She recently issued a letter to CEOs of brokerage firms that reminds brokerage firms not to allow their brokers to engage in the normal sales practices of any other industry.

In fact, automobile dealers participating in the cash for clunkers program would violate SEC rules, if they were brokers under SEC supervision.

The letter states:
Certain forms of potential compensation may carry with them enhanced risks to customers. Some types of enhanced compensation practices may lead registered representatives to believe that they must sell securities at a sufficiently high level to justify special arrangements that they have been given. Those pressures may in turn create incentives to engage in conduct that may violate obligations to investors. For example, if a registered representative is aware that he or she will receive enhanced compensation for hitting increased commission targets, the registered representative could be motivated to churn customer accounts, recommend unsuitable investment products or otherwise engage in activity that generates commission revenue but is not in investors' interest.
Schapiro believes motivating brokers to make sales targets is a bad practice. Brokers might churn accounts, recommend unsuitable investments or generate sales not in the investor's interest.

Of course, any business owner and seller of any non-perishable product tries to increase sales to a higher level than would occur just by replacement due to wear and tear. The entire fashion industry relies on the concept that clothes will be replaced more often due to fashion changes than due to wear. Many household products rely on style changes for increased sales beyond replacement needs. People understand that when they buy new products before the old ones wear out, the price of the item is paying for the salaries of sales workers and others and increasing the revenues and profit of the company. Why do people need to be prevented from buying new things if they are financial products and there is no fraud?

The automobile industry builds cars that car last for more than ten years but attempts to get people to buy new cars every three years or so and to take out auto loans to do it. The entire Cash for Clunkers program is based on the concept of increasing sales of cars by getting otherwise drivable cars off the road. In fact, it is a requirement of the program that the car be recently registered. Unregistered cars were not wanted. Is it in the best interest of the buyer to take on new debt to replace an existing usable car? It is not under SEC rules.

If the clothing salesperson tells you those clothes look terrific on you, but your friends think they make you look hideous, the salesperson probably violated Schapiro's selling rules for not having your putting your best interest first.

In no other industry, except maybe banking, do we have so many nonsensical, economically distorted, anti-business rules that serve no other purpose than allow the SEC to be paternalistic and unnecessarily protective.

If the SEC raised a child, the child would be in encased in protective material to prevent every nick and scrape from occurring. Every word spoken to the child would be reviewed before the child heard them to ensure that the child did not get emotionally hurt, offended or learn an incorrect fact.

Does the SEC, as it is configured today, really continue to serve any useful purpose? Do we really need another consumer financial protection agency, as proposed by President Obama, to extend the concept of paternalistic government? We need to stop viewing our citizens as childlike.

Read the complete letter here.

Read the SEC press release here

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