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A ‘Flawed’ SEC Program [A Retrospective “April Fool’s Day” Analysis]

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SEC Failed to Rein in Investment Banks [April Fool’s Day – 2015]

By Ben Protess, ProPublica – October 1, 2008 5:01 pm EDT

Editor’s Note: This investigative report was first published ten years ago. And so, we ask you to consider – on this April Fool’s Day 2019 – how [if] things have changed since then?  

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The Securities and Exchange Commission [SEC] last week abolished the special regulatory program that it applied to Wall Street’s largest investment banks. Known as the “consolidated supervised entities” program, it relaxed the minimum capital requirements for firms that submitted to the commission’s oversight, and thus, in the view of some experts, helped create the current global financial crisis.

But, the SEC’s decision to ax the program currently affects no one, since three of the five firms that voluntarily joined the program previously collapsed and the other two reorganized.

The Decision – 18 Months Ago

The decision came last Friday, one day after the commission’s inspector general released a report [1] (PDF) detailing the program’s failed oversight of Bear Stearns before the firm collapsed in March. The commission’s chairman, Christopher Cox, a longtime opponent of industry regulation, said in a statement [2] that the report “validates and echoes the concerns” he had about the program, which had been voluntary for the five Wall Street titans since 2004.

The report found that the SEC division that oversees trading and markets was “not fulfilling its obligations. “These reports are another indictment of failed leadership,” said Sen. Charles Grassley (R-Iowa) who requested the inspector general’s investigation.

The SEC program, approved by the commission in 2004 under Cox’s predecessor, William Donaldson, allowed investment banks to increase their amount of leveraged debt. But, there was a tradeoff: Banks that participated allowed their broker-dealer operations and holding companies to be subject to SEC oversight. Previous to 2004, the SEC only had authority to oversee the banks’ broker dealers.

Longstanding SEC rules required the broker dealers to limit their debt-to-net-capital ratio and issue an early warning if they began to approach the limit. The limit was about 15-to-1, according to the inspector general report, meaning that for every $15 of debt, the banks were required to have $1 of equity.

But the 2004 “consolidated supervised entities” program revoked these limits. The new program also eliminated the requirement that firms keep a certain amount of capital as a cushion in case an asset defaults.

Bear Sterns

As a result, the oversight program created the conditions that helped cause the collapse of Bear Stearns. Bear had a gross debt ratio of about 33-to-1 prior to its demise, the inspector general found. The inspector general also found that Bear was fully compliant with the programs’ requirements when it collapsed, which raised “serious questions about whether the capital requirement amounts were adequate,” the report said.

The report quoted Lee Pickard, a former SEC official who helped write the original debt-limit requirements in 1975 and now argues the 2004 program is largely to blame for the current Wall Street crisis.

“The SEC gave up the very protections that caused these firms to go under,” Pickard said in an interview with ProPublica. “The SEC in 2004 thought it gained something in oversight, but in turn it gave up too much public protection. You don’t bargain in a way that causes you to give up serious protections.”

Pickard, now a senior partner at a Washington, D.C.-based law firm, estimated that prior to the 2004 program most firms never exceeded an 8-to-1 debt-to-net capital ratio.

The previous program “had an excellent track record in preserving the securities markets’ financial integrity and protecting customer assets,” Pickard wrote [3] in American Banker this August. The new program required “substantial SEC resources for complex oversight, which apparently are not always available.”

Asked if he believes the 2004 program was a direct cause of the current crisis, Pickard told ProPublica, “I’m afraid I do.”

The New York Times reported Saturday that the SEC created the program after “heavy lobbying” for the plan from the investment banks. The banks favored the SEC as their regulator, the Times reported, because that let them avoid regulation of their fast-growing European operations by the European Union, which has been threatening to impose its own rules since 2002.

SEC Spokesman

A SEC spokesman declined to comment for this article, referring inquires to Chairman Cox’s statement. In the statement, Cox admitted the program “was fundamentally flawed from the beginning.” But Cox, a former Republican congressman from California, offered mild support for the program as recently as July when he testified before the House Committee on Financial Services. The program, among other oversight efforts, Cox said, had “gone far to adapt the existing regulatory structure to today’s exigencies.” He added that legislative improvements were necessary as well, and has since told Congress that the program failed.

More Questions

So why did the commission not end the program sooner? Some say that the program’s flaws only recently became apparent. “As late as 2005, the program seemed to make a lot of sense,” said Charles Morris, a former banker who predicted the current financial crisis in his book written last year, The Trillion Dollar Meltdown [4]. The SEC “didn’t know it didn’t work until we had this stress.”

And leverage does not always spell trouble. In a strong economy, leverage can also be attractive because it can increase the profitability of banks through lending.

In his recent statement, Cox said the inspector general’s findings reflect a deeper problem: “the lack of specific legal authority for the SEC or any other agency to act as the regulator of these large investment bank holding companies.”

Secretary of the Treasury Henry Paulson has called for a refining of the regulatory structure to reflect the global and interconnected nature of today’s financial system. In any case, the program’s failure can be seen in the disappearance of the participating banks: Bear Stearns, Lehman Brothers, Merrill Lynch, Morgan Stanley and Goldman Sachs.

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Assessment

Merrill Lynch’s leverage ratio was possibly as high as 40-to-1 this year and Lehman Brothers faced a ratio of about 30-to-1, according to Bloomberg [5].

The Fed and Treasury Department forced Bear Stearns into a merger with JPMorgan Chase in March. And the last two months, Lehman Brothers went bankrupt and sold their core U.S. business to British bank Barclays PLC, and Merrill Lynch was acquired by Bank of America. Morgan Stanley and Goldman Sachs, the two remaining large independent investment banks, changed their corporate structures to become bank holding companies, which are regulated by the Federal Reserve.

As these banks have folded or reorganized over the last several months, the Federal Reserve has largely assumed the SEC’s oversight responsibilities, though the commission will still have the power to regulate broker dealers.

Original Essay: http://www.propublica.org/article/flawed-sec-program-failed-to-rein-in-investment-banks-101

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The Computers are now Ruling Wall Street

The computers are now ruling Wall Street

By MIT Technology Review

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Over the past five years, human hedge fund managers have averaged 4.3 percent returns.

Funds that rely on algorithms to pick stocks, on the other hand—so-called quant-focused funds—have brought in 5.1 percent

Assessment: So, what gives?

More: The Massacre of Hedge Fund Business

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On Wall Street’s Suitability, Prudence and Fiduciary Accountability

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Financial Advisor’s are Not Doctors!

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Dr. David E. Marcinko FACFAS MBA CMP™ MBBS

THRIVE-BECOME A CMP™ Physician Focused Fiduciary

http://www.CertifiedMedicalPlanner.org

Financial advisors don’t ascribe to the Hippocratic Oath.  People don’t go to work on “Wall Street” for the same reasons other people become firemen and teachers.  There are no essays where they attempt to come up with a new way to say, “I just want to help people.”

Financial Advisor’s are Not Doctors

Some financial advisors and insurance agents like to compare themselves to CPAs, attorneys and physicians who spend years in training and pass difficult tests to get advanced degrees and certifications. We call these steps: barriers-to-entry. Most agents, financial product representatives and advisors, if they took a test at all, take one that requires little training and even less experience. There are few BTEs in the financial services industry.

For example, most insurance agent licensing tests are thirty minutes in length. The Series #7 exam for stock brokers is about 2 hours; and the formerly exalted CFP® test is about only about six [and now recently abbreviated]. All are multiple-choice [guess] and computerized. An aptitude for psychometric savvy is often as important as real knowledge; and the most rigorous of these examinations can best be compared to a college freshman biology or chemistry test in difficulty.

Yet, financial product salesman, advisors and stock-brokers still use lines such as; “You wouldn’t let just anyone operate on you, would you?” or “I’m like your family physician for your finances.  I might send you to a specialist for a few things, but I’m the one coordinating it all.”  These lines are designed to make us feel good about trusting them with our hard-earned dollars and, more importantly, to think of personal finance and investing as something that “only a professional can do.”

Unfortunately, believing those lines can cost you hundreds of thousands of dollars and years of retirement. 

More: Video on Hedge Fund Manager Michael Burry MD

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Suitability Rule

A National Association of Securities Dealers [NASD] / Financial Industry Regulatory Authority [FINRA] guideline that require stock-brokers, financial product salesman and brokerages to have reasonable grounds for believing a recommendation fits the investment needs of a client. This is a low standard of care for commissioned transactions without relationships; and for those “financial advisors” not interested in engaging clients with advice on a continuous and ongoing basis. It is governed by rules in as much as a Series #7 licensee is a Registered Representative [RR] of a broker-dealer. S/he represents best-interests of the firm; not the client.

And, a year or so ago there we two pieces of legislation for independent broker-dealers-Rule 2111 on suitability guidelines and Rule 408(b)2 on ERISA. These required a change in processes and procedures, as well as mindset change.

Note: ERISA = The Employee Retirement Income Security Act of 1974 (ERISA) codified in part a federal law that established minimum standards for pension plans in private industry and provides for extensive rules on the federal income tax effects of transactions associated with employee benefit plans. ERISA was enacted to protect the interests of employee benefit plan participants and their beneficiaries by:

  • Requiring the disclosure of financial and other information concerning the plan to beneficiaries;
  • Establishing standards of conduct for plan fiduciaries ;
  • Providing for appropriate remedies and access to the federal courts.

ERISA is sometimes used to refer to the full body of laws regulating employee benefit plans, which are found mainly in the Internal Revenue Code and ERISA itself. Responsibility for the interpretation and enforcement of ERISA is divided among the Department Labor, Treasury, IRS and the Pension Benefit Guarantee Corporation.

Yet, there is still room for commissioned based FAs. For example, some smaller physician clients might have limited funds [say under $100,000-$250,000], but still need some counsel, insight or advice.

Or, they may need some investing start up service from time to time; rather than ongoing advice on an annual basis. Thus, for new doctors, a commission based financial advisor may make some sense. 

Prudent Man Rule

This is a federal and state regulation requiring trustees, financial advisors and portfolio managers to make decisions in the manner of a prudent man – that is – with intelligence and discretion. The prudent man rule requires care in the selection of investments but does not limit investment alternatives. This standard of care is a bit higher than mere suitability for one who wants to broaden and deepen client relationships. 

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Prudent Investor Rule

The Uniform Prudent Investor Act (UPIA), adopted in 1992 by the American Law Institute’s Third Restatement of the Law of Trusts, reflects a modern portfolio theory [MPT] and total investment return approach to the exercise of fiduciary investment discretion. This approach allows fiduciary advisors to utilize modern portfolio theory to guide investment decisions and requires risk versus return analysis. Therefore, a fiduciary’s performance is measured on the performance of the entire portfolio, rather than individual investments 

Fiduciary Rule

The legal duty of a fiduciary is to act in the best interests of the client or beneficiary. A fiduciary is governed by regulations and is expected to judge wisely and objectively. This is true for Investment Advisors [IAs] and RIAs; but not necessarily stock-brokers, commission salesmen, agents or even most financial advisors. Doctors, lawyers, CPAs and the clergy are prototypical fiduciaries. 

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More formally, a financial advisor who is a fiduciary is legally bound and authorized to put the client’s interests above his or her own at all times. The Investment Advisors Act of 1940 and the laws of most states contain anti-fraud provisions that require financial advisors to act as fiduciaries in working with their clients. However, following the 2008 financial crisis, there has been substantial debate regarding the fiduciary standard and to which advisors it should apply. In July of 2010, The Dodd-Frank Wall Street Reform and Consumer Protection Act mandated increased consumer protection measures (including enhanced disclosures) and authorized the SEC to extend the fiduciary duty to include brokers rather than only advisors, as prescribed in the 1940 Act. However, as of 2014, the SEC has yet to extend a meaningful fiduciary duty to all brokers and advisors, regardless of their designation.

The Fiduciary Oath: fiduciaryoath_individual

Assessment 

Ultimately, physician focused and holistic “financial lifestyle planning” is about helping some very smart people change their behavior for the better. But, one can’t help doctors choose which opportunities to take advantage of along the way unless there is a sound base of technical knowledge to apply the best skills, tools, and techniques to achieve goals in the first place.

Most of the harms inflicted on consumers by “financial advisors” or “financial planners” occur not due to malice or greed but ignorance; as a result, better consumer protections require not only a fiduciary standard for advice, but a higher standard for competency.

The CFP® practitioner fiduciary should be the minimum standard for financial planning for retail consumers, but there is room for post CFP® studies, certifications and designations; especially those that support real medical niches and deep healthcare specialization like the Certified Medical Planner™ course of study [Michael E. Kitces; MSFS, MTax, CLU, CFP®, personal communication].

Being a financial planner entails Life-Long-Learning [LLL]. One should not be allowed to hold themselves out as an advisor, consultant, or planner unless they are held to a fiduciary standard, period. Corollary – there’s nothing wrong with a suitability standard, but those in sales should be required to hold themselves out as a salesperson, not an advisor.

The real distinction is between advisors and salespeople. And, fiduciary standards can accommodate both fee and commission compensation mechanisms. However; there must be clear standards and a process to which advisors can be held accountable to affirm that a recommendation met the fiduciary obligation despite the compensation involved.

Ultimately, being a fiduciary is about process, not compensation.

More: Deception in the Financial Service Industry

Full Disclosure:

As a medical practitioner, Dr. Marcinko is a fiduciary at all times. He earned Series #7 (general securities), Series #63 (uniform securities state law), and Series #65 (investment advisory) licenses from the National Association of Securities Dealers (NASD-FINRA), and the Securities Exchange Commission [SEC] with a life, health, disability, variable annuity, and property-casualty license from the State of Georgia.

Dr.Marcinko was a licensee of the CERTIFIED FINANCIAL PLANNER™ Board of Standards (Denver) for a decade; now reformed, and holds the Certified Medical Planner™ designation (CMP™). He is CEO of iMBA Inc and the Founding President of: http://www.CertifiedMedicalPlanner.org

More: Enter the CMPs

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[PHYSICIAN FOCUSED FINANCIAL PLANNING AND RISK MANAGEMENT COMPANION TEXTBOOK SET]

  Risk Management, Liability Insurance, and Asset Protection Strategies for Doctors and Advisors: Best Practices from Leading Consultants and Certified Medical Planners™  Comprehensive Financial Planning Strategies for Doctors and Advisors: Best Practices from Leading Consultants and Certified Medical Planners™

[Dr. Cappiello PhD MBA] *** [Foreword Dr. Krieger MD MBA]

[Two Newest Books by Marcinko annd the iMBA, Inc Team]

Conclusion

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[PRIVATE MEDICAL PRACTICE BUSINESS MANAGEMENT TEXTBOOK – 3rd.  Edition]

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  [Foreword Dr. Hashem MD PhD] *** [Foreword Dr. Silva MD MBA]

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Walking Around the Financial District in New York

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FinFair 2015

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Great Depression versus Great Recession [A Poll]

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Yesterday versus Today?

The Great Depression is often compared to today’s Great Recession. There are some interesting facts when comparing the Great Depression to the Great Recession. It may even be considered scary when laid out directly in front of you.

The cause of the Great Depression was because people were borrowing too much money, unlike the Great Recession where the banks are lending too much money irresponsibly. Don’t forget that what was once a recession turned into the Great Depression because of unemployment rates reaching 25%, bank failures covering half of all banks, and more.

Both Roosevelt and Obama have used “wall street bankers” as a scapegoat.

View more interesting facts about the Great Depression and Recession by viewing this infographic presented by Payday Loan.

Assessment

Do you think we are going into another Great Depression?

Conclusion

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Health 2.0 Financial Planning for Medical Executive-Post Members

A By-Product of Health 2.0?

By Dr. David Edward Marcinko FACFAS MBA CMP*

[Founder and CEO]

www.MedicalBusinessAdvisors.com

Dr David E Marcinko MBAA decade ago, Editor Gregory J. Kelley of Physician’s MONEY DIGEST and I reported that a 47 year old-doctor with $184,000 annual income would need about $5.5 million dollars for retirement at age 65. Then came the “flash-crash’ of 2007-08, the home mortgage fiasco and the Patient Protection and Accountable Care Act [PP-ACA] of 2010; etc.

No wonder that medical provider career panic is palpable. Much like the new medical home concept, the idea of holistic life planning was born.

Life Planning

Life planning has many detractors and defenders. Formally, life planning has been defined in the following way. 

Financial Life Planning is an approach to financial planning that places the history, transitions, goals, and principles of the client at the center of the planning process.  For the client, their life becomes the axis around which financial planning develops and evolves.

But, for physicians, life planning’s quasi-professional and informal approach to the largely isolated disciplines of medically focused financial planning, was still largely inadequate.

Why? 

Today’s personal financial and practice environment is incredibly more complex than it was in 2007-08, as economic stress from HMOs, Wall Street, liability fears, criminal scrutiny from government agencies, IT mischief from hackers, economic benchmarking from hospitals and the lost confidence of patients all converged to inspire a robust new financial planning 2.0 approach for medical professionals.

Example of a financial planning mistake 

Recall the tale of Dr. Debasis Kanjilal, a pediatrician from New York who put more than $500,000 into the dot.com company, InfoSpace, upon the advice of Merrill Lynch’s star but non fiduciary analyst Henry Bloget.

Is it any wonder that when the company crashed, the analyst was sued, and Merrill settled out of court? Other analysts, such as Mary Meeker of Morgan Stanley, Dean Witter and Jack Grubman from Salomon Smith Barney, were involved in similar fiascos.

Although sad, this story is a matter of public record. Hopefully, doctors now understand that the big brokerage houses that underwrite and recommend stocks may have credibility problems, and that physicians got burned with the adrenalin rush of “self-directed” investment portfolios.

Example of a medical practice management mistake 

Just reflect a moment on colleagues willing to securitize their medical practices a few years ago, and cash out to Wall Street for perceived riches that were not rightly deserved

Where are firms such as MedPartners, Phycor, FPA and Coastal now? A recent survey of the Cain Brothers Physician Practice Management Corporation Index of publicly traded PPMCs revealed a market capital loss of more than 95%, since inception. 

Another Approach?

This disruptive narrative shift was formally noted by the Institute of Medical Business Advisors Inc [iMBA, Inc] and introduced to the medical and financial services industry. This research and corpus of work resulted in hundreds of publications in the Library of Medicine, National Institute of Health (NIH) and the Library of Congress, along with related publications, a dozen textbooks and white papers

http://www.ncbi.nlm.nih.gov/nlmcatalog?term=marcinko

The iMBA approach to financial planning, as championed by the www.CertifiedMedicalPlanner.org professional charter designation, integrates the traditional concepts of fiduciary focused financial planning, with the increasing complex business concepts of medical practice management.

The former ideas are presented in our textbook on financial planning for doctors: Financial Planning for Physicians and Advisors

The later in our companion book: Business of Medical Practice [Edition 3.0]

A textbook for hospital CXOs and physician-executives: Hospitals & Healthcare Organizations

While most issues of risk management, liability and insurance are found in Risk Management and Insurance Strategies for Physicians and Advisors

And, for the perplexed, all definitions are codified in the dictionary glossary Health Dictionary Series

Health 2.0 Paradigm Shift

And so, the ME-P community now realizes that a more integrated approach is needed.  The traditional vision of medical practice management, personal physician financial planning and how they may look in the future are rapidly changing as the retail mentality of medicine is replaced with a wholesale philosophy.

Or, how views on maximizing current practice income might be more profitably sacrificed for the potential of greater wealth upon eventual practice sale and disposition.

Or, how Yale University economist Robert J Shiller warns in “The New Financial Order” [Risk in the 21st Century] that the risk for choosing the wrong healthcare profession or specialty might render physicians obsolete by technological changes, managed care systems or fiscally unsound demographics. 

Physician-Executive

My Assessment

Yet, the opportunity to re-vise the future at any age through personal re-engineering, exists for all of us, and allows a joint exploration of the medicine, business and the meaning and purpose of life.

To allow this deeper and more realistic approach, the advisor and the doctor must build relationships based on fiduciary trust, greater self-knowledge and true medical business and financial enhancement acumen.

Are you up to the task?

Conclusion

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Link: http://feeds.feedburner.com/HealthcareFinancialsthePostForcxos

Speaker: If you need a moderator or speaker for an upcoming event, Dr. David E. Marcinko; MBA – Publisher-in-Chief of the Medical Executive-Post – is available for seminar or speaking engagements. Contact: MarcinkoAdvisors@msn.com

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