Investment firms struggle with the conflict between generating profit from their stockbrokers and industry regulatory compliance. Which do you think wins?
investment firms fail to protect investors
Big name brokerage firms spend tens of millions annually to project an image of safety, strength, and integrity to investors. The truth about the securities industry is as far from that image as east is from west. Some of the investment firms that appear most often during the commercials run during golf and tennis tournaments are among the worst in the industry at protecting investors from the greed or indifference of individual stockbrokers.
Take A.G. Edwards, for example. In December 2007, Massachusetts Secretary of the Commonwealth William Galvin filed an enforcement action against investment firm A.G. Edwards & Sons, Inc., that reveals the central flaw in the securities industry’s system of self-regulation. Every brokerage firm is required to have a system of compliance controls designed to detect and prevent violations of the securities laws. The system assumes that each layer of management will keep an eye out for potential customer abuse and act promptly to stop it. Nice theory, but far too often that idea is left in the realm of the theoretical, as this case illustrates.
According to Secretary Galvin, A.G. Edwards stockbroker Howard “Buck” McHugh aggressively solicited early retirees from Boston Edison to take lump sum distributions of their retirement savings in connection with the company’s early retirement initiative and promptly began trading the customers’ assets for his own benefit, not theirs. When McHugh’s branch manager noticed the conduct, he restricted McHugh’s trading. McHugh promptly complained over his manager’s head to regional manager Bill Branson who scheduled a trip to the Boston branch to address the situation.
According to Secretary Galvin, rather than affirm the branch manager, Branson chastised him and told him to "take it easy" on McHugh. The rationale is telling. In sworn testimony, Branson stated “[Buck’s] production was substantial, it might have been one of the highest in the office, I mean, it was a large number.”
The case highlights the constant clash between profit-generating production from their stockbrokers and industry regulatory compliance. Guess which one of those is left standing when the two collide. Baby boomers and senior citizens must always remember that, for all their slick advertising, big name brokerage firms are much less interested in customer protection than in customer commissions. If investment firms have to sacrifice the pursuit of one to have the other, which do you think will survive? Baby boomers and senior citizens must take independent action to protect themselves against an industry that often seems only incidentally concerned with their welfare.
