Responsibility – Government The Last Line of Defense

The Madoff Ponzi investment debacle is the latest scandal in which “somebody” should have known. The oversight didn’t work: “Where was the government?” is the cry on primetime news and from investors. The government did have a regulatory role for the broker/dealers; however, the expectation that the “government” is solely and totally responsible for protecting everyone and every dollar from predators is overly optimistic at best. There is some reasonable expectation of protection, but each of us has a responsibility for due diligence, reasonable behavior, and oversight for whom we do business with. We also bear a responsibility for understanding that when opportunities knock that seem too good to be true … they usually are.

Knock Knock: Who’s There? Opportunity

Many, many times each year I am approached by someone who has passed the exams and other credentialing criteria to become a broker/dealer. This doesn’t mean that I automatically let them in the door to do business with me. Passing the exams is the minimum criteria for a certain category of transactions or business activity. In fact, as time has gone by I’ve learned that there are many people with the credentials that have little if any idea where the line is for what they are allowed to do in a deal and what they aren’t. There have been many calls to the regulatory agencies and many more e-mails sending the proposed “deal” documents to regulators and attorneys to review for the legal and ethical rules of what is and isn’t allowed. When I’ve rejected the proposals and included the opinions of legal counsel and/or the appropriate regulatory agency (SEC, etc.) the responses have all too frequently been “But we do this all the time” or “Everyone does this, it is no big deal!” Well, yes it is.

The “Big Deal” of “Everyone Does It”

As teenagers the (often whiny) argument to parents of “but all our friends are doing it” didn’t hold water because it wasn’t logical. It didn’t provide any real support for taking an action. So parents rejected it, typically with a line like “If all your friends were jumping off a cliff would you want to do that too?” Well would you? The government and its regulators are not our parents and while the regulators are charged with monitoring transactions and regulating activities, they do have to place a degree of reliance on the auditors, financial and compliance officers, and other internal controls systems in the organizations they monitor. What is failing is partially the regulatory process and wholly the ethical codes of conduct, the audit oversight, and the personal responsibility and accountability of the people engaged in the business processes.

Individual Accountability and Responsibility: Process Knowledge

If you don’t understand the process you are engaged in, whether it’s investments, real estate deals, or businesses, then it is time to learn at least the basics so that you can have fundamental knowledge to protect yourself and your interests. Everyone who engages in activities with an inability to read the “deal” documents exposes themselves to tremendous risk of loss. The first step is to have knowledgeable advisors that are reputable AND educate YOU by asking them questions, reading books, and getting diversified advice from other sources. Second, don’t put all your eggs (e.g., assets, trust) in one basket. By using multiple advisors, investment accounts, etc. you diversify your risk and increase the ability to detect any issues. Also, you aren’t tied to any one particular advisor if things start to go wrong.

The third step: Make sure you stay involved and aware. We get busy. We get complacent. DON’T! Establish a schedule that is workable for you to review your information (e.g., quarterly) and make an appointment with yourself to go over all your records, reports, and formulate questions that you have. Then set up an appointment to ask the questions and get answers! Learn. Learn. LEARN. No question is too simple. No question is too basic. No question is stupid. Even if you’ve asked it before, and need to ask it again, and again, and again: Do it!

Watch, Learn, Protect, and Report

If you don’t know and are concerned, then make a call. The rules and regulations as to what is allowed, what is legal, what is you fill in the blank change often. The regulatory agencies, bar associations, accounting professional groups, and so on are available for you to talk to. If you don’t know if your advisor is acting in accordance with his/her code of conduct, then visit the website for the credentialing agency and read the rules. If you’re still not sure, make a call and ask for an opinion. The state bar associations, state CPA boards, Securities and Exchange Commission (SEC), Financial Industry Regulatory Authority (FINRA), and other licensing groups all have staff available to answer questions and take complaints. We are all part of the monitoring, enforcement, and compliance system. If we don’t watch, learn, and report, then who will protect our assets and our economy? It is too big of a job to rely solely on governmental detection systems.

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