| 25 September 2009

The self-regulating body that oversees all 4,800 brokerage firms and over 647,000 registered representatives lost 27% of its own money on bad investments last year, according to reports in the Wall Street Journal. And we're not talking chump change, either. The Financial Industry Regulatory Authority manages more than $1.6 billion, most of which they received from holdings in the NASDAQ stock market (NDAQ).

With 2,800 employees FINRA does more than just process paperwork, regulate member firms and protect investors. According to their own Web site, "FINRA believes investor protection begins with education." On the site investors can check their broker, learn how to avoid scams and better understand college savings plans. Investor can also learn how to diversify their portfolios to reduce risk.

FINRA's fund managers obviously didn't stop to read much of this information. Nor did they partake in much of the education projects created by the FINRA Investor Education Foundation, which has doled out $46 million in grants to-date to fund education projects.

Granted, much of the money is handled by outside managers and consultants. But the ultimate responsiblity for the fund lies with FINRA, and we suggest they could have gained some helpful insights from this little ditty about avoiding problems with your broker.

Cheeky comments aside, the firm is finding itself in honest-to-goodness hot water with its members. According to the Journal article, some firms are filing lawsuits against FINRA claiming negligence and recklessness. FINRA, they claim, forgot to stay true to its capital preservation strategy and instead focused on high-risk strategies that didn't pan out.

FINRA has always found itself in a tough spot, regulating the very firms that fund it. Earlier this year we reported on FINRA's efforts to warn investors about the risks of leveraged ETFs. They later backpeddled on those warnings under pressure from firms and issuers, such as Direxion, which manages the Daily 3x Bear Fund (FAZ), among others. In the end, FINRA decided to play it safe and stood behind the broad shoulders of the SEC to issue a joint statement on the risks of leveraged ETFs.

FINRA fund managers have decided to play it safe since their shellacking last year. The Dow Jones Industrial Average has been on a tear this year, increasing 48% since its lows in 2008. And FINRA? Well, they're claiming a very safe strategy that has netted them a scant 12% thus far. Better safe and up than risky and down. That's what we hear anyway.