FINRA In The News, And Not In A Good Way

From Ulmer’s Broker-Dealer Law Corner Blog
By Alan M. Wolper

It has been said that there’s no such thing as bad publicity, but I wonder if FINRA feels that way after having been featured in a number of less-than-favorable, or at least curious, media stories over the last couple of weeks.

First, two weeks ago, Bruce Kelly of Investment News ran a story with this headline: “Finra Wants To Help The Small Broker-Dealer.” I figured it was a prank, or maybe Bruce had lost a friendly bet to someone and now had to pay up, like when a Chicago Bears fan has to wear a Green Bay Packers jersey for a day in order not to welsh on a bet with his buddy. Indeed, one of my clients forwarded the story to me and told me that the headline was so absurd he initially thought he had found the article on The Onion, rather than Investment News.

I am confident that I don’t have to explain why this idea is so funny. FINRA wanting to help small BDs? Please. Are we talking about the same small BDs that FINRA is rapidly driving out of business through endless regulatory exams with their countless requests for documents and information and OTRs, thereby driving up the cost of compliance to levels that are impossible to maintain? Or maybe with its Enforcement actions, which small firms, unlike the wirehouses, are unable simply to resolve by stroking a six- or seven-figure check?

Given what I know to be the truth about what’s happening to small firms, it came as no surprise that only a week after Bruce’s article on FINRA’s supposed desire to help those firms, Investment News published another one, based on statistics released by FINRA, called “Finra’s stats reveal an industry in decline.” That article was not funny or absurd, but chillingly accurate. The number of BDs is down, and continues to drop. Same with the number of branches. Same with the number of reps. Really, the only thing that isn’t down is FINRA’s operating budget.

Which leads us to the next two stories. The first dates back to last month, reporting on Robert Cook’s testimony before the House Committee on Financial Services, specifically the Subcommittee on Capital Markets, Securities, and Investment. Not sure how well that went for Mr. Cook. Consider this quote by Bill Huizenga (R-MI), the Chairman of the Subcommittee:  “As the primary regulatory authority for broker-dealers, FINRA plays an integral role in ensuring that capital markets are fair and efficient while protecting investors and other market participants. However, critics have noted that for the last decade, FINRA has engaged in mission creep and transformed itself from a traditional SRO into a quasi-governmental regulator more akin to a fifth branch of government, or a ‘deputy SEC.’” According to the Committee’s website, one of two key takeaways from that testimony was this: “Congress must make sure that FINRA, as a self-regulatory organization (SRO), remains accountable and transparent to those it regulates while being flexible to react and respond to changes in the market.”

The second story, from earlier this week, follows up on that takeaway regarding transparency: “SEC Nominees Jackson And Peirce Blast Finra’s Transparency During Hearing.” The article captures the highlights of the meeting of the Senate Banking Committee, held to consider the nominations of Robert Jackson and Hester Peirce to the SEC, but you can watch it yourself (start at one hour into the recording for the good stuff), if you are so inclined. Here is what Ms. Peirce had to say about FINRA, small BDs, and transparency in response to a question posed by Senator Rounds on behalf of the Committee:

“I do think that FINRA needs to be reviewed.”

“I worry about transparency, too. I’ve heard from small firms that have concerns about their ability to be heard by FINRA.”

“We’re seeing the number of small firms drop pretty dramatically and so one has to ask, is that related to the fact that the regulatory burden is not properly calibrated.”

“We want to make sure the communications between FINRA and its regulated entities is such that when someone sees something bad happening in the industry, they can go to FINRA without being scared that that’s going to train FINRA’s attention on a firm that’s fully compliant and doing things well.”

“I worry that the atmosphere now is one of . . . you keep your head low and you do your thing and you’re not even willing to raise issues when you see real fraud happening.”

Mr. Jackson echoed her concerns about transparency, although he was more focused on how well FINRA has publicized the number of registered reps who are still working in the industry despite multiple disclosures on their records.

Is it any wonder that small BDs are an endangered species? Even potential SEC Commissioners whose nominations have yet to be approved are already well aware that FINRA doesn’t listen to such firms, that it is out of touch with small BDs, who are literally afraid of being regulated out of business by FINRA. All this despite Mr. Cook’s “listening tour” and his “FINRA 360” initiative. I remain hopeful that something will change, that there will come a time when I run across a headline like Bruce’s that touts FINRA’s support of small BDs and not laugh out loud. But, clearly, we are not there yet. FINRA has a long way to go to gain the trust and confidence of the small member firms that it regulates, and it will take actions, not words, to make that happen.