Washington INsider

Washington INsiderblog

Mark Schoeff Jr. looks at what's really happening on Capitol Hill - and the upshot for advisers.

Finra's 'independent regulator' label gets closer scrutiny during SRO debate

Moniker used for years by agency may help its effort to oversee advisers

Aug 15, 2012 @ 3:08 pm

By Mark Schoeff Jr.

As the Financial Industry Regulatory Authority Inc. begins its sixth year of existence, the perception of its relationship to the market it oversees has taken on new importance.

Formed on July 30, 2007, from the consolidation of the National Association of Securities Dealers Inc. and the regulatory arm of the New York Stock Exchange, Finra earlier this week elected three new board members and reappointed three others.

The composition of the 22-member panel – with 11 public governors, 10 industry governors and Finra chief executive Rick Ketchum holding the other seat – is one reason that Finra describes itself as “the largest independent regulator for all securities firms doing business in the United States.” It has a majority public board.

This “independence” label has drawn new scrutiny in recent months, after legislation that would establish one or more self-regulatory organizations for investment advisers was introduced in the House. Finra is lobbying fiercely on behalf of the bill and covets the role of the adviser SRO.

But as the debate over the bill continues, the term SRO itself is undergoing a renovation. During a June 6 hearing on the bill, Chet Helck, chief executive of the global private client group at Raymond James, said that “SRO” is a misnomer.

“After many decades of legislation, oversight, and regulation, regulatory organizations like Finra are not controlled, or unduly influenced, by the industry they regulate,” Mr. Helck said in prepared testimony. “On the contrary, today, regulatory organizations like Finra are widely viewed and respected as independent, self-funded organizations whose priority is to protect investors.”

A few weeks after Mr. Helck's appearance on Capitol Hill, the Washington Post described Finra as an independent regulator in a feature story about Mr. Ketchum.

Finra's use of the “independent” label is not new. In February 2009, it changed the boilerplate description on its news releases from “non-government regulator” to “independent regulator,” a term that also was used in the description of the organization on the Wikipedia page that was created in 2007.

Finra is trying to stay at arm's length from the industry not only in rhetoric, but also by bolstering its enforcement efforts.

“Since July 30, 2007, Finra has brought 6,291 disciplinary actions and levied fines totaling $254.1 million,” Finra said in a statement. “Finra also ordered nearly $54.5 million in restitution to harmed investors.”

Just today, Finra expelled the firm WJB Capital Group Inc. from the securities industry and barred the firm's chief executive and chief financial officer from leading other firms for lying about the company's financial condition and conducting business while it was below required capital levels. The firm neither admitted nor denied the charges in the settlement.

That's latest example of stepped up Finra enforcement. An analysis released last week by Sutherland Asbill & Brennan LLP shows that Finra is on pace to increase the total amount of fines it levies this year by 15% over 2011 – a jump from $68 million to $78.4 million.

In the first six months of the year, Finra reported 609 cases. If it maintains that rate, it would register a 9% increase over the disciplinary actions brought in 2011, according to Sutherland.

This enforcement increase can be attributed in part to cases coming to fruition since the 2008 financial crisis, according to Brian Rubin, a Sutherland partner. It also might reflect Finra's effort to set itself apart from the industry.

“There may be somewhat of a push to be a more aggressive regulator to better position themselves as the SRO for investment advisers,” said Mr. Rubin, a former chief counsel for enforcement at NASD.

“There is at the staff level an attitude that they want to do their jobs right and they want to come across as effective prosecutors,” Mr. Rubin added. “No one at the top is going to say bring cases for the sake of bringing cases.”

But flexing enforcement muscle while portraying itself as an independent regulator could help Finra make its case to become the next adviser SRO – or whatever it might be called.

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