15 transformational events: Finra brings all brokers under one roof

Jun 23, 2013 @ 12:01 am

By Mark Schoeff Jr.

The creation of the Financial Industry Regulatory Authority Inc. in 2007 brought all brokers under the same regulatory roof, achieving a breakthrough for market self-policing.

The product of a merger between the NASD and the enforcement arm of the New York Stock Exchange, Finra encompasses both the NASD's focus on small brokers and the NYSE's oversight of large financial firms.

The integration gives Finra greater scope and depth than its predecessors.

“Combining the two regulatory programs allows Finra to have a significant regulatory footprint across the country, where we're leveraging each legacy organization's experience and knowledge as it relates to different-size firms and business models,” said Susan Axelrod, Finra's executive vice president of regulatory operations.

PHOTO GALLERY 15 transformational events

Finra oversees 4,270 brokerage firms, 161,765 branch offices and 630,345 registered securities representatives. It is funded by membership fees from the companies it regulates. With a staff of 3,200, it operates in Washington and New York, and has 20 regional offices.

Finra had $880.1 million in revenue in 2011 and reported an operating loss of $84 million, according to its latest annual report.

The melding of the NASD and NYSE rule books makes life easier for brokers who move from wirehouses, which were overseen by NYSE, to independent broker-dealers, which had been regulated by NASD.

“Operating on a consolidated rule book makes that transition less complex,” said Dale Brown, president and chief executive of the Financial Services Institute Inc., which represents primarily independent broker-dealers.

Finra has a mixed record as a regulator, according to Tamar Frankel, a professor of law at Boston University. The problem Finra faces is inherent with all self-regulatory organizations.

“It is built on its membership,” Ms. Frankel said. “Whenever brokers really care [about an issue], and Finra goes against them, they will trump Finra.”

Ms. Axelrod disputes the notion that Finra has been captured by its members. The organization's 22-person board consists of 11 public representatives, 10 from industry and Finra chief executive Richard G. Ketchum. The SRO is dedicated to protecting investors and maintaining market integrity, Ms. Axelrod said.

“We can be informed by the industry, but in no way are we instructed by them,” she said.

Mr. Brown also dismisses the notion that Finra is beholden to brokers.

“They're an industry-funded independent regulator,” he said.

Although the merger that created Finra was designed to rationalize oversight of brokers, investment adviser advocates worry that Finra has its sights set on expanding its scope to advisers.

Last year, the organization led the lobbying campaign for federal legislation that would authorize one or more self-regulatory organizations for investment advisers, holding itself out as the best choice for the role. Investment advisers fiercely opposed the legislation — and the notion of Finra taking over from the SEC as their regulator. The SRO bill died without a committee vote. Finra has said that this year, it is backing off lobbying for a similar measure.

But David Tittsworth, executive director of the Investment Adviser Association, remains wary of Finra. He asserts that Finra's regulatory ambitions can be traced back to its genesis.

The NASD-NYSE combination “was absolutely a critical event,” Mr. Tittsworth said. “It has created a large organization that is intent on growing further and extending its jurisdiction to investment advisers. Absent the merger in 2007, you wouldn't have seen such a push for that.”

Finra maintains that it seeks stronger investment adviser oversight to increase investor protection. The SEC examines only about 8% of registered investment advisers annually; Finra examines about half of its registrants every year.

“It's a gap that definitely needs to be addressed,” Ms. Axelrod said.

She pointed to Finra's exam program as one example of how the organization is meeting the 2007 merger goal of being a more efficient and effective regulator. Exams are now risk-based, zeroing in on firms and business practices that are deemed to be the biggest threats to investors.

She said that strides also have been made in enforcement, where there is now a greater emphasis on returning money to investors who have been ripped off by brokers. In 2012, Finra levied $68 million in fines and ordered $34 million in restitution.

“We've moved all these programs forward from where they were six years ago,” Ms. Axelrod said.

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