InvestmentNews INsider

The INsiderblog

InvestmentNews reporters offer their take on intriguing or controversial articles from around the web.

Finra engages in rulemaking by enforcement: financial industry groups

FSI and SIFMA criticize broker-dealer regulator for creating standards based on settlements

Jun 21, 2017 @ 1:56 pm

By Mark Schoeff Jr.

Financial industry trade associations criticized Finra for using enforcement to establish regulatory standards for brokers rather than the formal rulemaking process, in letters to the broker-dealer regulator as part of its self-examination process.

The Financial Services Institute, which represents independent brokers and financial advisers, said that as the Financial Industry Regulatory Authority Inc. has increased its fine level, FSI members are wondering about the broker-dealer self-regulator's motivation.

"Recent developments in fines have lead [sic] members to believe that enforcement has moved away from investor protection and is now actively creating standards and rules outside the rulemaking process," David Bellaire, FSI executive vice president and general counsel, wrote in a June 19 comment letter. "Furthermore, some FSI members report that they feel the threat of large fines is being used to force them to sign [settlements]. The drastic rise in fines combined with lower restitution rates tend to show that Finra is using the enforcement mechanism to regulate members rather than make investors whole."

The FSI based its comment in part on a study by Brian L. Rubin and Adam C. Pollet of the law firm Eversheds Sutherland that shows that Finra fines reached a record $176 million in 2016, an increase from $94 million in 2015, while investor restitution decreased to $28 million in 2016 from $96 million in 2015.

The Securities Industry and Financial Markets Association made a similar assertion, saying that its members were targets of enforcement actions based on "unofficial legal positions taken by Finra staff," such as when a settlement becomes an "interpretation...applied to all firms," or when decisions are based on remarks in a Finra official's speech.

"Member firms find 'regulation by enforcement' extremely troublesome because it creates legal standards and imposes retroactive regulatory requirements and legal liability outside the formal rulemaking process," SIFMA president and chief executive Kenneth E. Bentsen Jr. wrote in a May 8 comment letter.

"Earlier this spring, FINRA President and CEO Robert W. Cook asked the public to provide their thoughts and ideas on improvements to FINRA's current engagement programs," Finra spokeswoman Nancy Condon said in a statement. "We thank those who have commented for their thoughtful feedback, which we will consider in our evaluation to help ensure FINRA is the most effective and efficient regulator it can be."

The FSI and SIFMA were responding to a 30-page March 21 request for comment in which Finra asked for feedback about its engagement with member firms. The solicitation of comments is part of the Finra 360 initiative launched by Mr. Cook in which the organization is reviewing its operations. The comment deadline was June 19.

The expansive request for comment provided an opportunity for respondents to evaluate a range of Finra activities, policies and structure. For instance, the Public Investors Arbitration Bar Association criticized the makeup of the Finra committees and its board of governors, where it said it wanted to see more investor advocates. The Finra board is comprised of 23 members, 12 of whom are "public governors" and 10 of whom are "industry governors." Mr. Cook also sits on the board.

"While the Finra Board of Governors has its purported 'public' governors, it would appear from their background and/or current positions that most of them are not what PIABA would consider to be investor advocates," PIABA president Marnie Lambert wrote in a June 19 comment letter. She cited five public governors who are currently or were formerly associated with investment firms or have ties to the financial industry.

0
Comments

What do you think?

View comments

Upcoming event

Sep 24

Conference

Diversity & Inclusion Awards

Attend an event celebrating diversity and inclusion as well as recognizing those who are leading the financial services profession in this important endeavor. Join InvestmentNews, as we strive to raise awareness, educate and inspire an... Learn more

Most watched

INTV

Young advisers envision a radically different business in five years

Fintech and sustainable investing are two factors being watched closely by some of the 2019 class of InvestmentNews' 40 Under 40.

INTV

Young professionals see lots of opportunity to reinvent the advice experience

Members of the 2019 InvestmentNews class of 40 Under 40 have strategies to overcome the challenges of being young in a mature industry.

Latest news & opinion

New Jersey fiduciary rule: Pressure leads to public hearing, comment deadline extension

Industry push results in chance to air grievances on July 17 and another month to present objections.

InvestmentNews' 2019 class of 40 Under 40

Our 40 Under 40 project, now in its sixth year, highlights young talent in the financial advice industry. These individuals illustrate the tremendous potential of those coming up in the profession. These stories will surprise, entertain, educate and inspire.

Galvin to propose fiduciary rule for Massachusetts brokers

The secretary of the commonwealth is proposing a fiduciary standard in response to an SEC investment-advice rule he views as too weak.

Summer reading recommendations from financial advisers

Here are some books that will keep you informed and entertained during summer's downtime

4 strategies for Roth conversions

There's never been a better time to do a Roth conversion, and here are several ways to go about it.

X

Hi! Glad you're here and we hope you like all the great work we do here at InvestmentNews. But what we do is expensive and is funded in part by our sponsors. So won't you show our sponsors a little love by whitelisting investmentnews.com? It'll help us continue to serve you.

Yes, show me how to whitelist investmentnews.com

Ad blocker detected. Please whitelist us or give premium a try.

X

Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print