Time for Finra to pull back the curtain on its oversight and board

The regulator undercuts its investor-protection mission by obscuring the most dangerous firms it oversees

Jun 21, 2017 @ 12:36 pm

By Benjamin P. Edwards

The public faces a transparency problem with the Financial Industry Regulatory Authority Inc.

Finra plays a central role in investor protection and financial regulation. Surprisingly, it often refuses to tell the public much information about itself or the industry it oversees.The public cannot use ordinary tools like the Freedom of Information Act to get more information. These open-government laws do not apply to Finra because it is a quasi-governmental, self-regulatory organization. Unlike other regulators, Finra must decide for itself how much information it will reveal to the public.

Instead of revealing the full picture to the public, Finra often only offers a peek, granting access to tiny slices of information but refusing to reveal the rest. This serves a purpose: By disclosing some limited information, Finra may pretend to publicize information without enduring sunlight's disinfecting scorches.

At times, Finra's preference undercuts its investor-protection mission by obscuring the most dangerous firms Finra oversees. The regulator and investor-protection advocates have long known that a small group of the worst stockbrokers inflict a disproportionate amount of damage. Despite the known danger, Finra limits access to information that would allow the public to protect itself by refusing to identify the fraud-prone firms flagged for additional review. Worse, Finra even refuses to allow public access to its databases — access that would allow outsiders the wider view necessary to independently assess the real risks. Instead, Finra's BrokerCheck website treats investors to just a peek. It flashes a single record at a time but refuses to reveal the whole picture.

To be sure, Finra could not operate effectively if it revealed all of its information to the public. Finra may have good reasons for keeping its internal risk rankings secret. A Finra-created risk designation might unfairly stigmatize a firm and taint the firm's reputation by implying that the regulator viewed the firm as particularly troubling. Still, the need for Finra itself to remain somewhat impartial hardly justifies limiting the public's ability to access the underlying information and draw its own conclusions.

The stonewalling has not stopped all of the stories. After Finra refused a Reuters request for access to its database, Reuters partnered with Columbia Law School to lift a corner of the curtain. The Reuters report found cockroaches crawling through some Finra firms — embarrassingly flagging a firm run by one of Finra's industry-elected board members. The report identified dozens of firms as seeming havens for brokers with Finra flags on their records. In industry parlance, "cockroaching" happens when Finra shuts down a firm only to see its brokers simply scuttle to set up shop at other firms.

(More: Finra CEO Robert Cook promises to give brokerages more guidance on overseeing rogue brokers)

To its credit, Finra's new CEO Robert Cook, has invited scrutiny of Finra's self-regulatory model and reached out to stakeholders beyond industry firms. For this scrutiny to succeed, Mr. Cook should pull up the curtain and stop the limited peeks. Outside stakeholders cannot support industry self-regulation that denies the public access to critical information.

That information extends beyond its oversight of Finra firms and to its Board of Governors. In an article forthcoming in the Cincinnati Law Review, I point out that Finra discloses little information about the purportedly public representatives serving on its board or the powerful committees that shape its decisions. For example, Finra's annual report reveals that Randall K. Quarles serves on its board as a "public governor." Under Finra's bylaws, a public governor is a person who "has no material business relationship with a broker or dealer." Beyond a statement issued at the time of appointment, Finra did not provide a biography or otherwise reveal that Mr. Quarles also serves on the board of directors for the U.S. Chamber of Commerce — an organization that accepts contributions from Finra-regulated firms and lobbies on behalf of business interests.

Access to information about Finra's governance matters because Finra's regulations affect the public. The public gave Finra its power in 1938 when Congress passed the Maloney Act authorizing brokerage firms to form self-regulatory organizations. In essence, Finra holds its power in public trust. If the regulator cannot trust the public with basic information, the public may lose trust in Finra's ability to protect investors and our capital markets.

Benjamin P. Edwards is an associate professor of law in the William S. Boyd School of Law at the University of Nevada, Las Vegas.


What do you think?

View comments

Upcoming event

Nov 19


New York Women Adviser Summit

The InvestmentNews Women Adviser Summit, a one-day workshop now held in six cities due to popular demand, is uniquely designed for the sophisticated female adviser who wants to take her personal and professional self to the next level.... Learn more

Most watched


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.


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

Funding for Reg BI, other SEC advice reform efforts denied in Waters amendment

House likely to approve measure that effectively kills rule package, but it faces uphill battle in Senate

Wall Street lashes out at Sanders' plan to pay off student debt with a securities trading tax

Financial pros argue that a transaction levy will hurt mom-and-pop investors along with investment houses.

GPB paid B-Ds and reps steep commissions to sell troubled private placements

GPB paid commissions of 9.3%, or $167 million altogether, on the firm's private placements.

Give us a break, active managers say

Seven portfolio managers share their outlooks for the rest of the year, generally agreeing that it's been hard for active managers to stand out.

GPB Capital reports decline in value of two biggest funds

One has dropped by 25.4% and the other by 39%, according to the company.


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.


Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print