As the changing of the guard takes place at the
Financial Industry Regulatory Authority Inc. this month, new CEO Robert W. Cook and Chairman John J. Brennan would do well to revisit some of Finra's more important investor protection proposals that were shelved or watered down on their way to approval over the past couple of years.
An important point to remember is that these proposals came from within Finra. The professionals running the organization obviously thought there was a need for these rules, or they wouldn't have proposed them in the first place and then fought for their passage. The proposals were only revised or tabled because the brokerage industry mounted efforts to stop or dilute them. They are a reminder of the two masters Finra tries to serve: the investing public that it claims to protect and the brokerage industry that it is supposed to regulate but continues to pander to with its actions —and inactions.
LINKING TO BROKERCHECK
If Mr. Cook and Mr. Brennan want to clear the air and assert their independence from the industry, they can start by revisiting three proposals.
The first was a rule that would have required brokers to provide links to their BrokerCheck profiles from their company websites and social media pages. It seemed like a pretty straightforward proposal. Finra has invested a lot of time and money in building the BrokerCheck database, which tracks brokers' careers along with their disciplinary history. It says it wants investors to be able to access the database easily so they can conduct background checks on brokers, so asking brokers to establish links to their BrokerCheck profiles seemed like a good idea.
The industry didn't think so. It argued that it would be too costly and technologically unwieldy. The original proposal was withdrawn and modified twice. The final watered-down version requires brokerages to provide links from their websites to the BrokerCheck home page, instead of linking to individual BrokerCheck profile pages, which the Finra staff thought would be more useful.
The second rule Finra should revisit was one that would have required brokers moving from one brokerage to another to disclose the signing bonuses they receive. Most brokers move so they can collect such bonuses, not because they think the new firm is so superior to the one they are leaving, as they often tell their clients. The idea behind the proposal was to bring transparency to the process.
The industry pushed back on this one pretty strongly, and Finra caved. It settled for requiring that brokers changing firms provide an “educational communication” that doesn't have to mention specific compensation packages.
The third rule Finra's new leadership should take up — and the most important of the three — is CARDS, which stands for Comprehensive Automated Risk Data System. It would have given Finra the ability to detect abusive broker conduct before investors were hurt, not after, when clients are forced to sue to collect damages. Outgoing Finra CEO Richard Ketchum fought hard for the proposal, but to no avail. The industry fought harder, claiming it would cost too much and compromise client confidentiality.
REVIVING CARDS
In the end, Mr. Ketchum shelved the proposal, which means it still could see the light of day sometime in the future. But that will be up to Finra's new leadership, which can choose to resurrect it, as well as restoring the original terms of the other investor proposals outlined here. The other option is to maintain the status quo, in which Finra gives the appearance of representing the interests of investors while shilling for the industry it is supposed to be regulating.
