Two nominees for the Securities and Exchange Commission questioned Finra's transparency during a confirmation hearing on Tuesday morning, saying the brokerage regulator hasn't been doing enough in this area and that its conduct should be reviewed.
Hester Peirce, one of the nominees to fill the SEC's two vacant slots, discussed transparency from the vantage point of small brokerage firms' communication with Finra, a self-regulatory organization that monitors the nation's roughly 3,700 broker-dealers and 631,000 brokers and is overseen by the SEC.
Ms. Peirce, a Republican, said the current operating environment lends itself to small broker-dealers potentially being "scared" to report industry misconduct out of fear Finra will "train its attention" on a firm that is compliant.
"I worry about transparency. I've heard from small firms that have concerns about their ability to be heard by Finra," Ms. Peirce said during the nomination hearing before the Senate Banking Committee. "I'm worried the atmosphere now is one of, you keep your head low and you do your thing, and you're not even willing to raise issues when you see real fraud happening."
WATCHDOG UNDER SCRUTINY
InvestmentNews last month published an
exposé on the Financial Industry Regulatory Authority Inc., detailing the lack of transparency displayed by the brokerage watchdog despite the enormous power it wields over the securities industry.
That investigation found that people in the industry know little about how the regulator operates, how it spends the millions it collects in membership fees and fines, and how it sets its regulatory agenda.
"I believe there's room for improvement at Finra, especially in the area of transparency," Sen. Mike Rounds (R-SC), a member of the Banking committee, said at the hearing for Ms. Peirce and the other nominee, Robert L. Jackson Jr., a Democrat.
In a statement, Finra spokeswoman Michelle Ong said CEO Robert Cook has been conducting an ongoing listening tour among members and has heard extensively from small firms among numerous other stakeholders. She said Finra has already implemented changes to address that feedback and Finra 360, a multi-year organizational improvement initiative, provides a framework to address additional feedback.
Ms. Peirce, who was previously nominated by the Obama administration, has been critical of Finra before. Mr. Jackson joined in that chorus on Tuesday morning, saying Finra should release more data and information on the "degree to which stockbrokers are engaged in fraud."
REPEAT OFFENDERS
"There are a number of repeat offenders in that space, and I'm not sure that Finra has been transparent enough in getting that information to investors, so investors can tell the difference between the producer who can help them plan for their retirement and someone who's going to take their money," Mr. Jackson said. "I think there's a lot of work to do in that area."
In Finra's statement, Ms. Ong said brokers with a demonstrated history of misconduct or patterns of repeat violations, as well as a history of previous employment at disciplined firms, have been a Finra priority.
She said Finra is also strengthening its approach to high-risk brokers in three areas: it has created a dedicated examination unit to identify and examine brokers who may pose a high risk to investors; it's reviewing firms' supervisory procedures for hiring or retaining high-risk brokers; and it's evaluating firms' branch office inspection programs as well as their supervisory systems. She said Finra intends to publish additional guidance in the coming months regarding firms' supervisory obligations related to brokers who may pose higher risk.
If their nominations were to be confirmed by the Senate, which is expected, Ms. Peirce, a senior fellow at the conservative Mercatus Center at George Mason University, and Mr. Jackson, a law professor at Columbia University who specializes in corporate disclosures, would
round out the SEC's five-member commission. The Senate
confirmed Jay Clayton as SEC chairman this past spring.
Both nominees expressed their encouragement at Mr. Cook leading the organization. Mr. Cook
succeeded Richard Ketchum as chief executive of Finra in 2016.
Mr. Cook earlier this month
indicated he would consider more transparency around Finra board deliberations and how it spends fine proceeds.
"[He's] made an effort to reach out to a whole range of constituencies to find out their concerns about Finra," Ms. Peirce said. "That said, I think it's important for the SEC to oversee that process closely."
