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The BIG Hole in Financial Regulatory Reform

Posted by Larry Doyle on March 22, 2010 4:24 PM |

Why am I so skeptical that Senator Chris Dodd’s proposed Financial Regulatory Reform (for overachievers in the audience, the link connects to the 89-page proposal) will truly change behaviors on Wall Street? For the very simple reason that I have seen no highlighting of the Financial Industry Regulatory Authority within the proposed Financial Regulatory Reform. Strike you as a little odd? It strikes me that the Wall Street lobby is hard at work keeping its self-regulator, that being FINRA, right where they want it.

Against this backdrop, I was pleasantly surprised to see highly regarded Barron’s columnist Jim McTague reference that the proposed reform would promote transparency and accountability of FINRA. Jim wrote this weekend, Dodd Prepares to Whack Wall Street:

There is lots to like in Dodd’s bill. It increases the accountability and transparency at self-regulatory organizations like the Financial Industry Regulatory Association, or Finra, which are currently accountable to almost no one.

My pulse quickened and heart raced upon reading this sentence. What had I missed that Dodd injected into his proposal? Why hadn’t other members of the press picked up on this key point? How did I miss this?

I spent the better part of this morning reviewing the proposal, but could not find McTague’s assessment. In fact, in the formal proposal which I linked to above, the only mention of FINRA was a brief aside on page 45. It reads:

Finally, the SEC and the Financial Industry Regulatory Authority (FINRA) should expand the Trade Reporting and Compliance Engine (TRACE), the standard electronic trade reporting database for corporate bonds, to include asset-backed securities.

That’s it. I thought I was losing my mind. How could I be missing something that one of the most highly regarded financial journalists is highlighting. Where is it?

I owe Jim a debt of gratitude as he directed me toward a fabulous review of the proposed reform at the venerable law firm, Davis Polk: Summary of the March 15, 2010 Draft of the Restoring American Financial Stability Act, Introduced by Senator Chris Dodd (D-CT). I could not wait to see where and how FINRA would be addressed.

Once again, my anticipation was met with disappointment. The only reference to FINRA was on page 22:

Authorized the MSRB (Municipal Securities Rulesmaking Board) to assist the SEC and FINRA in examinations and enforcement actions regarding MSRB rules, and retain half of any penalties imposed by the SEC, in such enforcement actions.

That’s it. Count me as not impressed, but again I knew I must be missing something. Again, Jim was most helpful and pointed me towards a collective designation for securities associations.

Uh-oh. Are you kidding me? Senator Dodd lumped FINRA in with some trade groups. I wonder if that includes the Rotary Club?

In all sincerity, I am most appreciative of the direction Jim McTague provided. I finally unearthed Senator Dodd’s “aggressive” stance in taking on the organization that, in my opinion, lies at the core of the Wall Street-Washington incest and failed investors so miserably. (FINRA had oversight responsibilities of Lehman, Bear, Merrill, Madoff, auction-rate securities, et al). On page 24 of the Davis Polk summary, we learn:

Report on Oversight of National Securities Associations. Requires the GAO (General Accounting Office) to submit a report on the oversight by the SEC of national securities associations to Congress once every 3 years that evaluates: the governance of such associations; the examinations carried out by such associations; the executive compensations of such associations; arbitration services provided by such associations; the review performed by such associations on advertising by its members; the cooperation between such associations and state securities administrators to promote investor protection; the funding of such associations; the policies of such associations regarding employment of former employees of such associations by regulated entities; the effectiveness of the rules of such associations in achieving the goals of the rules; the transparency of such associations; and the effectiveness of such associations along with both public and internal confidence in such associations.

The fact that FINRA is not singled out by name in Dodd’s report is a HUGE red flag. Over and above that, Dodd’s proposal is nothing more than a review of the SEC’s oversight of FINRA. Why only once every three years? A review of the reviewer? That’s accountability? That’s transparency? Not in my book. In my opinion, that’s both a joke and a confirmation that the Wall Street lobby was hard at work to keep the wolves at bay!!

I am deeply grateful to Jim McTague for his help and assistance in leading me to the David Polk summary. I respectfully disagree, however, that this reform creates the needed transparency and accountability for FINRA.

Perhaps Senator Dodd and his colleagues may want to review the Project on Government Oversight’s thoughts on FINRA in which they call the very concept of self-regulation for Wall Street into question. POGO’s letter to four separate Congressional sub-committees can be found here.


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