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Wall Street’s SRO Police Take MAJOR Hit

Posted by Larry Doyle on October 3, 2013 8:58 AM |

Did you feel a sizable tremor running between Washington and Wall Street overnight? I did.

At the epicenter of this tremor was the first meaningful questioning of the practice of self-regulation on Wall Street by their governmental overseers at the SEC.

Securities and Exchange Commission Chairman Mary Jo White opened the door to a potential overhaul of financial-market oversight, saying the special regulatory status of U.S. exchanges may not best serve investors or public companies.

Wow. That simple statement may never lead anywhere, but the mere fact the SEC issued a statement of this sort is a tidal shift of epic proportions. Who else echoed the sentiments of this seismic activity? 

None other than the longstanding regulatory lapdog and former SEC chairman Harvey Pitt had this to say on the topic of the SEC’s potential overhaul of self-regulation for our equity exchanges:

This is a big deal,” said Harvey Pitt, a former SEC chairman and now chief executive of consulting firm Kalorama Partners LLC. “The SRO [self-regulatory organization] function was once crucial, but in terms of exchanges it no longer is,” he said, adding that NYSE Euronext and Nasdaq GroupInc. have relegated their regulatory functions “to a back-burner.”

Yes indeed, this is a big deal.

But let’s be straight here. For those who have been watching closely, the concept of self-regulation has always been a badly flawed model for Wall Street. To think that the industry — whether equity exchanges or the large banks themselves — might properly police themselves while looking to maximize revenue is a joke. But this joke and many iterations thereof have been played out on investors since Wall Street’s self-regulatory efforts were launched back in 1939.

Who ultimately pays? We all do.

The only reason I believe Ms. White is speaking out now is because the self-regulatory joke has become so egregious, and the resulting lack of trust and confidence show no signs of abating. Will Ms. White’s questioning of the self-regulatory model lead to meaningful changes in oversight on Wall Street? We can only hope, but I am not holding my breath for the very simple reason that the SEC has also shown itself to be a massively conflicted organization when trying to properly police Wall Street.

Is there really any doubt about that as well?

Navigate accordingly.

Larry Doyle

Please pre-order a copy of my book, In Bed with Wall Street: The Conspiracy Crippling Our Global Economy, that will be published by Palgrave Macmillan on January 7, 2014.

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I have no business interest with any entity referenced in this commentary. The opinions expressed are my own. I am a proponent of real transparency within our markets so that investor confidence and investor protection can be achieved.

  • Russ

    The likelihood of the SEC ever monitoring and curbing the activities of Wall Street is zero to zero to the 100th power.

  • Andrew

    The FINRA experiment has been a disaster. I think one of two options exist to replace it. 1. No regulation at all. Buyer beware. Initially, this would make the market the wild west. The wheat and chaff would separate over time. Not likely to happen. (But really, with HFT so dominant, isn’t it a chaotic marketplace now?) 2. Customers need an independent regulator, funded by a slice of each transaction, that they have a voice in. Arbitration doesn’t cut it. Needs to be a 50-50 balance among public and industry folks.

  • Matt

    People need to realize where FINRA came from–a merger of the NYSE and NASD regulatory apparatuses. Their reason for being was initially to guarantee MARKET FAIRNESS for participants on the Exchanges and to punish infractions of market rules in that regard. FINRA has now morphed to include every aspect of the investment landscape, e.g. advertising, a Registered Rep’s personal financial life, a Registered Rep’s outside employment, a Registered Rep’s compensation arrangements (see the proposed rule re: signing bonuses, retention bonuses etc.). Meanwhile the rules originally governing market actions, e.g., painting the tape, customer front running on markets etc. are flouted daily by HFT traders and nothing is done to reign them in. The rules are so extensive that even FINRA employees don’t adequately understand them As a former manager on Wall Street, I once had to answer an inquiry from FINRA as to why one of my RR’s had 1)switched a cline from a bond fund to a more diversified fund portfolio in the same fund family and how much in commissions the RR made in the switch. The answers were 1) none of your business as to why the switch was made since the client had not hired FINRA to give investment advice and 2) no commission was generated since the exchange was in the same fund family. So FINRA, at this stage in its existence seems not only to be out-of-control in its rule-making but also incompetent. We can do better.

    • LD


      I totally concur and I think you will want to read my book where I pull no punches in shedding a whole lot of light into the world of Wall Street regulation.

      Thanks for your riveting insights. FINRA might be comical if they were not so pathetic.

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