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SEC Commissioner Stein: We Must Better Understand FINRA

Posted by Larry Doyle on February 12, 2014 6:13 AM |

Who oversees the private, Wall Street funded police detail, aka FINRA, that I have long maintained operates as little more than meter maids?

The SEC, that’s who.

Or at least the SEC is supposed to regulate and oversee FINRA. Whether the SEC effectively oversees an organization which on its face appears to be loaded with conflicts of interest — if not much worse — is the stuff on which books are written.

As a strident critic of both the self-regulator and the self-regulatory model, I have long called for FINRA’s doors and windows to be opened so America can really learn what goes on within this organization and its relationships with the very banks on Wall Street that fund it. Who seems to be joining my call for a serious review of FINRA? 

None other than a recently appointed SEC commissioner Kara Stein who in the midst of a talk just last week had this to say:

And we must better understand and clarify the role of the FINRA, which has taken on more and more regulatory functions.  In recent years, through private contracts, FINRA has come to run many critical market surveillance functions, from monitoring for insider trading, to looking for cross-market manipulations.  While this may be one way to deal with increasing market complexity, it arguably has also created new challenges: including how to effectively oversee a very important, but private regulator.

We need to be thinking about the interactions between FINRA and its customers, other market participants, the Commission, and regulators and participants in related markets.

This public statement is long overdue and if it is not a de facto admission that the SEC has failed to properly oversee FINRA, I do not know what is.

Are you listening Mary Schapiro?

The key questions now are: what will the SEC do and what will they share with the American public on this front? Let’s give Commissioner Stein some assistance and tell her to air the dirty laundry within FINRA in the following fashion:

1. Call for FINRA to undergo an independent outside audit.

2. Call for FINRA to be accountable under the Freedom of Information Act.

3. Call for FINRA to not be afforded the privilege of absolute immunity. I mean, absolute immunity without total transparency is little more than a license to steal, don’t you think?

4. Call for FINRA to release all the information, financial and otherwise, pertaining to the merger between the NASD and the regulatory arm of the NYSE to form the self-regulator.

That’s a start, Commissioner.

No softball around here. After you get the information and answers to points 1-4 above so that you can “better understand and clarify the role of the FINRA,” can we count on you to share all of what you learned with the American public? FINRA does answer to you, right ? And you and your colleagues at the SEC do answer to us, the American public, don’t you?

Or you are supposed to, right?

Transparency is still the great and only disinfectant. Especially when it comes to the backroom where those overseeing the meter maids may be cozying up to the heavyweight firms on Wall Street that provide the bulk of the funding for FINRA.

Navigate accordingly.

Larry Doyle

Please order a copy of my book, In Bed with Wall Street: The Conspiracy Crippling Our Global Economy.

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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.

  • Andrew

    LD, You are spot on. Unfortunately, the atmosphere in Washington is not conducive to such scrutiny. BO himself said that “I am the President, and I can do what I want” So much for checks and balances.

  • Mark Rome, zEthics

    Thanks again Larry for keeping your readers informed.

    “The key questions now are: what will the SEC do and what will they share with the American public on this front?”

    #5, Implement a framework that fully discloses the inner
    workings of FINRA. Such a framework might look like:

    1) Effective policy management (online policy library)
    2) Ongoing assessments (people, process, systems & technology)
    3) Performance Scorecards (hard & soft metrics)
    4) Event management and reporting (utilizing Failure Modes and Effects Analysis)
    5) Annual certifications to the Federal Code of Conduct (reinforce core values)
    6) Enterprise data analytics (talent & workforce analytics)

    • Mark,

      Love it. Looks like a whole lot of requirements for meaningful reporting of critically important information.


      Thanks for highlighting these points as well.

  • Matt

    The major problem with FINRA involves their funding mechanism–Bd fees and regulatory fines. FINRA is NOT independent, it is a creature of the industry it is supposed to regulate (anyone remember National Association of Securities Dealers?) This organization consistently has to balance the twin objectives of 1). keeping the membership on board and 2) imposing just the right level of fines on the industry for their malfeasance to make it look as though they are tough regulators while not over burdening the members. Could be why they were such tough regulators in the ARS debacle (NOT!).

  • Cliff Forbes

    La Cosa Nostra would be green with envy of FINRA. Legalized mobsterism.

  • Ray

    Almost finished reading your book. Great, great. great. What an education I got!

    If another catastrophe hits the fan in the USA, like you say, “be vigilant” for the stench will only get worse than it is now. You probably could have written 1000 pages.

    Any chance Aguirre would head the SEC? Can you imagine not wanting to put an honest guy in a regulatory position? How far we have fallen!!

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