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Congress Wants to Give Wall Street Yet Another Chance to Regulate Itself

Congress apparently thinks the SEC is too effective. To remedy that, it wants to increase the role of FINRA, Wall Street's self-funded self-regulator. What could go wrong?
FINRA, the Financial Industry Regulatory Authority, is already deputized by the government to oversee brokers. The idea is that using it is cheaper than giving more money to the SEC. Why? Because FINRA's $877 million budget is paid by the brokers it regulates. If this plan goes through, FINRA would replace the SEC as regulator of registered investment advisers, who collectively manage about $40 trillion.
And where did Congress get this money-saving idea?
From people like former congressman Michael "Sarbanes and" Oxley, who earlier this year registered as a lobbyist for FINRA. He was part of the $300,000 the group spent in the first three months of the year exercising its constitutional right to petition Congress. Very patriotic.

FINRA vs. the SEC -- a comparison
Let's be clear -- FINRA is not a toothless watchdog. It fined members almost $43 million last year. At the same time the SEC, which has a similar budget, issued more than $1 billion in penalties.

FINRA's top 10 executives were paid $11 million in 2009. As previously mentioned, this is paid by Wall Street. SEC chair Mary Schapiro, who used to head FINRA, made $163,000 last year.

Coincidentally, FINRA's become a much more aggressive regulator just as it's pushed for more power. In the first five months of the year levied $28.1 million in fines, a 118 percent increase over the previous year. Over the same period it has taken 463 disciplinary actions, the most in at least five years.

FINRA seems to have no interest in answering the astounding number of questions that people -- including Congress -- are asking about it:

  • How does it select arbitrators for securities disputes? For more than a year the Public Investors Arbitration Bar Association has been trying to get the SEC to hand over documents about this via the Freedom Of Information Act. The SEC has refused, citing an exemption to FOIA which allows it and other regulatory agencies to keep secret their dealings with "financial institutions." To most folks that means banks, brokerages and the like, not a regulatory agency working - allegedly - for the U.S. public.
  • Where does FINRA invest its own money? A key piece of information when it comes to determining if the group has any conflicts of interest. No answer.
  • Why won't it let Sen. Charles Grassley (R-Iowa) have information he requested about "suspicious trading" complaints regarding SAC Capital?
  • Why did it fire investigator Joseph Sciddurlo after four years on the job? He says it was because he wanted to take a harder look at some Wall St. accounting procedures. No answer.
  • Why did it only fine UBS $2.5 million for misleading investors? UBS sold $1 billion in notes which for some reason investors thought were safe. (Could have something to do with their catchy name: "100 Percent Principal-Protection Notes.") Despite that, the notes were worth about nothing once Lehman Brothers collapsed.
  • Why does it no longer send examination reports on brokers to state securities regulators? FINRA stopped doing this two years ago, claiming this would have forced it to give certain rights to brokers during investigations that it currently doesn't. State regulators do not agree.
And last, but certainly not least: How will we even know if FINRA is doing its job? A March report by the Boston Consulting Group found that self-regulatory organizations like FINRA don't have to regularly disclose information to the SEC about their regulatory operations. Further, the SEC also doesn't have a consistent set of metrics or standards to assess FINRA.

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