Wall Street's regulators ask for second chances and promise more effective regulation. But we all remember Bernie. And what's really changed for the better?
On March 14, 2013, the Financial Industry Regulatory Authority ("FINRA") Chairman and Chief Executive Officer Richard G. Ketchum gave a speech to the Consumer Federation of America Consumer Assembly. In keeping with such things, FINRA published a transcript of Ketchum's prepared remarks and I urge you to read it.
I am not an unbiased commentator when it comes to FINRA or CEO Ketchum. As my published commentaries for many years clearly evidence, I am a critic of self regulation, of FINRA (and its predecessor the NASD), and of the Ketchum administration. To my credit I make that bias clear in articles such as this. Also read:
For me, the self regulation of Wall Street may once have been a fair and valid concept, perhaps from the 1930s through some of the 1970s; but for a number of decades now, I believe it has lost its credibility, its validity, and any compelling rationale for its continued existence. Many in the securities industry disagree vehemently with me. We will have to agree to disagree.
I see Wall Street's self-regulatory organizations ("SROs") as largely trade groups on steroids, regardless of the industry's and the sros' protestations to the contrary. At FINRA, for example, all voting of any consequence is limited to member firms - neither the public nor hundreds of thousands of registered persons are enfranchised to vote for members of the Board, for members on any committees, or on any rule proposals. As evidenced by the disgrace of the Madoff, Stanford Financial, and other financial scandals, FINRA has not exactly served as a formidable first line of defense against financial fraud. If anything, FINRA has been little more than a Maginot Line. For critics such as me, part of the explanation for the failure of regulation is found in the construct of FINRA as an SRO.
Today as in many years past, I advocate for the decertification of FINRA as an SRO and persist in my view that we need to re-fashion non-governmental regulation into a more inclusive private-sector regulatory organization that fairly represents the full spectrum of market participants: private investors, institutional investors, financial services firms, registered persons, and regulators. Such a private sector regulator would fully enfranchise all such constituents rather than merely allocate votes to its industry member firms.
Yes, I know, FINRA and others will point to the academics and so-called public advocates on its Board. And, in response, I will point to the fact that such individuals were appointed through a member firm controlled process and that there are many troubling conflicts inherent in such selections - endowed chairs, corporate sponsorships, entanglements from service on multiple corporate and non-profit boards, etc.
If self regulation is, in fact, a workable model, then why has it been such an abject failure? If self regulation only needs to make a few more changes and upgrades, as we are so often assured each and every time there is another troubling failure of regulatory oversight and timely intervention, then why haven't all the past remedial measures worked?
Do not set me up as a convenient punching bag or strawman. I have been an equal opportunity critic of government regulation. I find little comfort with the Securities and Exchange Commission's record of regulation and have similarly called for the demise of the federal regulator and to replace it with more nimble, smaller regulators better equipped to regulate more focused aspects of the ever expanding Wall Street. No, I am not in favor of less examiners and prosecutors. I merely note that amassing some 3,000 folks under one overblown government bureaucracy has failed; and that creating smaller regulators with Delta Force-like capabilities may be a better alternative. I also want to end the silos and infighting among and between federal, state, and self-regulatory organizations by limiting the duplicity and common turf.
In reading CEO Ketchum's remarks to the Consumer Federation of America, once again I see the clues for what I view as the shortcomings of FINRA. Please, you read his speech and draw your conclusions. We may disagree, and I respect that. Nonetheless, let me offer you the following direct quotes:
But, since some of you may not be familiar with FINRA, I want to start by telling you who we are. FINRA is the Financial Industry Regulatory Authority-an independent, non-governmental regulator for all securities firms doing business with the public in the United States. Our core mission is to pursue investor protection and market integrity, and we achieve our goals without costing taxpayers a single penny. FINRA regulates nearly 4,300 brokerage firms and about 630,000 registered securities representatives-and not just from our offices in Washington. We are out there on the ground and in the field every single day-in offices all across the country-overseeing virtually every aspect of the securities business.
While Ketchum is free to paint his organization with the lovely pastels that he chooses, I do not have to gush over his word picture. He says that FINRA is "independent." Independent of what and from whom? How can an organization essentially funded by 4,300 member firms be independent of that very industry it claims to regulate?
Do you look back over the recent revelations from the Great Recession and believe that FINRA has satisfied its core mission of pursuing "investor protection and market integrity?" Has there truly been no cost to the American taxpayer when our nation was hammered by financial fraud, which many industry commentators ascribe to having been furthered by failed and ineffective regulation? Keep in mind that FINRA accepted some blame for the Madoff and Stanford Financial fiascos. See:
In accepting blame, it's not enough to simply mouth Mea Culpa. What was learned? What was terminated? What was implemented? And is the FINRA of today truly an overhauled and reformed SRO or do we merely get to hear talking points in defense of the status quo?
How, then, does the "mind" of those at FINRA's helm work? What are they thinking when the undertake the monumental task of regulating Wall Street. Ketchum's own words from his Consumer Federation of America speech offer the following insight:
We at FINRA and the Foundation believe the optimal approach to financial capability involves a convergence of financial education, "choice architecture"-the behavioral economics concept that you can change consumers' behavior by changing their choices-and effective regulation.
Ah yes, the gobbledygook of Washington double-speak. Do you use expressions in your daily communications such as "a convergence of financial education?" Do you even comprehend what it means to refer to something as a "choice architecture?" Additionally, consider these phrases in Ketchum's address:
We're also concerned about certain closed-end funds . . .
We are concerned that retail investors may not understand that some funds are returning capital to maintain the high distribution rates . . .
We've also reminded firms about their responsibilities regarding the sale and marketing of private placement securities. Specifically, we've reminded brokers . . .
So given the environment, FINRA is particularly concerned about the suitability of the products registered representatives recommend to investors. . .
At FINRA, we spend a lot of time thinking about what drives investment professionals to recommend products that are less than appropriate for their customers-or to make other mistakes that harm investors. . .
Last May, in a speech I gave at FINRA's annual conference, I challenged brokers to assess whether their business practices place their-or their employees'-interests ahead of customers. I also called on firms to make sure that the products they sell are appropriate . . .
A few months later, we initiated conversations with a number of brokerage firms to better understand how they identify and manage conflicts. . .
FINRA believes, however, that a fiduciary standard, alone or coupled with other regulatory harmonization, is not a guarantee against misconduct. . .
We also believe investors should be informed of conflicts involving recruitment packages when they make the important decision to move an account . . .
Currently, we are analyzing the provisions of the JOBS Act and talking with the SEC and interested parties about approaches to implementing the crowdfunding rules . . .
To my eyes and ears, I don't exactly come away with the sense that there's much action going on at FINRA; and the SRO's track record doesn't exactly overwhelm me with a sense of pre-emptive market intervention or of timely enforcement. Ketchum tells us about FINRA believing and being concerned. There is also quite a bit of reminding and thinking going on. Further, we are told of the issuance of challenges and calling on firms to do the right thing. Frankly, it seems that FINRA and its predecessors tried that whole thinking, challenging, believing, analyzing, and talking thing before - or so we were often told when folks were testifying before congressional committees to explain what went wrong.
Ultimately it's not my intent to paint Ketchum out as a bad guy; he is not . In fact, I am convinced that he is quite sincere and dedicated to his vision of Wall Street regulation. The problem for me is that the results of FINRA's regulation consistently fall short, and that means that many of those regulating Wall Street just don't seem to have an effective gameplan. As I have often quipped: When a man's been divorced ten times, it can't always be the wife's fault.