Heritage Foundation Releases Landmark Report on FINRA

February 2, 2017

For much of the past 25 or so years, I have been a somewhat lone voice in the regulatory wilderness, protesting the excesses of inept regulators and ineffective regulation. I am not an opponent of regulation, however, and my early career on Wall Street included two stints as an industry regulatory lawyer with the American Stock Exchange and the National Association of Securities Dealers (now known as the Financial Industry Regulatory Authority "FINRA"). In my private practice of law, in addition to representing industry clients, I also represent defrauded public customers and industry whistleblowers.  

In more recent years, I have unabashedly characterized FINRA as a failed self-regulatory organization. I criticize FINRA not simply because of what it has become but because I know what it could be. As one who favors the libertarian political perspective, I am frustrated by the failure of the private sector to meet the challenge of implementing a fair and effective regime of self regulation. Sadly, FINRA comes off as little more than a trade group that too often acts as a lapdog for its too-big-to-fail members. Among the failed policies doggedly pursued by FINRA is a one-size-fits-all regulatory scheme that has been forced upon a beleaguered small firm community. In justifying its existence, FINRA persists in policies that have socially engineered its smaller firms out of existence while inexplicably exalting the excesses of its larger member firms. This lack of vision and clumsy oversight is a disservice to thousands of smaller brokerage firms, to hundreds of thousands of disenfranchised men and women who work in the financial community, and, in the end, to millions of public customers who are victimized by unscrupulous industry participants and by the ponderous bureaucracy of self-regulation. 

After some eight decades of trial and error, the self-regulatory experiment that has come to rest in the form of FINRA should be consigned to the garbage dump. The hope -- the slim hope -- is that under the guidance of new Chief Executive Officer Robert Cook, FINRA may abandon its failed policies and aggressively move to implement a more effective regulatory scheme. To his credit, Cook has said the right things and has shown a cautious hand on the tiller. The honeymoon between him and the industry, and the patience afforded to him by consumer advocates has been appropriate; but the calendar will soon turn to a point in time when aspirations must take on the substance of results.  Cook may not have created the mess but he will be held responsible for cleaning it up.

On February 1, 2017, the Heritage Foundation published "Reforming FINRA" (Backgrounder #3181 on Economy, by David R. Burton, February 1, 2017). I can not limit the amount of praise that I can shower on this epic work. As noted in the report's introduction, Burton's thesis is that:

FINRA is a regulator of central importance to the functioning of U.S. capital markets. It is neither a true self-regulatory organization nor a government agency. It is largely unaccountable to the industry or to the public. Due process, transparency, and regulatory-review protections normally associated with regulators are not present, and its arbitration process is flawed. Reforms are necessary. FINRA itself, the SEC, and Congress should reform FINRA to improve its rule-making and arbitration process. This Heritage Foundation Backgrounder outlines alternative approaches that Congress and the regulators can take to improve FINRA, and provides specific recommended reforms.

lawyer who focuses on tax matters, securities law, and regulation among other areas, Burton is the Heritage Foundation's Senior Fellow in economic policy. His expertise on the topic of self regulation is evident by the power of his analysis and the force of his conclusions. This is a MUST READ for all Wall Street participants.

From the "I Told You So" school of vindication, a walk down memory lane: