From my perspective, FINRA is often little more than an inept and frequently ineffective regulator. Unabashedly and without any hesitation, I have long characterized FINRA as the lap dog of its larger member firms and little more than a hijacked trade group intent on eliminating its smaller members and promoting financial superstores and regional brokerages. Harsh words? Absolutely. Off the mark and unfair? I think not.As a former Series 7 and 63 registered representative; in-house brokerage, mutual fund, and investment company lawyer; American Stock Exchange lawyer and NASD attorney; as one of the founders of the NASD and then the FINRA Dissident Movement; as one of the four 1998 original petition candidates who first contested NASD's nominated Board candidates; and as a long-time advocate for industry reform, I remain disappointed with FINRA's persistent failure to embrace disparate views and to constructively reach out to dissidents. I have a big mouth. I have bellowed from the wilderness since the 1990s; but there is a difference, after all, between hearing and listening. I'm not questioning whether FINRA hears me; I'm questioning whether FINRA listens.During my 35 years on the Street, I have submitted only a couple of comments in response to various NASD/FINRA notices. Frankly, I view the effort as a waste of my time because the SRO only seems interested in confirmation of whatever initiative it is proposing. Why then did I publish this long-winded and expansive comment? Maybe it's old age catching up with me and a sense that this may be the last opportunity to lay it all out on the line.Bill's comment on the FINRA Special Notice is extensive and represents several weeks of consideration and revision. It is not something that you will likely see repeated in the near future. All serious market participants -- from broker-dealers to registered reps to customer advocates -- should invest the time to read through his sincere but blunt comment. By way of spoiler alert, here is a reform proposal as set forth in Bill's comment:
All of those in the FINRA community must accept the symbiotic need to police the industry, to root out the bad actors, to empower regulatory staff with the prerogatives and tools to fairly investigate and prosecute misconduct, and, in the end, to persuade the public for whom the industry exists that, yes, the private sector is a more nimble and effective regulator than big government. If you re-read the Special Notice, you will not find a single reference to the appropriate influence of associated persons, public customers, issuers, and other market participants. Who stands for those stakeholders? Who speaks out on their behalf? When do those market participants get to raise concerns about the inappropriate influence of FINRA's larger firms and of FINRA itself?I urge FINRA to reinvent itself as a "private sector regulatory organization" ("PSRO") and to expand and enhance its mission from one for the broker-dealer industry towards one for the larger private sector served by the financial services community. In furtherance of that change, the PSRO would serve in a holding-company role that oversees each of three regulatory divisions dedicated to Small member firms (smallest 25% of broker-dealers), Mid-sized member firms (50% of broker-dealers measured from midpoint), and Large member firms (largest 25% of broker-dealers). Pursuant to that restructuring, each division would draft a rulebook responsive to the unique needs of its constituency. The PSRO would fully enfranchise associated persons, and provide for the proportionate representation for such stakeholders as public customers, issuers, and regulators. Without question, a PSRO Board seat should be set aside for an investors' advocacy group such as PIABA.As part of reimagining the SRO into a more expansive PSRO, all industry registration and continuing education should be undertaken directly by an applicant through the PSRO holding company and not through the member firms. FINRA should establish an Anti-Fraud Fund whereby all defrauded public customers would obtain restitution in the event that member firms or associated persons fail to timely honor any awards for compensatory damages, costs, and fees. Finally, I would abolish mandatory arbitration for customers and associated persons.