Opponents of a bill that would shift the oversight of investment advisors from the Securities and Exchange Commission (SEC) to another entity such as the Financial Industry Regulatory Authority (FINRA) are gratified that the introduction of the bill has been delayed for several months, according to an aide to House Financial Services Committee Chairman Spencer Bachus, R-Ala. (“SRO bill opponents gaining traction with lawmakers,” InvestmentNews). Congressman Bachus is reportedly hesitating because of concerns expressed by the bill’s opponents.
The bill’s opponents include the House financial panel’s ranking Democrat, Rep. Barney Frank, the Investment Adviser Association, and the North American Securities Administrators Association (NASAA) (the association of state securities regulators), which opposes FINRA-style “self-regulation” and advocates independent state and federal oversight.
FINRA is the self-regulatory organization (SRO) for the brokerage industry. It has been pushing to become the self-regulatory organization for investment advisors as well.
Critics say that FINRA has done a poor job of protecting investors from unlawful sales practices by its member brokerage firms. (“Finra’s fines don’t match the crimes, critics say,” InvestmentNews). “It’s a very bad idea to expand the notion of self-regulation,” Denise Voigt Crawford, former commissioner of the Texas State Securities Board, was quoted as saying, adding: “They’re supposed to oversee the activity of the industry, but they are industry.”
FINRA’s funding comes from the brokerage industry. Senior FINRA executives are very well paid with industry money. Compensation for FINRA’s top 10 executives was $11.6 million in 2009. The current FINRA CEO, Richard Ketchum, received $2.24 million in salary in 2009, plus incentive pay and retirement benefits. Former FINRA CEO Mary Shapiro received $8.99 million as a “final distribution,” which included $7.6 million in vested retirement benefits when she left FINRA to become chairman of the SEC.
The rich executive compensation that is ultimately paid by the brokerage firms that FINRA is supposed to regulate provides a disincentive for the head of FINRA and other top executives to “bite the hand that feeds them.” The low level of fines FINRA imposes on its member firms for violations is evidence that the disincentive works. FINRA fined members $43 million in 2010 while the SEC, which has been criticized for lax enforcement, issued more than $1 billion in monetary penalties.
“When you look at the types of misconduct compared to the fines, you have to wonder if it will really deter the misconduct they’re tasked with cracking down on,” Michael Smallberg, an investigator at the Washington-based nonprofit Project on Government Oversight, was quoted as saying, adding: “Would Finra ever take serious action against who it’s relying on for its funding?”
Congressman Bachus’s bill comes after an SEC report that it lacked the resources to examine advisers adequately. The SEC reviewed 8% of registered advisers in fiscal year 2011. A FINRA-type SRO was proposed as one option for Congress to consider.
A more sensible option, according to NASAA and people who care about vigorous enforcement of the securities laws, may be to provide more resources to the SEC.
Page Perry is an Atlanta-based law firm with over 150 years collective experience representing investors in securities-related litigation and arbitration. While past results are not indicative of future success, Page Perry’s attorneys have recovered over $1,000,000 for clients on more than 45 occasions. For further information, please contact us.