FINRA Gets Some Needed Heat

Is FINRA Effective? Do investors need the fiduciary standard -- or is suitability enough?
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FINRA Gets Some Needed Heat

Post by GeorgiaGulf » Wed Oct 12, 2011 9:08 am

Why FINRA May Become An Even Bigger Joke

Last week one of our most outspoken and insightful contributors, Bill Singer, reported that a Federal Appeals Court in Manhattan ruled the Financial Industry Regulatory Authority (FINRA) didn’t have the right to discipline its member firms by taking them to court. The fourteen year old case involved a penny stock firm named Fiero Brothers, Inc. that was shut down and fined $1 million. Fiero never paid its fine and now the appeals court says FINRA didnt have the right to sue it.

The whole thing makes me laugh because ever since I started reporting on Wall Street and financial services firms in the 1980s, FINRA, then known as the National Association of Securities Dealers (NASD), had a reputation for being impotent. In July 2007, just as our financial crisis was getting underway, NASD changed its name to FINRA. Today many everyday investors think of FINRA as an important cop out there policing the investment landscape and protecting us from financial evil doers.

But the word “self” in SRO, means that the whole agency is run by members of the firms it is seeking to regulate. I think if you do some checking you will find that FINRA has never been a very effective cop on its beat. With a staff of about 3,000 it oversees more than 4,000 brokerage firms including Goldman Sachs, Merrill Lynch and E*Trade, and 600,000 or so brokers. FINRA’s very lifeblood comes from fees derived from its own members and registered reps.

Over the years FINRA has been describes as being “asleep at the wheel” when it comes to taking action against disreputable member firms. In my early days as a reporter the headlines were dominated by boileroom penny stock floggers like Blinder Robinson & Co and First Jersey Securities. More recently we have experienced the pain caused by firms like Bear Stearns and Bernard L. Madoff Securities. In fact at one time Ponzi king Madoff was the vice-chairman of FINRA predecessor, NASD. Bernie Madoff was one of our top securities regulators!

Now Alabama Republican Representative Spencer Bachus is pushing hard to give more regulatory power to FINRA because the SEC is ill-equipped to handle the job. To me its a bit like letting the student council at a junior high school take over the principal’s office because the principal and his staff are ineffective.

In the next issue of Forbes Magazine Emily Lambert will have a story on a FINRA’s current challenges. In conjunction with the story we will be hosting a conversation about whether or not FINRA is the right cop for the immense job of policing our investment securities business. Please add your comments to this post if you would like you join in online and in the pages of Forbes Magazine.

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