Wall Street’s trade group is chiding the Financial Industry Regulatory Authority for regulating by enforcement, arguing that its broker-dealer members are subject to enforcement actions or exam findings based not on specific regulatory requirements or official guidance, but rather “on unofficial legal positions taken by FINRA staff.”
The Securities Industry and Financial Markets Association wrote a recent comment letter to the self-regulator as part of FINRA’s requests for input on potential enhancements to certain engagement programs. SIFMA noted that examples of FINRA regulating by enforcement involved mutual fund share classes, market access controls and surveillance programs.
Further, SIFMA stated that a position taken in a settlement with a particular firm “then becomes an ‘interpretation’ which is applied to all firms.”
Another example, SIFMA argued, is when FINRA decisions are based on statements in speeches given by FINRA staffers or on outdated guidance in Regulatory Notices.
What Your Peers Are Reading
“Member firms find ‘regulation by enforcement’ extremely troublesome because it creates legal standards and imposes retroactive regulatory requirements and legal liability outside the formal rulemaking process,” SIFMA stated in its comment letter.
Robert Cook, FINRA’s CEO, instituted the FINRA360 initiative earlier this year, undertaking a comprehensive probe of the self-regulator’s operations and programs.
SIFMA also told FINRA that it would like to see “more rigorous application of FINRA’s framework for economic impact assessment, especially when consulting with key stakeholders in the development of rules and aggregating data to assess a proposal’s cost effectiveness, including consideration of alternative means of regulation.”
FINRA should also “do more to consider and internalize member input on regulatory matters,” SIFMA argued.
“Based on our experience, FINRA does not sufficiently consider and internalize member input or gather enough cost and benefit data — often resulting in unworkable or unnecessarily costly rules.”