Close Close
Sign In
Newsletters
Popular Financial Topics Discover relevant content from across the suite of ALM legal publications From the Industry More content from ThinkAdvisor and select sponsors Investment Advisor Issue Gallery Read digital editions of Investment Advisor Magazine Tax Facts Get clear, current, and reliable answers to pressing tax questions
Luminaries Awards
Podcast Center Video Center Webcasts Resource Center Events
About ThinkAdvisor Contact Us Advertise With Us Asset & Logo Licensing Sitemap Terms of Service Privacy Policy Copyright © 2024 ALM Global, LLC. All Rights Reserved.
ThinkAdvisor

Regulation and Compliance > Federal Regulation > FINRA

FINRA Plays ‘Gotcha’ With Brokers, Short-Changes Investors: Hester Peirce

By Jane Wollman Rusoff

X
Your article was successfully shared with the contacts you provided.

The Financial Industry Regulatory Authority plays gotcha with brokers, turns a deaf ear to firms and falls short in giving investors enough protection. That rotten review is from Hester Peirce, a former Securities and Exchange Commission staff attorney whom Barack Obama nominated last year for an SEC commissioner seat.

In an interview with ThinkAdvisor, Peirce declined to comment on the fact that, after a long delay, the Senate Committee on Banking, Housing and Urban Affairs did not vote her in; but she was indeed forthcoming about the need for regulatory reform in the financial services industry.

The Republican attacked FINRA and the Dodd-Frank Act and proposed ways the Securities and Exchange Commission could act to prevent another financial crisis. She fears the next one will be more severe than the calamity of 2008.

In her capacity as a senior research fellow at George Mason University’s Mercatus Center, Peirce has become known for her sharp criticism of financial markets regulation. Had she been voted a commissioner, she would she would have replaced Daniel Gallagher, a Republican who left the SEC in 2015.

Peirce continues to serve on the SEC’s Investor Advisory Committee. Between stints at the SEC and Mercatus, she was a staff member on the Senate Banking Committee.

ThinkAdvisor recently spoke with Peirce, who was on the phone from her Mercatus office in Arlington, Virginia. She is editor of and a contributor to a book that can obviously be deduced by its cover: “Dodd-Frank: What It Does and Why It’s Flawed” (Mercatus, 2012).  Here are highlights from our conversation:

What’s your reaction to President Donald Trump’s directives about the Dodd-Frank Act and the Labor Department’s fiduciary rule?

It’s definitely encouraging to see there’s some potential for change in financial regulation.

You have big issues with FINRA. For instance, you’ve written that it’s “hostile” to the industry.

Maybe “hostile” wasn’t the best word. But I’m not sure that FINRA serves anyone well its current form.  If you had a real self-regulator, it would work to implement the highest standard for the industry. But with a [presumed] self-regulator [FINRA] that’s playing gotcha with brokers, that’s when [brokers] who are honestly trying to do the right thing feel they have problems.

You’re saying that FINRA isn’t a “real” self-regulatory organization?

FINRA doesn’t even classify itself as an SRO anymore. They describe themselves as an independent regulatory organization. Their board isn’t a board of broker-dealers; it’s a board that has [only] some broker-dealer representation. FINRA now looks like just another version of the SEC.

Doesn’t the SEC have a federal mandate to regulate brokers?

Sure they do. But they’ve outsourced a lot of that work to FINRA.

What else troubles you about FINRA?

There are lots of complaints from the firms themselves, who worry about not being heard by FINRA. They say they want to serve their customers better by doing [such and such], but FINRA isn’t receptive to that. And investors feel they’re not getting the protection they need. The SEC perhaps doesn’t have as much insight into that portion of the financial services world as they should have.

Because FINRA has so much authority – and calls itself “Authority,” many consumers think it’s a government agency.

That’s an issue because on one hand, they’re able to do things that look a lot like a government agency; but on the other, you’re not subject to the same protections if you interact with FINRA as you would with a government agency. That’s where a lot of the concern arises.

Even though the SEC is supposed to oversee FINRA, it gives the impression of operating without accountability.

Yes. And they set a big budget and have lots of people working there. FINRA is almost the same size as the SEC. So it’s difficult for the SEC to oversee.

You’ve pointed out that the fines FINRA imposes “go into their own coffers.”

Right, which is not the way for any regulator to operate. You don’t want to reward the regulator.

How would you revamp FINRA?

I haven’t decided what the best remedy is – whether it’s to fold it into the SEC or to try to revise it from within. They have a new president and CEO [Robert Cook], who’s looking at things with fresh eyes. So we could see some changes coming from FINRA itself, or we could see statutory change that would give additional protection to brokers and investors.

What, specifically, would you like to see changed?

We certainly need some transparency in general about what they’re doing and how they’re using their money, understanding better their budget, more about their cases. There have been complaints about BrokerCheck. So making sure that that database is working properly is another area that needs [attention].

You wrote that the Dodd-Frank Act is “rewarding the regulators who missed the financial crisis.” Please explain.

Lots of people missed the financial crisis, and the regulators happen to be among those who missed it. They are people that make mistakes, just like the rest of us. But after the crisis, the regulators that made mistakes ended up with more power, more authority and more discretion. The Fed expanded its area of jurisdiction.

How does the SEC see its role?

The SEC has a much healthier vision and attitude about the financial industry and their role as a regulator compared to the bank regulators. That is, the SEC is here to regulate the industry, not to prevent individual firms from failing. If individual firms do stupid things and fail, they’re allowed to fail. And a firm that’s better able to serve customers will come in and take its place.

What’s the SEC’s goal in such a situation?  

To make sure it’s protecting a failing firm’s customers. Beyond that, you let the firm fail; and that’s that.

What’s the impact?

It creates dynamism in the economy that fuels economic growth and helps ward off financial crises. The SEC can do its best for the economy by making sure the capital markets are vibrant and that investors are able to participate in them. By performing that role, it provides a financial stability function.

In a nutshell, what’s wrong with Dodd-Frank?

The nutshell version is that it takes an approach to solving problems that relies on the regulators to make the right decisions to stop problems before they arise. That’s asking regulators to do too much. We need to have better regulation, but it has to incorporate the market’s eyes and ears on the ground as part of the structure. If you don’t let the market perform its natural disciplinary functions, you end up in a very dangerous place. And that’s where we are right now.

What should be done to get us out?

For one, look at the functions of the [Treasury Department’s] Financial Stability Oversight Council [which identifies risks]. Giving it powers to make recommendations to other regulators and to designate specific institutions by, sort of, labeling them too big to fail is problematic. It can lead to all kinds of regulatory distortions.

You’ve written that the next financial crisis is likely to be worse than the last. Why?

Because you have regulators, like the Fed, that have much more power over many more types of institutions – not only large bank holding companies but insurance companies and large broker-dealers and, maybe, asset managers, depending on how broad their reach is. So the mistakes the regulators make will reverberate more broadly throughout the system because more entities will be regulated in the same way as others versus having a little diversity with each regulator doing their own thing.

What’s your opinion of the Labor Department’s fiduciary standard rule for financial advisors managing retirement accounts?

I take the position that the rule would be better [established] by the SEC. That’s the regulator that should be dealing with those types of things. It makes a lot of sense to have the expert regulator in investor protection working on the [fiduciary] issue.

Is the SEC doing anything new right now with regard to RIAs?

They’re looking at how they can better oversee all of those registered advisors. They’re trying to figure out how to examine them frequently and thoroughly enough.

You argued during your Senate confirmation hearings that the SEC needs more expertise in the fixed income area. What would that entail?

Hiring some folks with experience in fixed income. The SEC has always been a little bit more focused on equities than on fixed income. But there’s a lot of [retail] money in fixed income. So if the SEC were looking at where they should allocate revenue, that might be a good place.

What are your hopes for the SEC in the short term?

The SEC has a really positive role to play in working to see that capital formation is easier in the U.S. That includes things like looking at what’s stopped companies from doing IPOs. We’ve seen fewer IPOs, and they’re [occurring] later in the lifetime of a company. The acting chairman [Michael Piwowar] has already signaled an interest in looking at some of Dodd-Frank’s rules to see whether they’re properly calibrated.

What else should the SEC do?

There are issues like trying to make sure the securities industry is doing what it can in terms of cybersecurity. And obviously, the agency should also be making sure it’s going after fraud. It certainly has a very important role there as well.

If the SEC did all that, would it help prevent another financial crisis?

Yes.

Does the law allow you to be nominated a second time to be an SEC commissioner?

There’s no legal barrier to people getting renominated. I think that Lisa [Fairfax, a Democratic law professor also nominated and not confirmed last year] and I are both eligible to be renominated.

In your statement to the Senate committee, you mentioned that when you were in elementary school, your hobby was plotting stock prices. Pretty unusual at that age!

My dad is an economist and would get the Wall Street Journal. I saw the pages in the back and wondered what all those lines were. So I loved getting out my graph paper and thought it was fun to see what was happening to companies’ share prices – but I had no money riding on anything.

— Related on ThinkAdvisor:

NOT FOR REPRINT

© 2024 ALM Global, LLC, All Rights Reserved. Request academic re-use from www.copyright.com. All other uses, submit a request to [email protected]. For more information visit Asset & Logo Licensing.