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.
