The Blog Of The Securities Industry Professional Association

The End Of FINRA: Dec 5, 2008

In several articles earlier this year, we broached the unthinkable: that the End Of FINRA was potentially at hand. Since then, we have seen much in the way of de-facto re-organization, with the Bulge Bracket firms – such as they still exist – coming under direct control of the Treasury.

Ironically, what this means is that the FINRA’s purview no longer includes those Majors in any real sense – and what the FINRA is left regulating is all of the smaller firms – the very ones that the FINRA has arguably been trying to get out of business for so long.

Curiously, the FINRA has remained somewhat quiet and aloof during this crisis, all but ignored by the maws of the mass media feeding frenzy.

Eventually the chickens come home to roost. Yesterday the FINRA announced a 10% Lay off Round – and  that some 300 employees would take early retirmement . Will the Regulator even be able to maintain it’s current level of oversight with these and future layoffs? And why do the layoffs come now, at this particular moment in time?

Recognition Of Failure And The Art Of Sepuku

At a time when investor confidence is at an all time low, the FINRA is cutting costs by laying off it’s most experienced people. At a time when the FINRA is sitting on a huge pile of cash ($1.5BL), it is choosing to lay off experienced people. At a time when the world is looking to our financial services regulatory matrix for a sign that the house is finally in order, the FINRA is laying off experienced people. At a time when the FINRA is still digesting the merger of it and the NYSE regulatory body, it is laying off it’s most experienced people.

Strange timing for layoffs. An examination of the timing may be probitive. A most obvious factor in the decision for to lay off experienced people might be the fact that approximately 10% of the entire financial services industry was layed off in the last month alone. Could a commesurate 10% layoff be appropriate on this basis?

Unlikely. Turnover at firms actually creates work, from a regulatory perspective; it does not lessen the burden. It may be counterintuitive, but in times of secular financial crisis, the workload at the regulatory powers-that-be increases.

Could these have been planned lay offs, as part of the synergies created by the Merger? If this were so, the timing might have given the regulators pause. Doesn’t look so good to lay off workers right in the middle of a crisis – particularly when the crisis was due to a failure of regulation.

Which brings up an entirely different interpretation. Taking all of the facts together, one can say several things.

  • There was systemic failure to oversee problems that in the clarity of hindsight should have been obvious.

  • Oversight responsibility of the Big Players has been largely removed from the FINRA

  • Regulation going forward will require new approaches and new thinking

So – is this bloodletting a tacit admission of failure, and at the same time an acknowledgment and preparation for real obsolescence?

The Samurai code (Bushido) may be instructive. The way of the Warrior places Honor above all else; even above life, when all else fails. Warriors make decisions and take responsibility for their actions. But to err is human. And when they err, they must atone, or live dishonored. The art of Sepuku is designed to be painful. A deep and penetrating cut to the gut is followed by a ritual disembowlment, a self mutilation in preparation for death.

A 10% cut may not seem terribly significant. But given the circumstances and timing- this writer believes the cut to be both practical and symbolic – and harbinger to sweeping changes.

The End of the FINRA as we know it may be at hand. And I do not write this with any joy. I believe the top management at the FINRA to be enormously capable; albeit guilty of a very human failing. They mis-directed their efforts toward regulatory consolidation at a time when their brilliance was terribly needed in heightened oversight. But how could they predict a black swan like the derivitives blow up? Sure the signs were there, but the FED was highly vocal – advocating more more and more. The blame rests ultimately with the FED in this writers’ opinion. And though the FINRA and SEC made monumental errors, should the baby really be thrown away with the bath water? I hope not. With fervent prayers, etc. Because as bad as the regulatory matrix has been for small firms, can you even imagine what it would be like if congress gets involved and starts creating regulation?

What is needed is strong reform and an end to the entrenched and blind beurocracy that has become modern regulation. Reform. Not cutting new regs from whole cloth.


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