The Blog Of The Securities Industry Professional Association

FINRA Launches Retrospective Rule Review

 FINRA recently announced that they will begin conducting a “look back” at their current rules to determine if the rules are meeting their intended objectives.

“FINRA believes it is important to look back at its significant rule makings to determine whether those rules and rule sets are meeting their intended investor-protection objectives by reasonably efficient means,” said Robert Colby, FINRA’s Chief Legal Officer. “By thoroughly assessing the impact of existing rules, FINRA will be able to ensure that its rules remain pertinent to current industry and market conditions and carefully tailored to protect the interests of the investing public.

The review process will consist of two phases: (1) findings and (2) action. During the findings phase, FINRA will assess the efficacy and efficiency of the rule or rule set as currently implemented.

Bravo to FINRA for finally doing something that most normal corporations do: Internal review.  Any good businessman knows that this should occur annually if not quarterly.  For instance, some broker dealers will evaluate their lines of business and decide to give up Muni Bonds and options because they barely had any transactions in those lines the last few years.  They may also explore their current policies and procedures to ensure that their outside brokers are indeed following the protocol.  While I applaud FINRA for this long overdue review, I feel its my  obligation to make things easier on them and give them a few areas in which the rules have not helped but have rather hurt investors. Here are just a few:

1)    Anti Money Laundering:  While this seems like a wonderful program that may help aid the finding of terrorists and mobsters, It can be argued that American Investors are being ravished by exorbitant fees every time they enter a trade.  Because of this rule, Investors have very few options when depositing stock certificates.  Fees from $1000-$2000 dollars are now the standard for depositing $10,000 worth of a low priced stock.   Is it the investors fault the company isn’t the next INTEl or Netflix?   In addition, almost all companies now put through huge front end fees on any new account opened so they can run dozens of identification checks.  Lastly, because of the difficulty in clearing stock certificates, most brokerage firms are charging the full 5%on all liquidations. I may be wrong but I have yet to see a press conference over the last 12 years in which there was a major terrorist network thwarted due to the AML efforts of a small firm in Idaho.

2)    PCAOB accounting Standard: This rule was made effective several years ago and has had the opposite effect then was intended. The rule has been an anchor around the necks of small firms and has caused harm to their ability to compete.   The financial audit of a CPA is supposed to be independent and not skewed by conflicts of any sort.  It can be argued that the larger firms on Wall Street are more out of control then ever before.  They take more risk and hide more losses than ever and as recently as last year we had the spectacle of the ‘London Whale Trader “ for JP Morgan who lost Billions trading Credit Default Swaps.  Originally the loss was determined to be a billion dollars in 2012, but by October 2013 the loss was estimated to be over 6 billion dollars…if PCAOB audits were so good, how come the supposedly independent auditor didn’t come out with the true financials at the end of 2012?   This is from a firm that was a recipient of TARP and is sucking federal dollars out of the government.  Meanwhile back at the small firm ranch, a one man operation in New York who does mutual funds by subscription only has to pay $20,000 for an annual PCAOB audit to ensure his books are correct and accurate.

3)    Rule 3012 and 3013:   Once again this is a rule that was passed amid the meltdown of Wall Street but in practical purposes accomplishes nothing.  The idea of testing your written supervisory procedures is a little misguided if the firm is not going to follow them anyway.  From FINRA the rule states: “3013report identifies the process a firm follows to establish, maintain, review, test and modify its written compliance policies and written supervisory procedures”.  Once again, we are taking compliance eyes of the ball ( investor protection) and turning them into William Shakespeare and forcing them to read, write and read and write some more.  With all this reading and writing, when is a Compliance officer supposed to find time to actually review trades for suitability?  Every brokerage firm in America knows that un authorized trading and unsuitable trading is against the rules.  The industry would be better served with a compliance officer eying trade blotters rather than writing more and more polices or testing the writing.  Are we really this naïve to think that if a firm had properly written policies and conducted this review that John Thomas Financial or LH Ross would still be in business?


These are just a few of the rules that we believe should be revisited.  What is your view? Please feel free to share them with us.


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May 19th, 2014



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