This article was originally published in Real Clear Markets
Self-regulation sounds like such a good concept. Not surprisingly, though, self-regulation, as it has come to be interpreted in Washington, is little more than government regulation conducted by a private entity without due process, accountability, or transparency. The House Financial Services Committee should keep the Washington reality in mind as it undertakes consideration of a bill to establish self-regulation for investment advisers.
The Washington version of a self-regulator is exemplified by the Financial Industry Regulatory Authority. FINRA, which is the successor to the National Association of Securities Dealers, regulates securities firms and is hoping to expand its reach to include investment advisers. Membership is compelled by law. If a brokerage firm wants to deal with the public, securities laws require it to be a member of a national securities association. The catch is that there is only one such association -- FINRA.
Failing to comply with FINRA's code of conduct is a punishable offense. Securities laws give FINRA the power to act in place of the SEC, as front-line regulator for brokerage firms and their employees. FINRA, using the power delegated by the SEC, writes the rules that govern what firms and their employees can do and how they can interact with customers. FINRA examines firms and doles out punishments for violations of FINRA's rules and the securities laws, including imposing fines and kicking people out of the industry.
FINRA's functions and powers look a lot like those of a government regulator, but that is where the similarities end. FINRA is not subject to the Administrative Procedure Act or cost-benefit analysis requirements of SEC rulemaking, and FINRA's decision-making process is less transparent than the SEC's process. Further, when FINRA takes a disciplinary action, even one that can destroy a member's reputation and livelihood, it is not subject to the due process requirements that a government regulator would be.
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In Finance, Private Regulation vs. Government Regulation
This article was originally published in Real Clear Markets
Self-regulation sounds like such a good concept. Not surprisingly, though, self-regulation, as it has come to be interpreted in Washington, is little more than government regulation conducted by a private entity without due process, accountability, or transparency. The House Financial Services Committee should keep the Washington reality in mind as it undertakes consideration of a bill to establish self-regulation for investment advisers.
The Washington version of a self-regulator is exemplified by the Financial Industry Regulatory Authority. FINRA, which is the successor to the National Association of Securities Dealers, regulates securities firms and is hoping to expand its reach to include investment advisers. Membership is compelled by law. If a brokerage firm wants to deal with the public, securities laws require it to be a member of a national securities association. The catch is that there is only one such association -- FINRA.
Failing to comply with FINRA's code of conduct is a punishable offense. Securities laws give FINRA the power to act in place of the SEC, as front-line regulator for brokerage firms and their employees. FINRA, using the power delegated by the SEC, writes the rules that govern what firms and their employees can do and how they can interact with customers. FINRA examines firms and doles out punishments for violations of FINRA's rules and the securities laws, including imposing fines and kicking people out of the industry.
FINRA's functions and powers look a lot like those of a government regulator, but that is where the similarities end. FINRA is not subject to the Administrative Procedure Act or cost-benefit analysis requirements of SEC rulemaking, and FINRA's decision-making process is less transparent than the SEC's process. Further, when FINRA takes a disciplinary action, even one that can destroy a member's reputation and livelihood, it is not subject to the due process requirements that a government regulator would be.
W