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Weasel Brokers Whine When Faced With New Rules


Ben S. Bernanke last week floated the notion of “macroprudential regulation,” government-speak for “an attempt by regulators to develop a more fully integrated overview of the entire financial system.”

Good luck, Mr. Federal Reserve chairman. If integration, broker oversight or speedy reporting of trouble are among the goals you’re shooting for, you had better brace yourself. The lobbying locomotive known as America’s financial industry was armed and already doing battle over a plan for stricter rules before you hopped that plane for the Fed’s conference at Jackson Hole, Wyoming.

The Financial Industry Regulatory Authority, formed when the New York Stock Exchange and NASD merged their regulatory units in July 2007, is in the midst of rewriting the rules that govern brokerage firms. The two sets of rules used by Finra have been partially cut back, partially merged, and, in some cases, reworked into proposed new rules. It’s the proposals for new rules that have some financial bosses morphing into candidates for anger-management class.

For a flavor of the industry’s reaction to the proposals, consider these choice observations made in the letters sent by banks, insurance companies, brokerage firms and their related lobbying groups this summer: Finra’s proposals were “overly burdensome,” “inappropriate,” “unnecessarily bureaucratic,” and would doom financial firms to new exposures to lawsuits.

“Finra has taken the position, which I support, that somebody’s got to be responsible,” for the mass of banking, insurance and securities products all being sold under one roof, says Philip M. Aidikoff, a Beverly Hills, California, lawyer who represents investors. “The pushback is from folks who don’t want to be regulated.”

Taking Offense

Among the offending suggestions Finra has floated is that brokerage firms establish a system “to supervise the activities of each associated person” in order to comply with securities laws. A regulator suggesting that brokerage employees be regulated? No wonder the firms are up in arms.

The rules now refer narrowly to an obligation to supervise registered representatives and registered principals — employees who have licenses granted by Finra. The feared “associated persons” category would take in others, including unlicensed partners, officers, directors and sole proprietors of brokerage firms. We wouldn’t want to pester them with rules, would we?

Nor would we want to make the bosses responsible for the stuff that the brokers were selling — at least if the “stuff” wasn’t officially overseen by securities regulators. Finra suggested that firms designate a registered principal to supervise “each type of business in which it engages.”

What Gall

Terrible idea, wrote Robert Keenan, chief executive officer of St. Bernard Financial Services Inc. in Russellville, Arkansas. “Finra has absolutely no basis, nor logic, to attempt to force broker/dealers like us to supervise non-security activities of our representatives.”

“We fear regulatory overlap and redundancy” if principals get that sort of authority, wrote James Livingston, CEO of National Planning Holdings Inc., in Santa Monica, California. The company has four brokerage subsidiaries.

Securities firms are equally galled that Finra is suggesting that firms hold on to customer complaint letters for four years, up from the three now; that firms send a written report to Finra within five business days of completing an internal investigation; and that offices be inspected every three years, something that’s way too costly given “today’s challenging economic environment,” in the view of the Securities Industry and Financial Markets Association, a trade group for the brokerage industry.

`Untenable Position’

ING Advisors Network, an Atlanta-based network of independent brokers, wrote to oppose record-keeping requirements that were “in addition to Securities and Exchange Commission rules.”

Firms also groused about Finra’s proposal to get tough about “outside business activities” of brokers, which can range from legitimate selling of insurance products to off-the-wall Ponzi schemes. Finra suggests that brokers get written permission from their firms before they engage in outside activities, and that brokerage firms be responsible for overseeing those activities once they approve them.

Bad idea, wrote J. Peter Purcell, CEO of Purshe Kaplan Sterling Investments in Albany, New York. It would put Finra members “in the untenable position of directly or indirectly supervising” registered investment advisers who weren’t Finra members, he said.

Piecemeal Regulation

Finra’s critics are technically correct that it is encroaching on other regulators’ territory. In practice, though, there’s a whole lot of business going on that isn’t getting scrutinized when a financial employee sells products and services subject to piecemeal, uncoordinated regulation.

In Bernanke’s “macro” regulated financial world, rules like the ones Finra is suggesting could be just the thing to shut down the industry weasels who parse every rule looking to avoid accountability. For a real understanding of where the loopholes are, the Fed chairman might sit back with a stack of those comment letters and compare them with the firms’ disciplinary records.

Purshe Kaplan Sterling was censured by Finra earlier this year because it hadn’t set up procedures for special supervision of brokers after customers filed complaints.

Financial Network Investment Corp., a broker-dealer in the ING Advisors network, was censured and fined by Finra in 2004 for being late in filing 130 amendments related to customer complaints, terminations, regulatory actions and criminal disclosures in its brokers’ records.

SII, one of National Planning Holdings’ subsidiaries, was censured and fined by Finra three times for supervisory problems over the past eight years. Kansas censured the firm for supervisory violations in 2004. Wisconsin censured and fined it for failure to physically visit its branch offices for compliance reviews in 1993.

These guys are complaining that Finra wants to make the rules tougher? Of course they are. Now let’s see if policy makers have the muscle to stand up to them.