Lawmakers: FINRA Oversight Hard on Small Dealers

WASHINGTON - Republicans on a House panel Friday criticized the Financial Industry Regulatory Authority for being too heavy-handed with small broker-dealer firms.

Members of the House Financial Services Committee's capital markets subcommittee questioned FINRA chairman and chief executive officer Richard Ketchum, the sole witness at the hearing on the self-regulator.

In his opening statement, subcommittee chairman Rep. Scott Garrett, R-N.J., charged that FINRA is no longer a traditional self-regulatory organization and has become more of a junior Securities and Exchange Commission.

"FINRA continues to step far beyond, I believe, its original jurisdiction," Garrett said. FINRA and the Securities Exchange Commission are the primary enforcers of the federal securities laws and municipal rules that apply to munis, while the Municipal Securities Rulemaking Board writes those rules and they are approved by the SEC.

FINRA examiners monitor broker-dealer activity through periodic examinations as well as through market surveillance. The self-regulator is also the primary examiner for dealer-affiliated municipal advisors under the SEC's municipal advisor registration rule.

Rep. Robert Hurt, R-Va., told Ketchum that small broker-dealers seem to struggle under the costs of complying with FINRA rules. Garrett said he has heard from smaller firms that they feel that FINRA does not listen to their concerns.

Ketchum said that it bothers him that small firms would feel left on the outside looking in, and acknowledged that they operate in a difficult environment.

But he also told the panel, "I do believe that small firms have a lot of input into FINRA." The complaints at the hearing on FINRA were similar to those made by Steve Genyk, chairman of Bond Dealers of America's board, in a recent interview with The Bond Buyer. Genyk said BDA is focused on what it feels is a disproportionate impact of rules and enforcement actions on small and medium-sized firms. "You're going to hear that from us over and over again," he said, making the point that while certain costs may be easily absorbed by major Wall Street firms, they are typically a burden for BDA members.

The hearing came just a day after the Government Accountability Office released a report recommending the SEC improve its oversight over FINRA by developing specific performance goals for the self-regulator to meet and improving the commission's own procedures for selecting FINRA programs and operations for oversight. Under federal law, the SEC approves FINRA rules, handles appeals of FINRA disciplinary actions, and is responsible for overseeing FINRA's effectiveness.

In his prepared testimony, Ketchum told lawmakers about FINRA's recent work, including muni market initiatives.

"In the area of fixed income securities, we have been working closely with the SEC and MSRB to develop ways to enhance transparency and execution quality in the fixed income market," Ketchum told the panel. Last year FINRA proposed a rule jointly with the MSRB that would require dealers to provide customers on their confirmations a "reference price" of the same security traded that same day.

Ketchum also told the legislators that FINRA plans to publish guidance on best execution -- something MSRB officials have also said they plan to do in coordination with FINRA.

"This guidance will, among other things, reiterate firms' overall best execution obligations and emphasize the importance of evaluating the availability and accessibility of electronic systems and how such systems can provide benefits to their customer order flow to ensure they receive the best prices reasonably available," Ketchum said.

FINRA's annual conference takes place in Washington May 27-29.

For reprint and licensing requests for this article, click here.
Enforcement Law and regulation
MORE FROM BOND BUYER