Independent financial advisors face an avalanche of regulation when it comes to their businesses. Of the many agencies that regulate advisors, they engage more often with FINRA than any other securities regulator. Improving their experiences by reducing the burden placed upon them by inefficient regulatory requirements will make it easier to run their businesses well and serve their clients effectively.
There are many ways to achieve this goal, but the process of navigating FINRA regulations could be greatly improved by implementing robust cost-benefit analysis for rulemaking, reforming the arbitration process, creating procedures that promote exam consistency and efficiency, and enhancing transparency in FINRA’s operations. A breakdown of these four items follow:
Robust Cost-Benefit Analysis Requirements for Agency Rulemakings
- Implement cost-benefit analysis early in the process: A systemic analysis that clearly identifies the problem a rule is designed to solve and the underlying assumptions made in proposing the rule. The cost-benefit analysis would lead to a final rule only if the benefits clearly outweigh the costs. This process would go a long way by forcing FINRA to think thoroughly through the potential unintended consequences of proposed regulation.
- “Look-back” requirement: A requirement for newly adopted rules examining whether they are achieving their intended purposes while avoiding unnecessary costs, and eliminating rules that fail this requirement. FINRA would also be required to review its entire rulebook to revise or eliminate ineffective rules.
- Publish document detailing process: FINRA should provide the public with details of their cost-benefit process in a fashion similar to the SEC’s decision to publish its memorandum on guidance for economic analysis.
Reform the FINRA Arbitration Process
- Motion to Dismiss Rule: The revisions to the Motion to Dismiss rule makes dismissal of claims on statute of limitations or eligibility grounds all but impossible, resulting in increased legal fees and additional settlement negotiation leverage for claimants who pursue frivolous cases.
- Public Arbitrators: Data has shown that recent changes implementing the all-public panel option has resulted in a pendulum shift toward claimants in arbitration cases. Additionally, attorneys who earn 100 percent of their revenue from representing claimants in arbitration cases continue to qualify as public arbitrators.
- FSI Task Force: FSI has formed a Task Force made up of experienced attorneys, arbitrators, and broker-dealer executives which is tasked with developing a white paper summarizing proposed reforms to the process.
Promote Exam Consistency & Efficiency
- Feedback Processes: Measures should be taken to allow firms to provide feedback to FINRA examiners which will be reviewable and measurable. Providing this feedback will provide a mechanism for FINRA to establish a benchmarking process for identifying inconsistent rule interpretations and exam experiences.
- Make Uniformity a Priority: FINRA should establish additional processes and procedures to review exam feedback in order to implement changes to the exam process that will result in increased uniformity and consistency.
Increase Transparency and Accountability
- Meeting Transparency: Enhance advisors’ ability to actively participate in FINRA governance by publishing agendas to all FINRA Board of Governors, Small Firm Advisory Board, District and other standing committee meetings.
- Transparent Disclosure: Prominently disclose details of FINRA’s lobbying activities, investment transactions, and compensation for top executives.
- Ombudsman: Raise the profile of the FINRA Ombudsman and educate members on its role.
Taking these steps would greatly enhance the ability of advisors to navigate the regulations put forth by FINRA, as well as offer relevant input on how to further improve the organization’s efficacy and operations.
What do you think of these points? Share your thoughts and suggestions in the comments section!