September 28, 2009
September 28, 2009
We are writing to object to FINRA's proposed pricing increase.
These increases appear to be predicated on the presumption that when revenues derived from the membership go down, the fees assessed to the membership must increase in order to support the status quo regulatory level of oversight. This puts additional stress on all firms and redirects funds that could be used for internal infrastructure and capital reserves to external overseers. Such a scheme does not serve the interests of the investing public or of the membership. It also has the undesired effect of disproportionately burdening smaller firms—those that can least afford it and which were least responsible for the recent financial meltdown.
We note that the current structure contains both a variable (GAI) and a fixed (PA) component, and we consider it fair as it is. While it is difficult for everyone to function in the current environment, the guiding principles for both FINRA and the membership must be: tighten your belts and improve your operations. There must also be much better alignment between regulatory goals and regulatory methods, including the related costs of those methods.
As the last couple of years have shown, FINRA's methods of examination and prevention are deeply flawed. We have seen little indication that FINRA's approach to regulation and examination has changed markedly in the wake of numerous scandals and significant upheaval. Instead, FINRA's position seems to be that they need more money to do more of what they have done in the past. With the proposed increases (100% increases in some cases) FINRA seeks to ensure that its revenue is stabilized despite the fact that the revenues of its members have declined precipitously. We, too, would like to see our revenues stable, but we are not in a position to simply coerce additional revenue from our clients. Such an approach is generally considered unethical and it is also ineffective since our client base is not compelled to work with us.
There needs to be financial justification for the magnitude of the increase—not simply a balancing of the budget. If FINRA must raise its fees, a detailed explanation should be presented of what FINRA has accomplished in the areas of regulatory productivity and investor protection. An accounting of what FINRA has done to address these issues seems responsive to both the membership and to the public it is charged with protecting.
To be effective, compliance efforts must be grounded in a comprehensive firm-based system of strong supervision and ongoing oversight. Regulatory reviews should ensure that these processes are in place and that they are implemented with care and skill and in proportion to the specific issues faced by the firm in question. Further, all reviews of the membership should be approached with an eye toward evaluating genuine risk and considering likely what ifs? that may not be apparent to those working in the firms themselves. This is not the system we have.
Instead, regulatory examinations deal with minutiae and are so broad in scope that it is virtually impossible to focus on significant areas of risk or for the regulators to provide useful guidance. Member time that should be spent monitoring client transactions and representative conduct is instead spent completing forms and reproducing reams of paperwork in response to FINRA checklists that bear little relationship to improving the quality of investment services offered or to protecting the investing public from actual wrongdoing. This, in turn, requires FINRA to devote extraordinary hours to oversight that mostly fails to prevent misconduct and also tends to unearth violations that have little impact on investor protection.
The current system pays lip service to preventing the next Bernie Madoff but it is structured instead to do the opposite. Approving these pricing increases without concrete improvements to the system will reinforce the current inadequate approach while causing significant financial damage to the membership.
Michelle E. Heyne
Chief Compliance Officer
McAdams Wright Ragen, Inc.