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The Securities Industry Labels Efforts To Protect Investors As Too Costly

November 18, 2014 Blog

A showdown is coming between the Financial Industry Regulatory Authority – FINRA – and the securities Industry lobbyists, namely the Securities Industry and Financial Markets Association – SIFMA – over increasing investor protection.

The industry’s self-regulator, FINRA is often maligned as being too soft on the securities industry. It’s funded by the industry, and many securities fraud lawyers cut their teeth at the organization, only to wind up with lucrative jobs with investment houses that need to play by FINRA rules.

But the relationship between FINRA and Wall Street is not looking so cozy at the moment. It appears that FINRA wants to be taken seriously as a watchdog, a development we applaud. At issue is a new system that FINRA wants to implement to catch problems with fraud and abuse of customers, which could prevent future Madoffs from happening.

FINRA has proposed to implement a customer data collection initiative called Comprehensive Automated Risk Data System, or CARDS. The CARDS system would allow FINRA to “collect reams of brokerage account information quickly and efficiently, bolstering its ability to detect investment product sales abuses and other harmful market trends”, according to an InvestmentNews article by Mark Schoeff.

In other words, FINRA in real time would be able to sniff out the bad guys of the securities business. The way regulation currently works, a thief, like Madoff, can steal for years without being discovered. The hope of FINRA’s CARDS system is that it would dramatically speed up its efforts to find the bad brokers and financial advisers.

Rather than recognize that customers have been abused and defrauded by many Wall Street firms and Ponzi schemes, SIFMA, the DC mouthpiece for the securities business, outright rejects any new regulation and sees no place for the CARDS program.

At a SIFMA meeting last week, at which the Head of FINRA discussed how CARDS would help investors, SIFMA threw down the gauntlet, calling the CARDS plan “too costly to implement” and unnecessary regulation. SIFMA, the voice of Wall Street inside Washington, essentially vowed to bring a forceful lobbying effort to kill the program.

The organization’s president and CEO Kenneth Bentsen Jr. “said that the industry has qualms about the price tag CARDS would carry for the brokerage firms and potential privacy breaches,” according to another Schoeff article. “He also said that CARDS, which would frequently collect reams of brokerage account information duplicates supervision and surveillance activities companies already have in place.”

Interestingly, the call for new regulation and the industry’s opposition to it comes on the heels of a FINRA study released last week which shows that 92% of investors say “it’s important to have a ‘cop on the beat’ to protect them from malfeasance in the markets and that 74% of investors support additional regulatory protections”, according to the first Schoeff article cited.

“Investors want more regulatory protection and are willing to pay higher brokerage costs to get it,” according to Schoeff’s report.

“Just as a pep talk, let’s agree that the goal should be to find a quicker and most efficient way to be able to identify significant problem in the industry and react before more investors are harmed,” said FINRA’s CEO Rick Ketchum.  “Let’s think together about how best to do that.”

We are clearly heading for a showdown between FINRA and its efforts to increase investor protection and SIFMA working to kill any such new protections for investors. It will be a test of FINRA’s mettle. Will the industry watchdog stand up to the powerful DC lobbying efforts of the securities industry? Stay tuned.

Zamansky LLC are securities and investment fraud attorneys representing investors in federal and state litigation against financial institutions.