Split Personality: When Self-Regulatory Organizations Face Opposition
January 2015
IN THIS ISSUE
— Disclosure and Civil Liberties: When Groups and Their Members Conflict
— Going Against Leadership: When a Group Defies Its Backers
GREETINGS!
Welcome to the January 2015 edition of our newsletter! In this issue, we’ll examine issues that can arise when a self-regulatory organization tries to enact new regulations upon its membership.
DISCLOSURE AND CIVIL LIBERTIES: WHEN GROUPS AND THEIR MEMBERS CONFLICT
Self-regulatory groups, assembled and funded by certain industries to police themselves (such as in finance or accounting) were generally in vogue until the mid-2000s, when the collapse of Enron led to questioning of such groups (and, in the case of accounting, led to creation of a federal oversight board.) The largest financial industry regulatory group, FINRA, recently proposed requiring registered broker-dealers to provide monthly reports detailing transaction information — including margin call information — as a means of identifying abusive practices before widespread or systemic harm can occur.
Many of the companies that make up FINRA’s membership have gone on record as opposing the plan, stating that it violates an investor’s civil liberties to have such details disclosed. The system, which uses the acronym CARDS, has been supported by consumer groups who are concerned that their constituencies often fall victim to investment fraud.
GOING AGAINST LEADERSHIP: WHEN A GROUP DEFIES ITS BACKERS
On its face, an observer would be forgiven for thinking that FINRA’s proposal would die a quiet death. After all, FINRA is funded solely by fees paid by broker-dealers and the firms that employ them, and in 2013 FINRA generated more than $450 million in program service revenue. Public comments from large institutional money managers like Fidelity (which participated in a pilot program to help FINRA refine the program’s specifications) reiterated opposition to the inclusion of “customer account level data,” and the American Civil Liberties Union also expressed its concerns. The public comment period closed at the end of 2014 and it remains to be seen how the final version of CARDS may differ from what was proposed, but the program itself is generally seen as a leap forward in disclosure for an organization that purges data about registrants after they are out of the system (i.e., unregistered) for two years.
As many advocates have noted, dishonest advisers (in any industry) rarely prey upon just one client, and the aggregation of trading data may help the regulator (and, if need be, law enforcement) identify bad actors and their frauds in something closer to real-time. It would appear that despite some opposition, the CARDS program is moving forward, and how it finally takes shape may be a statement on the tolerance level markets have for self-disclosure.