We Love Regulation!

We love regulation! We owe our success to the regulatory environment in the financial services industry. From a selfish standpoint, we can say that we enjoy regulations. Similar to the way doctors love the flu and dentists love cavities, we are happy that we have a raison d'être.

Now that I have been associated directly or indirectly with the financial services industry for over five decades, I have come to the realization that while I value regulation, I really hate some of the regulations. I don’t hate all regulation since I recognize that at least some regulation is necessary. On the other hand, I recognize that the current regulatory environment in the securities industry is somewhat out of control.

I listen avidly to our current president telling the world how under his administration, many useless regulations have been eliminated. If you would like to know what his administration has, or more specifically what his administration hasn’t done in the securities industry, see Https://Www.Brookings.Edu/Interactives/Tracking-Deregulation-In-The-Trump-Era/ and notice that hardly anything has been done so far.

Instead, we have a national securities association call the Financial Industry Regulatory Authority, FINRA, which keeps promulgating rule after rule. Most of the businesses regulated by that authority – note that it is hardly an association of members at all – are small enterprises with fewer than a handful of people that have difficulty keeping up with all of the rule changes.

Securities broker-dealers are required to register with as many as 53 different governmental organizations if they wish to transact business with their denizens and each of those organizations has different rules.

The various securities exchanges to which securities broker-dealers belong each have their own set of rules and regulations.

Within the securities industry there is even a subsector organization called the Municipal Securities Rulemaking Board that was created decades ago to specifically regulate the municipal and state securities markets.

We would be remiss if we forgot about the mother of all securities regulators, the Securities and Exchange Commission, which has its own set of regulations and keeps promulgating new ones all of the time.

And in the wake of the Madoff scandal, we have the Public Company Accounting Oversight Board regulating auditors who examine the financial statements of almost all securities broker-dealers, including broker-dealers that are not public companies, owned by public companies and broker-dealers that never handle the property of customers of broker-dealers. Indeed, based upon who it regulates, the PCAOB is somewhat of a misnomer.

The confusion created by the plethora of rules and regulations is exacerbated by the armies of bureaucrats who enforce these regulations in a manner that is often inconsistent with justice and fairness and is often applied inconsistently between regulatory organizations or even within the same regulatory organization.

The culture influencing each of the regulator soldiers is very challenging. The regulatory organization provides job security for them and for the employees of broker-dealers who need to deal with the regulators and their rules. Yet, these benefits often defy the imagination of many in our beloved securities industry.

Mary Schapiro was on point many years ago when she proposed that there be a single rulebook for all New York Stock Exchange members that were also NASD members. It was a refreshing concept to have a single rulebook. I served for a while on an informal group of industry experts who were reconciling some of the financial and operational rules of each of those regulators so that what ultimately resulted were consistent rules that were more fairly applied.

The creation of FINRA and its single rulebook was admirable. On the other hand, there are still multiple regulators dealing with multiple rulebooks and the industry and the general public suffer because of it.

On top of that, we need to change the culture of the regulators so that they understand that many if not most of the exceptions that they discover are not against the public interest at all.

I challenge our governmental authorities to finally recognize that multiple regulators of the world’s finest securities marketplaces who create multiple rulebooks are not in the public interest.

To paraphrase our beloved former president, Ronald Reagan, who told Mr. Gorbachev to tear down the Berlin Wall, it is time for someone in Washington (no matter what the results are in the upcoming election) to tear down the regulatory walls that currently exist.

We truly need a sequel to the National Securities Market Improvement Act of 1996 (NSMIA), which will get rid of useless regulations. We need to change some of the culture of regulation to make it kinder and gentler.

Tempus fugit – I hope it gets done soon!


Howard Spindel is the author of this article and is currently associated with many broker-dealers. His remarks represent his own opinion and not necessarily the views of any broker-dealer with which he is associated. He has many securities industry licenses, such as the following series, 4, 7, 24, 27, 57, 79 and 99, and has been a featured speaker at various industry conferences. He has served as an elected member of FINRA’s Small Firm Advisory Board representing the New York region.