By Suzanne Barlyn
Sept 25 The Financial Industry Regulatory Authority will more deeply scrutinize the potential costs and benefits of securities industry rules it wants to propose, a top lawyer for the Wall Street industry-funded watchdog said on T ues day.
FINRA will take the added measures before submitting proposed rules to the U.S. Securities and Exchange Commission for approval, said Robert Colby, FINRA's chief legal officer.
The move comes, in part, because the SEC wants FINRA to "better support" the economic aspects of proposals the SEC must review, Colby said in remarks to compliance professionals at an industry luncheon in New York. The SEC must review and approve rules proposed by securities industry self-regulatory organizations.
An SEC spokesman declined to comment.
The SEC became more concerned about costs and benefits of industry rules when a federal court threw out an important part of the Dodd-Frank financial oversight law involving shareholders' ability to nominate corporate directors, saying the agency's economic analysis was flawed.
Now those concerns appear to be trickling down to rules from self-regulatory groups that the SEC must review and approve.
Wall Street's top lobbying group, the Securities Industry and Financial Markets Association, has also been pushing for more detailed analyses of the costs of certain rules to the industry.
FINRA's heightened focus will probably require the regulator to hire more economics professionals, Colby said during what he described as his first public comments since joining FINRA in June. Among other challenges FINRA faces, trying to understand and quantify the benefits of a rule can be more challenging than determining its costs, Colby said.
While the shift is a positive development, it will also mean a more "rigorous process" for developing or changing industry rules, he said. The analysis will help satisfy the SEC's review process, Colby told reporters after his speech.
Critics say pressure from the securities industry, along with the SEC's focus on costs and benefits at the agency and beyond, will stifle financial regulation.
"It's put the regulators in a straitjacket in a manner that is almost certain to ensure that we have a repeat of the financial crisis and further destruction of American wealth," said Lynn Turner, a former SEC chief accountant, in an interview. "Regulators will not be able to put in place rules that are necessary to prevent a recurrence," said Turner, now a consultant at LitiNomics, Inc. in Mountain View, California.
In addition to its economic focus, FINRA also plans to review the effectiveness of rules already in place, Colby said. The regulator is planning a schedule for the reviews, which Colby said would be "time consuming." Still, the process will be worth the effort since many rules remain on the books for years without any analysis of whether they are working, he said.
The plan follows a U.S. government report released in May concluding, among other things, that the SEC does not review FINRA's rules to determine their effectiveness. The SEC also does not have a process for that type of review, according to the Government Accountability Office, an investigative arm of Congress that released the report.
It is unclear whether FINRA's plan to review its existing rules is linked to the GAO's findings. An SEC spokesman declined to comment.