By Anthony Tokarz,
Money and Investing Writer
The Financial Industry Regulatory Authority (FINRA) filed a regulatory rule proposal with the Securities Exchange Commission (SEC) on Monday, November 21, in the hope of gaining the authority it needs to react more aggressively to disruptive trading activity.
Currently, FINRA, a nongovernmental private corporation that exercises a degree of regulatory control over the financial industry, can only respond to disruptive trading incidents and patterns by initiating government proceedings that often take years to reach conclusions and implement corrective measures.
Its filing voices a view that the corporation, which works to protect investors by ensuring the fair and open functioning of securities markets, ought to have the power to initiate expedited proceedings to halt market manipulation and disruption of singular systemic danger.
The practice of “layering” or “spoofing” exemplifies the sort of behavior against which FINRA seeks greater authority. A trader “spoofs” a security by first moving its value by placing a succession of trade orders, then canceling them before they go through as legitimate trades, then trading the security at the other end at the modified price.
Because such incidents often occur as part of a broader strategy or pattern, FINRA argues that the SEC should grant them the power to issue cease-and-desist orders with less procedural delay.
At present, these cease-and-desist orders remain in effect until the underlying disciplinary proceedings at the government level have concluded. The proposed changes would empower FINRA to issue permanent cease-and-desist orders independent of the government-level disciplinary process.
However, only FINRA’s CEO would have this power, and only after the demonstrated failure of other measures to halt the infraction. The CEO could also choose to delegate the power to a senior officer, though a specific case of abuse would delimit the bounds of this power.
In weighing this proposal, the SEC will take into account FINRA’s unique position as a watchdog within the US Financial Industry. The private corporation has contracts to police all registered broker dealers, in addition to responsibility for policing 18 stock and options exchanges besides.
The breadth of FINRA’s responsibility and the scope of its oversight furnishes it with a vast trove of information for cross-reference and examination to identify and isolate cases of market abuse, and then to leverage those incidents into the recognition of broader patterns violate the integrity of US markets.
This proposal comes several months after FINRA began an investigation into the professional culture of brokerages and financial advisory firms. The corporation undertook the investigation on suspicion that unstated rules, practices, and expectations at such firms compromise compliance and risk-management strategies.
The SEC is sure to consider FINRA’s proposal in the context of this latter investigation—should it return a positive verdict and grant FINRA additional regulatory power, government officials will most likely have decided that the watchdog’s unique knowledge of broker practices across the country has attuned it to subtle behaviors that signal departures from normalcy in firms’ handling of securities.
In affirming the proposal, therefore, the SEC will make a statement that FINRA’s blend of knowledge and positioning within the industry warrants the added powers to safeguard market integrity.
A version of this article appeared in the Tuesday, December 13th print edition.
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