FINRA to Oversee Investment Advisors on Wall Street?

Congress is currently considering whether to grant the Financial Industry Regulatory Authority (FINRA) authority to oversee nearly 12,000 registered investment advisers who control almost $40 trillion in assets. At present, the Securities and Exchange Commission (SEC) bears this responsibility. Critics of the plan argue that Congress will put investors at risk if it approves of the change, as FINRA is financed by the brokers it is currently charged with regulating.

Critics believe that FINRA does not protect investors. The fines that FINRA levies against its members are only a fraction of losses that investors suffer as a result of broker misconduct. For example, FINRA recently fined UBS only $2.5 million for misleading investors after it sold one billion dollars in Lehman Brothers structured products, including “100 Percent Principle Protection Notes” that became worthless when Lehmen Brothers collapsed in 2008. In 2009 FINRA issued a total of $43 million in fines, compared to the SEC which issued over $1 billion in fines for the same year.

Critics also say that FINRA’s arbitration process is flawed. Brokers’ clients must arbitrate grievances pursuant to clauses in the contracts they sign. Less than Investors who have been successful in arbitration on average only received less than half of damages they sought.

Those who oppose expanding FINRA’s authority also complain about the lack of transparency and accountability in FINRA’s oversight process. While FINRA does examine its broker-dealer firm members, there are no benchmarks to assess the thoroughness of these investigations.

Finally, many fear that the large compensation of FINRA’s top executives makes them hesitant to take necessarily forceful action against those who pay their salaries, since FINRA is member-funded.

Allowing FINRA to oversee investment advisers in addition to its broker oversight duties may seem like an appealing cost-saving measure. But significant questions remain about how the entity would ensure investor protection, given the amount of broker misconduct that FINRA has failed to prevent. If you have lost assets due to broker misconduct, do not hesitate to contact an experienced attorney who can discuss your situation with you and advise you of your options.

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