Executives at broker-dealer firms speaking at a compliance trends panel during Finra’s annual conference last month were united in calling for an end to regulation by enforcement. In its place they want succinct, clear, tell-it-as-it-is guidelines.

“We’d like to get back to regulation by guidance – an environment we had in what seems like a million years ago, when we received a lot more solid guidance about what Finra and other regulators had seen in their audits and in the industry as a whole,” said Amy Webber, president and CEO of Cambridge Investment Research. A regulation by enforcement culture encourages broker-dealers to “always be on the defense, she added.

Finra CEO Robert Cook has said the self-regulator is continuing to gather input and to identify improvements that can be done during an ongoing comprehensive self-evaluation and organizational review, referred to as Finra 360. “We are committed … to take a fresh look at what we do today and to provide greater transparency and guidance to the industry where appropriate,” he said.

Robert Muh, CEO of Sutter Securities, urged Finra members to take Cook up on his offer to take input, particularly on rules. “Take the time to look at the … rulebook, and I’m almost willing to bet that the majority of those rules can be simplified and be brought down to 10 pages, or maybe even one to two pages,” he said.

The rules imposed on broker-dealers by Finra and other regulators have typically been in response to an industry problem, and that is understandable, he said. But many of the “reactionary” rules have “compounded the problem by having people who didn’t really understand how to solve it write the rules to fix it,” Muh said. Citing an example, he said he appreciates the need to make all retirement advisors act as fiduciaries, but “for the DOL to come out with their set of rules, that’s not their job, in my opinion.”

It would be extremely advantageous for the industry if Finra members took a more proactive role in suggesting “constructive changes” to existing rules, he said.

“It’s very frustrating for all of us when the rule book is not clear and someone says on the other side of the table, ‘But I don’t care,’” said Stephen Cutler, vice chairman at JPMorgan Chase. Cutler, who was previously the firm’s general counsel, serves as a senior advisor to chairman and CEO Jamie Dimon and assists on complex legal issues as well as advising on corporate governance and shareholder matters, regulatory issues and culture initiatives.

Cutler said broker-dealer firms are “too frequently” the subject of enforcement action: “I don’t think that’s good for anyone. Ultimately, it’s a nearsighted approach to bettering the industry.”

He said compliance officers, in particular, are the first line of defense for regulators – and they shouldn’t be scared away from the industry by threats of enforcement aimed at them as individuals.


“I hope that regulators are very circumspect before they bring enforcement action against compliance officers, but unfortunately we’ve seen a bunch of that over the years. I don’t think it’s because we’ve seen compliance officer misconduct increase over the years. I really do believe there’s much less latitude on the part of regulators on the part of compliance officers,” he said.

“It’s one thing if a compliance officer is actively doing something bad. But it’s another thing if a compliance officer has missed an issue. I hope we can see the pendulum swinging back a little bit so that those misses don’t become the subject of enforcement actions,” he added.

It can be “terrifying” for compliance officers to be aggressively pursued by regulators, said Brent Taylor, head of legal at UBS Financial Services, adding that such a situation is not an environment conducive to getting officers' cooperation. “You almost can’t win. You are asked 'How come you didn’t notice this, and if you did notice, how come you didn’t do more about it?' You’re constantly living in the world of 20-20 hindsight with the regulators.”

JPMorgan Chase’s Cutler also brought up an issue he said he’d been grappling with for years: multiple examinations conducted by multiple regulators, which can lead to multiple sanctions for the same conduct issue.

“The way this has been going in the last decade is frankly in the wrong direction. Every regulator feels the need to impose its own sanction and we just have to find a way to put an end to that, so that regulators talk to each other more,” he said.

He said the biggest challenge with dealing with multiple regulators is “a lot of times ‘Regulator A’ simply will not credit or take into account what ‘Regulator B’ is doing,” and broker-dealer firms may end up with up to six separate sanctions. “The sanctions that you’re getting become a function of the number of regulators at the table rather than a proportionate response to what you actually did.”

While overlapping regulatory jurisdictions are addressed in the Financial CHOICE Act, which was passed by the House of Representatives earlier this month, Cutler said “Who knows?” if that part of the bill “will ever see the light of day.” If passed into law, the Financial CHOICE Act would essentially undo many of the Dodd-Frank reforms put in place following the global financial crisis.