Securities Law Prof Blog

Editor: Eric C. Chaffee
Univ. of Toledo College of Law

Monday, August 17, 2009

FINRA Officer's Senate Testimony on Stanford Oversight

On August 17, 2009 Daniel M. Sibears, Executive Vice President, FINRA Market Regulation Programs, testified before the Senate Committee on Banking, Housing and Urban Affairs on FINRA's oversight over Stanford's broker-dealer operations.  Mr. Sibears stated that the broker-dealer operations have been subject to regular inspections every other year for the past ten years.  Since 2007 there have been 4 formal disciplinary actions, each resulting in a censure and modest fines.  In addition, FINRA received and reviewed 9 complaints and 7 regulatory tips since 2001.  In conclusion, he states:

Recent frauds, including Stanford, and the financial crisis of the last two years have made it painfully clear that the current regulatory structure is weakened by gaps, inconsistencies and, at times, jurisdictional limitations that should be remedied. In the Stanford case, while FINRA examined Stanford's broker-dealer, it did not examine the investment adviser, nor did it have the clear ability to compel information from Stanford's foreign bank affiliate. Such limitations are frustrating in practice and in the aftermath of this kind of fraud, no regulator can be happy with the status quo.

 Individual investors are the most important players in the financial markets, and we need to earn back the confidence of those investors by closing the gaps in our current U.S. regulatory system and strengthening oversight of all financial firms and professionals regardless of how they are registered. As FINRA's CEO, Rick Ketchum, testified before this committee earlier this year, we believe that one of the most important gaps to close in terms of investor protection is the disparity in oversight between broker-dealers and investment advisers. Between the SEC and self-regulatory organizations, more than half of the approximately 4,900 registered broker-dealer firms are examined each year. By contrast, the SEC projects that fewer than 10 percent of the more than 11,000 registered investment adviser firms will be examined during fiscal years 2009 and 2010. The authorization of an independent regulatory organization for investment advisers would augment the SEC's ability to oversee those financial firms with more frequent exams and expanded enforcement resources would enhance protections provided to all customers of investment advisers.

 As we have learned over the last two years, a system of fragmented regulation provides opportunities to those who would cynically game the system to do so at great harm to investors. FINRA is committed to working with other regulators and this Committee as you consider how best to restructure the U.S. financial regulatory system.

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