(This guest post originally appeared at the author’s blog)
Some folks accuse me of being a tough critic of Financial Industry Regulatory Authority (FINRA). In some corners of Wall Street I am considered the nation’s leading critic of FINRA. However, given the strong language and compelling allegations contained in the December 15, 2009, Comment Letter to the Securities and Exchange Commission from the Pink OTC Market, Inc. (Pink OTC), I may be in danger of losing my title.
The Pink OTC is apparently upset — perhaps, “enraged” would be a more fitting characterization — at FINRA’s November 13, 2009, rule proposal http://www.sec.gov/rules/sro/finra/2009/34-60999.pdf to restructure quotation collection and dissemination for OTC Equity Securities. FINRA’s avowed purpose is
(1) create a Quotation Consolidation Facility (“QCF”) for OTC Equity Securities for regulatory and transparency purposes that would serve as a data consolidator for all quote data in the over-the-counter equity market;
(2) delete the FINRA Rule 6500 Series, which governs the operation of the OTC Bulletin Board Service (“OTCBB”); and
(3) modify the position charge from $6.00/security/month to $4.00/security/month.
See Page 2 of the Notice http://www.sec.gov/rules/sro/finra/2009/34-60999.pdf
In its Comment Letter, the Pink OTC strongly opposes FINRA’s filing for the following reasons:
• The QCF Proposal is an abuse of FINRA’s regulatory power.
• The QCF Proposal injures investors and harms legitimate small businesses.
• The QCF Proposal violates the letter and spirit of the Securities Exchange Act of 1934 (the “Exchange Act”).
• The QCF Proposal is anti-competitive.
• The QCF Proposal is a regulatory taking without providing just compensation.
See Page 1 of the Comment Letter at http://brokeandbroker.com/images/PinkSheetProp.pdf
A lot is at stake and given FINRA’s recent penchant for throwing its considerable weight around, the Pink OTC is not only taking this proposal seriously, but they seem to be lacing on the gloves and send out an industry-wide call to arms. This doesn’t look like it’s going to be a nice, clean fight.
In their comment letter on the proposal, the Pink OTC rips into FINRA’s application as
[T]he latest in a series of attempts, first in 1992 and again in 2000, by the commercial division of FINRA and its predecessors to achieve by unlawful regulation what it was unable to accomplish through competition in the marketplace. We urge the Securities and Exchange Commission (the “Commission”) to reject the unlawful QCF Proposal, in the same way that the Commission has seen through and blocked past efforts by FINRA to obtain a competitive advantage through abuse of its regulatory power.
Pink OTC respectfully urges the Commission to reject the unlawful QCF Proposal in order to protect the investing public and small businesses. If adopted in its current form, the QCF Proposal will encourage fraudulent practices in the market for OTC equity securities by fostering the misconception by market participants that FINRA operates a QCF marketplace and regulates the issuers of securities with quotations disseminated through the NASDAQ Level One feed. . .
[T]he dissemination of a national best bid or offer (“NBBO”) in OTC equity securities is currently being effectively accomplished by Pink OTC, a private firm.The QCF Proposal would, therefore, replace by regulation the beneficial services currently provided competitively by Pink OTC with the commercial services ofFINRA, a quasi-governmental regulator, which, in effect, would result in the
nationalizing of the intellectual property produced by Pink OTC. . .
[I]t follows that the QCF Proposal would amount to a “taking” of Pink OTC’s lawful property rights without compensation, which is in violation of the U.S. Constitution.
See Pages 1 to 3 of the Comment Letter at http://brokeandbroker.com/images/PinkSheetProp.pdf
Wow! Pink OTC is not pulling its punches. It accuses FINRA of proposing unlawful and unconstitutional acts. FINRA is depicted as an anti-competitive quasi-governmental bully intent on destroying free enterprise rights through an impermissible taking. And we’re only at the point where the referee has given the fighters instructions. Wait till the bell rings for Round One.
In recent years, it’s gotten tough for FINRA. As a self-regulatory organisation it was used to donning the white hat and warming to the public’s acclaim as a good guy. However, the hat’s gotten a bit dirty amidst allegations of regulatory failures with Madoff, Stanford, and a host of other miscues. Then there was the recently lost fight on Capitol Hill with the aborted Bachus Amendment. Then there is the ongoing turf war with the Financial Planning Coalition over the future of investment advisory/financial planning regulation. Of course, there are the pending class action lawsuits citing to alleged fraud in the machinations leading to the merger of the NYSE and NASD into FINRA. Then there is the whole issue of FINRA’s multi-million dollar losses, senior staff layoffs, and the amassing of a one-million dollar lobbying fund. Plus, don’t forget the internecine warfare within the FINRA community among supporters of the self-regulator and its detractors in the reform and dissident movements.
I’m not sure who’s running FINRA public relations these days, but maybe it’s time to get senior management into a conference room, close the doors, and have a much-needed chat. The sharp elbows, the brass knuckles, the kidney punches — it ain’t workin’ guys. You wanted to play hardball. Well, guess what, when you’re up at bat, you can’t complain if they start throwing at your head. As little kids are wont to say in playgrounds all over this nation: You started it.
Ah, nothing like the mature politics of self regulation. I’m sure the bad guys are enjoying all of this distraction.