What distinguishes effective regulation from ineffective rules that do not achieve their promised public benefits and needlessly drive up costs to important industries? It's a complex and vital question, and one that does not have a single static answer. In my experience, the most effective and successful regulatory rule-making efforts have three things in common:
1. They build on common goals shared by the regulator and industry participants.
2. They acknowledge that the regulator does not have all the answers and integrate industry members into the rule-making process as partners to help solve operational challenges and avoid unintended consequences.
3. They avoid a rush to judgment and instead allow enough time to factor in feedback from all of the regulation's affected constituencies in order to get the rule right.
One great example of a rule-making process that incorporates each of these elements is Finra's current effort to raise investor awareness of its
BrokerCheck system by integrating links to the database into firms' and advisers' websites.
FSI strongly supports measures to enhance transparency and investor access to information about advisers and we believe that Finra's BrokerCheck system, which provides details on advisers' employment and disciplinary history, as well as their certifications and licenses, is an important resource that can help clients make sound financial decisions.
(More: Finra sends BrokerCheck link rule to SEC)
When the Financial Industry Regulatory Authority Inc. proposed its first version of a rule on this subject in January 2013, however, the proposal included a number of provisions that would have been difficult or impossible for real-world businesses to implement.
DEEP LINKS
Most glaringly, the original draft rule would have required firms to include direct links (deep links) to the individual BrokerCheck profiles of each associated person who appeared on the firm's website in all online retail communications with the public, including via social media channels such as Twitter and LinkedIn. Among other challenging issues, it would also have required firms and advisers to monitor a wide range of third-party websites over which they had no control, including various online directories, to ensure that the links appeared and functioned properly on any website where the adviser or firm was mentioned.
As broker-dealer web developers and social media users quickly pointed out, the sheer number of associated persons affiliated with a given firm, as well as the rapidly evolving nature of social media channels, would have made these requirements a nightmare for Finra member firms. For a host of seemingly minor reasons — the 140-character limit in Twitter communications, the lack of an appropriately visible field in a LinkedIn profile, natural turnover of professionals in the industry, the likely emergence of new social media platforms in the future, and the ever-present problem of "broken links" — Finra's initial proposal would have created a range of new challenges and costs that would have drastically outweighed any potential benefits.
(More: Finra launches ad campaign for BrokerCheck)
In the spirit of helping Finra achieve its goal of increasing investor access to important information while also advocating a solution that works for our members, we outlined our concerns in a comment letter to the regulator in February 2013.
To its credit, Finra responded to FSI and other commenters by submitting a revised proposal for comment in April 2014. While the new draft rule remedied many of the problems we noted in the earlier version (for example, it removed the deep link requirement for social media communications), it contained other provisions that would have proven nearly as challenging for our members.
HYPERLINKS
Specifically, it would have required firms to include a clear reference and hyperlink to BrokerCheck on each firm website that was available to retail investors, and in any online retail communications with the public that included a professional profile of, or contact information for, an associated person. As we outlined in a second comment letter to Finra in June 2014, this would still have put firms and advisers in the difficult position of manually and continually posting, updating and monitoring links on a range of third-party websites in order to remain compliant and ensure that the links were functioning properly.
As a result of this extensive process of engagement, close review and consistent dialogue, we were pleased when Finra submitted a third version of the proposed rule for comment in June of this year. The revised version requires firms to include a link to BrokerCheck on their own home page and on individual adviser profiles, but would no longer require firms or advisers to maintain or monitor similar links on social media sites.
While our most recent comment letter requests clarification on whether independent advisers' websites will be considered third-party sites or members' sites, FSI believes that our collaborative process of engaging with Finra to help the regulator achieve a crucial goal has produced a well-reasoned and balanced proposal.
By acknowledging the value of our members' perspective and input, and by viewing our industry as a valuable partner that can help identify and minimize potential operational problems and unintended consequences, Finra has crafted a workable potential rule that stands a much better chance of accomplishing its stated aims than did previous iterations. We also applaud Finra for taking the time to gather and listen to feedback from a broad array of constituencies that stood to be affected by the rule.
Dale Brown is president and chief executive of the Financial Services Institute Inc.
