The Wall Street Journal-20080205-Brokerage Regulators Set Up Panel To Screen Big and Top-Priority Cases

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Brokerage Regulators Set Up Panel To Screen Big and Top-Priority Cases

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The regulators who oversee the U.S. brokerage industry have set up a committee to screen noteworthy cases before moving forward officially, a practice that may result in fewer enforcement actions.

The Financial Industry Regulatory Authority is now running about 10% to 20% of the cases brought by its far-flung enforcement staff past its Disciplinary Advisory Committee. The reviews, which began in the fall, focus on cases involving priority issues or large sanctions.

Brokerage-industry representatives have welcomed the change, saying it offers an opportunity to rein in overeager enforcement attorneys. Jim Shorris, executive director of FINRA enforcement, says the goal is to make sure that actions brought by enforcement staff around the country are consistent.

"It gives all the staff an opportunity to hear about significant cases," Mr. Shorris said, adding, "It's an opportunity to really vet the case, to put it to the test." He said the committee meets frequently enough to prevent bottlenecks.

FINRA was created last year by the merger of the National Association of Securities Dealers and a regulatory arm of the New York Stock Exchange.

Here is how the system works: Once an enforcement team has conducted its investigation, it makes its case for action to a committee of about a dozen senior enforcement managers.

The committee may tell the staff it needs to do more legwork to build a case, or it may recommend changing the charges to make them more appropriate or consistent with the authority's policy priorities. The committee may also tell the staff to drop some of the accused from a claim or drop some or all of the charges. If the committee decides a case should be pursued, it will suggest a range for a settlement.

The Office of Disciplinary Affairs, which has existed for years, provides another level of review by vetting settlement agreements before they are finalized.

The committee review is helping to allay concern in the brokerage industry about "rulemaking by enforcement," that is, when new policies are effectively implemented via patterns of enforcement, rather than through more rigorous, formal procedures for adopting new rules.

"We would hope this new body could help prevent that by looking for situations where an existing rule is being expanded in an enforcement action without advance notice to the industry," said David Bellaire, general counsel and director of government affairs at the Financial Services Institute, an advocacy group for independent firms.

FINRA enforcement chief Susan Merrill, who took the review process with her from NYSE Regulation, has said that the authority won't use enforcement cases to make law.