Throughout this week, the Washington Examiner’s Restoring America project will feature its latest series titled “Reforming the Deep State: Reining in the Federal Bureaucracy.” We invited some of the best policy minds in the conservative movement to speak to the issues of what waste, fraud, abuse, and unaccountability exist throughout the federal government and what still needs to be done. To learn more about the series, click here.
The Constitution created three branches of government: the legislative, the executive, and the judicial. For the past century, progressives in Congress have created a fourth branch composed of “independent agencies” and an unaccountable regulatory bureaucracy. This fourth branch is now often called the administrative state.
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But Congress has also created a fifth branch of government that few people know about.
This fifth branch is composed of so-called self-regulatory organizations. They are private organizations to which Congress has delegated regulatory and taxing power. They are largely opaque and unaccountable — an administrative state inside the administrative state. None of the due process, transparency, regulatory, or other protections we normally associate with government apply to their actions.
The largest and most powerful fifth branch agency is the Financial Industry Regulatory Authority, a Delaware not-for-profit organization. It, not the Securities and Exchange Commission, is the primary regulator of broker-dealers (Wall Street). Congress and the SEC have delegated regulatory power over Wall Street to FINRA.
FINRA has a $1.7 billion budget and 4,200 employees. In comparison, the SEC has a $2.1 billion budget and, now, approximately 4,100 employees.
THE LEFT’S REAL POWER IS CONTROLLING THE BUREAUCRACY
FINRA is not controlled by industry nor is it directly accountable to the voters or Congress. Instead, it is controlled by a board that chooses its own successors. FINRA imposes taxes (called fees) and fines. Its membership fees are not voluntary, and the fines it imposes must be paid. If a firm doesn’t pay the fees or fines, it is not legally allowed to do business. FINRA is the only national securities association and, under law, a firm must be a member of a national securities association to do business.
Its board meets in secret. FINRA is not subject to the Freedom of Information Act, the Sunshine Act, the Regulatory Flexibility Act, the Paperwork Reduction Act or any of the other laws passed, or Executive Orders issued, to make government more accountable to the public.
Almost all disputes between broker-dealers and customers must go through the FINRA arbitration process. FIRNA arbitrations, both for customers and for broker-dealers accused of wrongdoing, are secret. And since there is no requirement for a written opinion providing findings of fact and conclusions of law, meaningful review of arbitrator decisions by a court or the SEC is extremely difficult. Neither policymakers nor market participants have any idea what FINRA actually does in these arbitrations.
Congress holds numerous hearings each year regarding the actions and policies of the SEC. FINRA executives, in contrast, testify perhaps once every two years and rarely address FINRA’s operations, budgets or policies. The SEC oversight of FINRA is light and private. This needs to change. FINRA, the most important regulator of Wall Street players, should not be a black box.
FINRA is not the only fifth branch agency. This is just one of many examples of such delegation of core congressional authority to an unelected and unaccountable group. The fifth branch also includes the National Futures Association, the Municipal Securities Rulemaking Board, and the regulatory functions of the various national securities exchanges and registered clearing agencies. Although it operates differently from the SROs, the Public Company Accounting Oversight Board is a non-profit corporation established by Congress to which regulatory and taxing authority has been delegated. It is similarly opaque and unaccountable.
CLICK HERE TO READ MORE FROM THE ‘REFORMING THE DEEP STATE’ SERIES
Regulation and taxation should be done by government, not opaque, unaccountable private organizations to which government has delegated such authority. Government should be transparent and subject to due process and regulatory protections that protect citizens from arbitrary authority.
Congress should return regulatory and taxing authority to the SEC or, in the case of the National Futures Association, to the Commodity Futures Trading Commission so that these basic protections apply. At the very least, Congress needs to step in and impose robust transparency requirements, due process protections, and regulatory reform on SROs.
David R. Burton is a Senior Research Fellow in economic policy at The Heritage Foundation.