Seeking Alpha: Is A Stronger FINRA A Good Thing For Investors?

Regular investors don't always seem to know who's minding the store when it comes to supervising brokers, brokerages, and asset managers. While the Securities and Exchange Commission (SEC) gets a great deal of attention, and arguably has the most power, there are a host of other agencies and associations that play significant regulatory roles. Now one of the largest of them, FINRA, is reaching for even more power and authority. While more regulation of such an aggressive industry as financial services may seem logical to some, particularly after the abuses of recent years, FINRA's track record should give investors a moment or two of pause.

What FINRA Is
FINRA, short for Financial Industry Regulatory Authority, came into being in 2007 with the merger of the National Association of Securities Dealers (NASD) and the New York Stock Exchange's regulatory arm. Though many investors assume that FINRA is a government body, it is not – it is a private corporation that regulates financial services firms that deal with the public (in other words, brokerages and registered representatives like brokers and sell-side analysts).


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Is A Stronger FINRA A Good Thing For Investors?

FinancialEdge: It's Not Illegal If The Government Does It

It's good to be king - and it always has been. Ever since the first government formed, there has been the idea that there are things a government can do that are illegal when done by private citizens. This power also extends into the world of commerce and business, where the government allows itself powers and latitude that private citizens and corporations simply do not get. Whether one wishes to argue that the government must do some of these things simply to keep the whole system running, it does not change the fact that the government does engage in behaviors that would be illegal for anyone else.


Taxes - Involuntary Commerce?
Governments are unique in their power to levy taxes; in fact, it is one of the defining traits of a government. Even allowing that citizens do get something back for their taxes (roads, police, courts, etc.), the fact remains that it is not a voluntary transaction. There is no company out there that can similarly compel financial transactions - a homeowner can choose to turn off the power if that is their choice (though perhaps the new health care law in the U.S. will make health insurance inescapable). (For more, see How To Owe Nothing On Your Federal Tax Return.)

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Does The FDA Help Or Harm?

It is difficult to overstate the importance of the FDA to companies in the pharmaceutical, medical device, biotechnology and diagnostics industries. In short, the FDA effectively gets to decide who is even allowed to compete in the market. It is illegal to sell a drug or device with advertised medical claims without FDA approval, and insurance companies will typically not pay for their use. As a result, investors cannot afford to ignore the workings, or the prevailing mood, of the FDA when considering investments in this sector.

Unfortunately for investors, the FDA is not constant. The agency does not necessarily maintain a consistent view of its own mission, nor how best to execute it. As a result, the regulatory environment can sway back and forth between lenient and stringent, with little recourse for the companies or their investors. That said, understanding how the FDA operates and its shifting moods can help investors navigate these treacherous waters a little more safely. (To learn more, see Investing In The Healthcare Sector.)

Mission and Motivation
First and foremost, the FDA is in operation to help protect public health, primarily by ensuring that companies prove the safety and efficacy of drugs/devices, manufacture them properly, and market them appropriately. Almost every investor has probably heard stories of the traveling medicine shows of the 1800s and early 1900s where hucksters and frauds sold various "patent medicines" that, at best, did not cure anything and at worst were actually quite harmful.

The FDA also has a secondary mandate to help foster innovation in healthcare by working with industry and academia to find better ways to evaluate safety and efficacy and to respond to innovations in medicine. While the FDA is often criticized for moving too slowly, the agency has made strides in expediting the approvals of orphan drugs and oncology drugs, and has worked with the industry to figure out approval pathways for drug/device-hybrids, biologics, gene therapies and other medical approaches that were never contemplated by the legislation that gave the FDA its mandate(s). That said, the FDA is still somewhat behind the curve when it comes to molecular diagnostics, genetic testing and biologics, and that has created ample chaos for companies in these fields.

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