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Big-Bank Regulator Targets the Little Guy

Jan. 7 (Bloomberg) -- Dock David Treece is not your typical 25-year-old.

“Dock2,” as he is known -- to distinguish him from his father, also named Dock -- graduated from the University of Miami four years ago with a bachelor’s degree in business administration, focusing on finance.

Instead of taking a job at a big Wall Street investment bank, he returned home to Toledo, Ohio, and joined, as a partner, his father’s tiny investment-advisory firm, Treece Investment Advisory Corp., and the family broker-dealer, Treece Financial Services Corp. The two companies have five employees: Dock2 Treece, his father, his younger brother and two administrators.

What Treece has learned in the past few years about the Financial Industry Regulatory Authority, and how difficult it makes life for small firms like his family’s, should make your skin crawl. It is a story that perfectly illustrates how bureaucratic, imperial and hubristic Wall Street’s self-appointed, self-regulatory agency has become since it was formed five years ago.

I have written about Finra several times, particularly about how anyone who works on Wall Street or does business there signs away any legal redress relating to a financial squabble other than through the Finra-administered arbitration system.

Abdicating Rights

It is one of the largest abdications of legal rights in the country, affecting millions of Americans every day. And Finra has no government authority -- its existence depends on the banks it's supposed to oversee.

So, what’s it like for a tiny financial-services firm that comes under Finra’s regulatory umbrella? If Treece is to be believed, it is one administrative nightmare after another that put small firms out of business by bogging them down with costly, ill-informed and pointless compliance exercises.

There are about 4,500 registered broker-dealers in the country, some 4,000 of which have 150 brokers or fewer. “FINRA constantly comes out with new rules and regulations for firms and brokers, with absolutely no concern for the impact [they] will have on firms - particularly smaller firms,” Treece wrote recently to his House representative, Robert E. Latta. “Most of these new regulations make very little rational sense. While FINRA’s self-described mission is to ‘protect the investing public,’ most rules are aimed not at protecting investors from harm, but from creating new technical violations to impose fines and penalties on firms.”

Treece explained to me that his family’s broker-dealer sells its customers mutual funds but has no customer accounts and no customer money.

“It’s a very simple operation,” he said. “We represent literally no risk to the public, and we’re on a two-year exam cycle.” (Finra examines broker-dealers on a regular basis, generally once every two years, depending on the size of the firm.)

The firm’s last Finra exam started three years ago. The way it usually works is the examiners come to the Toledo office for a week or two, look things over and then go back to their district office in Chicago and write a compliance letter.

“It doesn’t matter what firm you work for, where you are, what kind of business the firm does,” Treece told me. “They will find something wrong, because that’s the job of an examiner, to find things that are wrong.” He continued, “Typically, it takes a revision and a procedures manual to clarify something, and that’s it; everybody goes about their day.”

The Treeces’ 2010 Finra exam, however, went on for eight months, as the regulators kept asking for more and more documents to try to discover a minor technical point about what kind of mutual funds the firm sold to its customers.

4,000 Pages

Treece said Finra kept telling him to sell a kind of mutual fund that he knew he wasn’t supposed to sell, but the examiners seemed to not understand the rules. To fulfill one Finra request required 4,000 pages of documents to be copied and sent off.

“It had taken my staff two weeks to get together, literally, just standing in front of a copy machine for 12 hours a day, pull a file out, take the documents out that they wanted, copy them, put them in a box, put the originals back in the file, and put the file back,” Treece said. “I mean, talk about useless.”

He said he spent more than $30,000 in legal fees -- chicken feed on Wall Street but a big deal at a tiny firm -- trying to convince the examiners of something they should have known about all along. But Finra wouldn’t back down.

Eventually, Treece pushed for a meeting in Chicago with higher-ups. (A Finra board member attended the meeting and another one joined by phone.) “Why are you harassing us?” he wanted to know. Treece was convinced that Finra was trying to put his firm out of business -- and the statistics back him up.

Since 2007, there are 12.5 percent fewer brokerage firms, 5 percent fewer branch offices and 6 percent fewer registered representatives in the financial services industry.

Acccording to Treece’s data, there has been a 26 percent increase in the number of disciplinary actions taken against member firms, a 31 percent increase in the number of firms expelled from the industry and a 65 percent increase in the number of individuals expelled. After three hours, the Finra brass apologized to Treece.

Then and there, Treece decided to run for one of the elected seats on the Finra board, in order to represent small brokerage firms. “This is the industry I plan to be in for a while, and I want to make sure that there’s an industry for me to make a living in five years from now,” he said. “And the way it’s going, Finra seems absolutely intent on a mass-scale consolidation.”

Seeking Transparency

His biggest concerns are making the regulatory body more transparent and more accountable. For instance, there are no minutes published for Finra board meetings, so nobody can figure out what was discussed.

“I can understand confidentiality issues within individual firms,” he said. “But if this board is setting policy for the entire industry, and we’re the ones dealing with the consequences, we should know what’s being discussed, who’s favoring certain issues, who’s against them, what kind of reasoning there is behind it.”

He wants more accountability for the examiners: “Finra examiners seem to walk around with this sense of impunity, like they’re a federal agent, and they’re not. I don’t know how else to put it to them. I mean, they’re not an IRS agent. They’re not an agent of the FBI. They’re an employee of a quasi-governmental agency that’s funded by the industry.”

Dock2 Treece sounds just like the kind of young, dedicated individual who should be on the Finra board if it is at all serious about reforming an industry that became utterly out of control during the past few decades. But, not surprisingly for a first-time reformer, he lost his bid for a board seat last August at Finra’s annual meeting. He vows to fight on and run again until the group implements meaningful reforms.

“You can only make money on what’s between your ears,” he said. “And Finra increasing the burden -- financial, regulatory or otherwise -- on firms has only served as a catalyst to drive firms out of the brokerage business.”

(William D. Cohan, the author of “Money and Power: How Goldman Sachs Came to Rule the World,” is a Bloomberg View columnist. He was formerly an investment banker at Lazard Freres, Merrill Lynch and JPMorgan Chase, against which he lost a Finra arbitration case over his dismissal. The opinions expressed are his own.)

To contact the writer of this article: William D. Cohan at

To contact the editor responsible for this article: Tobin Harshaw at

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