For Regulators, the Merry Chase Never Ends
This article first appeared as FLASH FRIDAY on Traders Magazine.
FLASH FRIDAY is a weekly content series looking at the past, present and future of capital markets trading and technology. FLASH FRIDAY is sponsored by Instinet.
In business there’s a certain dynamic that plays out between profit-seeking industry participants and regulators: industry participants try to innovate and stay a step ahead; regulators try to catch up.
That ongoing dynamic is certainly the case in the capital markets business, where trading and investing firms seek to gain efficiencies and an edge on rivals, and the U.S. Securities and Exchange Commission, the Financial Industry Regulatory Authority and other regulators work to stay on top of the latest trends and determine what if any new rules or rule changes are needed.
Traders Magazine caught up with one financial regulatory expert, who started his career the same year man landed on the moon.
From a 1998 Traders Magazine article:
John E. Pinto, a 29-year veteran and senior official of market regulation at the National Association of Securities Dealers, has left the organization to run the Washington branch of Dover International, an Atlanta-based consulting firm.
Pinto had most recently served as an executive vice president of member regulation at NASD Regulation, the NASD subsidiary headed by Mary Schapiro. NASD Regulation was created two years ago in the wake of two governmental investigations of Nasdaq.
“I saw a significant change happening in the organization,” Pinto said. “Mary Schapiro was bringing in her own people. I felt it was time for me to move on.”
Pinto joins Dover as an executive vice president and president of Dover’s Financial Services Exchange, a subsidiary that specializes in mergers and acquisitions. He is currently the sole employee at Dover’s Washington outpost. His compensation includes an equity stake in the firm.
Pinto had a high-profile NASD career. Pinto joined the organization in New York in 1969, gaining prominence as an examiner. He moved to the NASD’s main office in Washington in 1975, serving separately as a director of enforcement, vice president of surveillance and senior vice president of compliance.
In 1989, Pinto was named executive vice president of regulation at the NASD, responsible for all enforcement, examination and surveillance at the organization. As executive vice president, Pinto supervised all regional attorneys and oversaw all advertising, compliance, corporate financing, enforcement and market-surveillance departments of the 14 NASD district offices. He was named executive vice president at NASD Regulation in 1996.
Fast forward to 2020, and Pinto is Managing Director at Renaissance Regulatory Services, a Washington, D.C.-based firm that provides compliance and operational consulting and support services to broker-dealers and investment advisers. According to its website, the firm is “founded on the premise that the financial services industry is constantly changing”, and Pinto has seen a lot of change.
“If you look at the way the Nasdaq market operates, it’s all geared toward electronic trading and the type of activity that doesn’t involve the intervention of a human being,” Pinto told Traders Magazine on Aug. 5.
“From the regulatory side, monitoring of the market has changed with the technology,” Pinto continued. “Back in the day you’d have some information, but basically you’d be going out into the field, sitting at the firm and reviewing things at the firm. Today, a lot of it is done by mining the data that a firm submits before an exam. It’s dealt with remotely before an examiner has to go on site.”
The SEC’s Regulation Best Interest is among the rulesets that Renaissance clients are most interested in currently, in terms of the impact on their business. Reg BI lays out a new standard of conduct for brokers, as well as an interpretation of the fiduciary duty that applies to registered investment advisors.
Pinto said the SEC and Finra are on balance effective regulatory organizations, considering their resource constraints. Finra reported 3,517 dues-paying member firms in 2019, down from 5,106 in 2005; Pinto recalls there were about 6,600 Finra member firms at one point.
“Regulators are always working hard to try to keep up with changes made in the industry,” he said. “They are making much better use of technology, which makes their manpower more effective.”
“People are in the business to make money, so they’re going to be innovative in finding better ways to do things, and the regulators have to try to keep up,” Pinto concluded. “I think they’re doing a pretty good job, but they have their challenges.”