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FINRA Transparent? Why Would They Want To Do That?

Posted by Larry Doyle on July 19, 2010 4:36 PM |

A month ago I highlighted a list of proposals presented to FINRA which would generate a significant level of transparency into Wall Street’s self-regulator. Given everything we have gone through over the last few years, who in America would not now want greater transparency from Wall Street’s self-regulator? I wrote FINRA Owes America Answers on These Proposals:

FINRA can talk about transparency and integrity all it wants. We all know talk is cheap. FINRA’s board and executives need to show America how they truly define and embrace transparency and integrity. How so?

FINRA is scheduled to hold its first Annual Meeting in almost three years on August 2nd. In anticipation of that meeting, FINRA member firm Amerivet Securities has submitted seven proposals to be included in the FINRA proxy materials. The FINRA board and executives owe their member firms, and ultimately America, the opportunity to address and then receive complete answers on each of these proposals.

These proposals cover topics such as compensation, FINRA’s relationship with Bernie Madoff, lying in the proxy statement to form FINRA, and more. How did the FINRA board respond to these proposals? In so many words, the board has said, ‘Why would we want to do that?’ Investment News reports, Members in Uphill Fight to Make FINRA Transparent:

Broker-dealers are in favor of several proxy proposals that urge the Financial Industry Regulatory Authority Inc. to become more transparent, but they doubt Finra will implement any of the ideas even if a majority of members approve them.

Most of the proposals — which are all non-binding — call on Finra to disclose more information to member firms, especially about management’s compensation, and to open its monthly meetings to the public.

Two others, however, call on the regulator to address specific issues — the question of whether Finra managers had any involvement with Bernard Madoff’s family or firms and an opinion letter from the IRS regarding payments to members following NASD’s merger with the New York Stock Exchange’s regulation unit.

In the proxy released last week, Finra urged members to vote against all of the proposals.

“A number of these [proxy] proposals could adversely affect Finra’s ability to fulfill [its] responsibility” for investor protection and market integrity, Finra said in its proxy.

That advice is falling on deaf ears.

“We’re going to vote for all of them, and I suspect most other [broker-dealers] will do the same,” said Ray Grenier, chief executive of Delta Equity Services Corp. “I’m mystified why Finra is resisting.”

The proxy items were submitted by Amerivet Securities Inc., which is involved in separate litigation with Finra over related governance procedures.

Finra’s staff believes that this is the first time a member firm has submitted proxy proposals, said Finra spokeswoman Nancy Condon.

So what?! Member firms are not supposed to be allowed to ask for basic information and transparency? Condon makes an asinine statement here.

Amerivet initially wanted the proposals to be mandatory, but when Finra balked, the firm resubmitted them as non-binding recommendations.

But because they are non-binding, Jim Biddle, founder of The Securities Center Inc., holds out little hope that Finra will embrace the proposals — even if the majority of members support them.

“I don’t think we’ll gain very much even if 60% [of member firms] vote for them,” he said.

One of the proposals asks for a study of whether any current or former Finra officers or directors had any involvement with Bernard Madoff’s family or firms.

Reviewing any ties is a “perfect way for Finra to say, look, [Finra management] didn’t have anything to do with” the Madoff fraud, said Joel Blumenschein, president of Freedom Investors Corp. Mr. Blumenschein is running for a small-firm seat on the Finra board.

In its proxy, Finra said that the proposed Madoff study would simply duplicate a 2009 inquiry by a Finra review committee. But Amerivet, in submitting its proposals, said that the Finra committee did not have the authority to review dealings between senior Finra officials and Mr. Madoff.

(In its report, Finra’s Madoff review committee acknowledged that it is limited by its charter to evaluating Finra’s exam program only.)

Another of the proposals would direct Finra to disclose the Internal Revenue Service opinion letter concerning how much NASD, Finra’s predecessor, could have paid its members following the 2007 merger. Finra claimed that the $35,000 it paid was the maximum amount possible under IRS rules, but it has never made the opinion letter public.

In the proxy, Finra said that several court decisions upheld its right to keep the letter confidential for competitive reasons.

In a December court hearing, a lawyer for Amerivet, Jonathan Cuneo, founding member of Cuneo Gilbert & LaDuca LLP, cited the IRS letter as the source of figures showing that NASD member firms could have received an additional $35,000 to $76,000.

Ron Reuven, chief executive of Reuven Enterprises Securities Division LLC, agrees with Amerivet that Finra could do more to clear up questions regarding both Mr. Madoff and the IRS letter.

“I would love to find out the answers to those questions, but unfortunately, I have very little faith that they will ever come out,” he said.

A proposal to require that Finra disclose the pay of its 10 most highly compensated employees is unnecessary because it already discloses the information in its annual tax return, the proxy said.

But Mr. Cuneo said that it takes too long for Finra’s tax return to become available, and it isn’t given directly to members.

“We still don’t know the full amount of [former Finra chief executive and current Securities and Exchange Commission Chairman] Mary Schapiro’s compensation in 2009, and we won’t know that until close to the end of 2010,” he said.

Another proposal that would give members a say-on-pay vote for the regulatory group’s five highest paid executives, “would give an inappropriate perception of the membership’s influence on the Finra regulatory program,” according to the proxy.

Finra also argued against a proposal that would make it disclose the investment intermediaries and products that it used for its own investment portfolio. Disclosure would give an impression that it endorsed certain firms or investments, the proxy said.

Amerivet said that more investment transparency is called for, given the large losses that Finra experienced in 2008.

The proposal to open Finra board meetings to the public “could stifle candid deliberations,” Finra said in its proxy. But Amerivet argued that there is no reason that Finra can’t be as transparent as most government agencies.

“We don’t dispute the right to close [a meeting] if they’re talking about enforcement actions or sensitive matters,” Mr. Cuneo said.

Finra also opposes an Amerivet proposal to create an independent inspector general, saying its existing internal audit department and ombudsman’s office already perform oversight roles.

Amerivet argued that those channels lack true independence.

Votes will be counted during Finra’s annual meeting on Aug. 12.

FINRA can talk all it wants about its pursuit of truth and transparency, but again ‘talk is cheap.’ Will FINRA walk the walk? Will FINRA promote transparency within its own operations, as so many broker-dealers want, or will it be more of the same Wall Street-Washington incest that has been integral in bringing our economy and market to their knees?

Thank you to a regular reader for bringing this story to my attention.

LD

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  • Lou

    What does FINRA really stand for?

    F = financial
    I = incredulity
    N = needing
    R = real
    A = assistance

    Finra is transparent all right. Everybody can see right through this facade.

  • Anon

    http://dynamodata.fdncenter.org/990_pdf_archive/521/521959501/521959501_200812_990O.pdf

    Page 8. total number of employees is 2,500. Total paid over $100k, 1,066. Thats 43%! How can they justify this.

  • John W
  • John W

    CFA credential implies a standard of care not always upheld.

    Self-Dealing Threatens Florida Pensions
    Wealthy Clients Should Beware Of Private Banks
    Wealthy Still Suckers For Madoff-Style Scams

    Edward Siedle

    When Mary Schapiro, Chairman of the Securities and Exchange Commission, spoke at the CFA Institute 2010 Annual Conference in May, the topic of her comments was the SEC’s “Investor-Focused Agenda.” Schapiro argued that the SEC is committed to giving investors the information they need and to helping bring sunshine to opaque markets.

    She seems to have failed to notice a troubling development in investor protection that was right under her nose. Recently her host, CFA Institute (which provides investment-related articles to Forbes.com), began a national radio ad campaign touting the years of rigorous training its members undergo and boasting that its members are held to the highest fiduciary standards.






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