Subscribe: RSS Feed | Twitter | Facebook | Email
Home | Contact Us

Is FINRA’s Board Tone Deaf?

Posted by Larry Doyle on August 20, 2010 3:15 PM |

When might a voting process with overwhelming returns be negated by the wishes and desires of the powers that be? Am I speaking of those who may occupy bully pulpits in third world nations? No, that guess would not be close. 

Am I referring to political leaders who are protected by military and business minions? Nope, still quite cold.

How about a board that is more affiliated with an organization’s executives than with its members? We are getting warmer.

What about financial regulators and a board who have the reputation of being much more closely aligned with major players within the financial industry than their rank and file members and American investors at large? Bingo!!

Let’s get more specific. A week ago, FINRA’s member firms voted overwhelmingly in favor of seven non-binding proxy proposals put forth by Amerivet Securities. In light of the vote and the overwhelming results, one would have thought that FINRA’s board would have absolutely no choice but to fully address these proposals. To do otherwise, one would think that the FINRA board might run the risk of further alienating its membership while sending a message to the American public at large that transparency and disclosures are virtues this financial regulator speaks of but does not truly practice. 

Could FINRA’ s board be so tone deaf to the current pulse in our nation today as to not listen and respond appropriately to these proposals? Well, let’s bang the drum a little bit louder so the tone resonating from America’s heartland gets through to the FINRA board.

America wants FINRA to open its books and records!! America wants FINRA to provide the requisite transparency and disclosures. America wants FINRA to begin to restore a modicum of investor confidence in the process. Why do I write this and raise this topic in light of the voting results a week ago? Well, it does not take a brain surgeon to see that the FINRA board or somebody closely connected has conveniently leaked a story into the market that despite the vote of the FINRA members, the board has little interest in pursuing all of these proposals.

Investment News provides a sneak peek inside FINRA’s operations in reporting, FINRA Proxy Proposals May Never See the Light of Day,  

Corporate-governance experts believe that seven proposals designed to make Finra disclose more information and give members a say on executive compensation may never be implemented, even though nearly 70% of those who voted in the regulator’s recent election approved them.

Because they are non-binding, the Financial Industry Regulatory Authority Inc. board doesn’t have to take any action on the proxy proposals. And the board made it clear that it was not in favor of the proposals, urging members prior to the election to reject them. The membership approved them anyway, by a 67% majority.

But Finra members don’t have the same leverage as corporate shareholders have over company boards, said Les Greenberg, a Culver City, Calif.-based securities lawyer who follows governance issues. If corporate boards ignore shareholder wishes, shareholders can vote the directors off the board, Mr. Greenberg said. Even the threat of voting out board members gives shareholders “a little bit more leverage,” he added.

Finra’s board consists of 22 members, including 14 appointees.

The seven proposals ask Finra to give members a “say on pay” for top Finra officials, improve disclosure of Finra executive pay, make board meetings public, disclose Finra’s investment activities and release an Internal Revenue Service opinion letter concerning NASD’s $35,000 payment to members following the 2007 merger with the New York Stock Exchange’s regulatory unit.

Nancy Condon, a spokeswoman for Finra, declined to comment for the story.

The proposals also ask for an inquiry into any connections Finra officials may have had with the Bernard Madoff firms. In addition, the proposals call for the creation of an independent inspector general for Finra.


As a regulator, Finra has a different relationship with its members than a public company has with its shareholders, said Jie Cai, assistant professor of finance at Drexel University.

“The mission for Finra is … to regulate member companies, and sometimes they may have to do something that’s really unpopular with members,” Mr. Cai said.

A say-on-pay process could create a sense of retaliation and “some sort of bargaining between Finra and the members it’s supposed to be regulating,” he said.

In its proxy, the Finra board made a similar argument, saying that a say-on-pay vote could “give an inappropriate perception of the membership’s influence on the Finra regulatory program.”

On the other hand, annual disclosure to members of executive compensation would create less of a conflict, Mr. Cai said.

Amerivet Securities Inc., which petitioned Finra to place the proposals on the ballot, wants executive pay to be disclosed in Finra’s annual report, rather than just in its tax filings, because the IRS filings are less timely and not distributed to members.

The say-on-pay proposal and additional transparency for Finra’s investment process are the most likely items to be addressed by the board, said Lisa Roth, chief executive of Keystone Capital Corp. and chairwoman of Finra’s small-firm advisory board.

Ms. Roth was also a small-firm candidate appointed by Finra’s nominating committee in this month’s election. She lost to an independent candidate. Ms. Roth supported four of the seven proposals.

Say-on-pay proposals are already commonplace, she said. In addition, under the Dodd–Frank Wall Street Reform and Consumer Protection Act, periodic non-binding say-on-pay proposals will be required for public companies.

The investment industry’s own standards of portfolio transparency could be followed by Finra, said Ms. Roth, who added that she does not have direct knowledge of what Finra’s board might be considering.

The advisory board will be discussing the proxy proposals, Ms. Roth said, and the full board is expected to start reviewing the proposals at its next meeting in September.

“I’m anxious to see what Finra does with those proposals,” she added.

Smaller firms, defined as those with fewer than 150 registered representatives, supported the proposals by 70%-plus margins in the election.

These small broker-dealers are upset that after the big Wall Street firms failed in 2008 and Finra itself suffered $568 million in investment losses, Finra executives awarded themselves significant pay and bonuses, said John Busacca, owner of the Broker Dealer Exchange LLC.

That year, 11 Finra executives had total compensation of $1 million or more, some of which includes retirement payouts. Then-Finra chief executive Mary Schapiro received $3.3 million in total pay, including $1.75 million in bonus and incentive compensation. Finra hasn’t yet filed its 2009 tax return, so more-current pay data is not available.

Mr. Busacca is one of the founders of The Securities Industry Professional Association Inc., which organized the successful slate of small-firm board candidates elected at Finra’s annual meeting Aug. 12.

One of those winning candidates, Ken Norensberg, managing director at Luxor Financial Group Inc., believes that the Finra board will consider the proposals.

“When you get an overwhelming number of votes, the powers that be will have to look at them,” he said. “I won’t speak for the board, but clearly, the members have spoken,” he added.

The proxy vote “is a mandate” for more transparency, Mr. Busacca said. “If the [Finra board] ignores it, I would not be surprised to see another proxy battle.”

The Investment News piece fails to highlight that the proxy proposals included the following, 

Proposal 8: FINRA should disclose (without redaction) all its correspondence with the IRS concerning the $35,000 payment to members in connection with the consolidation of NASD and NYSE Regulation.  

In the midst of that proposal is an allegation that Mary Schapiro, then FINRA head and current SEC Chair, misrepresented verbally and in writing what the IRS stated to FINRA. Despite the fact that FINRA’s lawyers  successfully warded off the charge embedded in this proposal, America deserves to know whether its SEC head lied in the proxy statement used for the merger of FINRA itself. 

What is it going to be? Will the FINRA board stick its head in the sand and pretend not to hear its members and the American public at large? Who on the FINRA board has the balls to stand up and say to their colleagues, “You know what, I’m breaking ranks. America deserves better. America deserves real transparency and disclosure and I’m going to give it to them.” 

Who has the courage? Who has the character?

Sense on Cents will be watching closely!!      

Larry Doyle

I have no affiliation or business interest with any entity referenced in this commentary. As President of Greenwich Investment Management, an SEC regulated privately held registered investment adviser, I am merely a proponent of real transparency within our markets so that investor confidence and investor protection can be achieved.

Please subscribe to all my work via e-mail, an RSS feed, on Twitter or Facebook.

Recent Posts