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What Will We Learn from FINRA’s Annual Meeting on 8-12-10?

Posted by Larry Doyle on August 11, 2010 12:20 PM |

Wall Street’s self-regulatory organization, FINRA, holds its annual meeting tomorrow inWashington D.C.. What will we learn? Will FINRA’s member firms vote for a number of non-binding proposals which would shine real light on the inner workings of this organization? America deserves to learn so much more than has ever been revealed about FINRA.

I have shared with many people that I believe the underlying tone of our markets would improve if FINRA were compelled to open its books and records. Why do I so strongly believe that? True transparency inherently breeds investor confidence. I made this very point to Joe Giannone of Reuters just the other day. Regular readers of Sense on Cents are fully aware of my feelings. Joe highlights the topics surrounding FINRA for a wider audience as he writes, FINRA Faces Calls to Lift Veil on Finances, Pay:

Wall Street regulator FINRA, which demands disclosure and openness from brokers, is under pressure to lift the veil on its own affairs.

The Financial Industry Regulatory Authority, a private corporation that regulates the nation’s 4,700 brokerages, will learns at its annual meeting on Thursday how many support a dissident’s call for more transparency.

Amerivet Securities, a small California brokerage that sued the watchdog last year seeking records on executive pay and investments, wrote seven nonbinding proposals included in FINRA’s July 12 shareholder proxy.

Elton Johnson, Amerivet’s president, wants FINRA to disclose compensation for its 10 highest-paid executives and how it invests a roughly $1.6 billion portfolio. Johnson also wants the regulator to hire an inspector general and conduct board meetings in public.

In a July 29 letter to FINRA members, Johnson accused the organization of failing to protect investors from disasters such as Bear Stearns, Lehman Brothers and Bernard Madoff.

“No objective observer can look at the performance of FINRA over the last few years and characterize it as an effective regulator, or being operated in its members’ best interests,” Johnson said in the letter.

He said several board candidates support some or all of his proposals, including five of seven candidates from small firms and one of two from medium-sized firms.

FINRA in the proxy urges members to reject Johnson’s proposals.

FINRA spokesman Nancy Condon declined to comment. Johnson, a U.S. Army Reserve officer, was recently deployed to Afghanistan and was not available for comment, according to his attorney, Jonathan Cuneo.

CLOSED DOORS

The annual meeting comes as FINRA, criticized for not preventing Wall Street’s excesses and failing to catch some epic frauds, stands to gain more authority. Under financial industry reform legislation signed into law last month, FINRA may regulate thousands of investment advisers.

Obscure to most Americans, FINRA is a powerful regulator and big-time operation with about 2,800 employees.

In 2008 it generated $804 million in member fees and other revenue, according to the most recent data it provides. It paid $542 million in compensation despite $480 million in portfolio losses and $145 million in hedge fund and partnership losses.

The SEC’s 2009 budget, by comparison, provided $960 million for 3,941 employees and estimated the agency would collect $1.33 billion in fees.

And while FINRA plays a critical market-oversight role, it is a private company, and the annual meeting at its Washington visitors center is not open to the public.

Critics like Johnson want FINRA to provide more information about its operations to brokers and the public.

Johnson renewed calls for a detailed investigation of what ties existed between FINRA officers and Madoff, who once served as Nasdaq chairman. Another proposal demands the opportunity to review correspondence between FINRA and the Internal Revenue Service, which collects federal taxes.

A number of critics, many of whom run small firms, contend that FINRA stiffed its members by distributing just $35,000 per firm in awards from the NASD’s 2007 takeover of NYSE Regulation, which created FINRA.

These brokers contend the IRS would have allowed significantly higher distributions.

FINRA’s pay packages for top officers also are a sore point. Mary Schapiro received $3.26 million as chief executive in 2008. As chairman of the SEC, a job she took in early 2009, she receives $162,900 a year.

Schapiro also received a $7.3 million retirement package from FINRA.

“The way that FINRA’s money is allocated means a lot to Amerivet and to many small broker-dealers,” Johnson wrote.

BEST INTERESTS

FINRA, in the proxy, responded to Johnson’s proposals.

The nonprofit organization said it discloses compensation for 40 officers in its annual Form 990 filed with the IRS.

It said probing its handling of the Madoff affair would duplicate a special review conducted by its board last year, and hiring an inspector-general likewise would duplicate roles played by its audit committee and its ombudsman.

The watchdog also said disclosure of its investing activities and opening its meetings to the public would not be in the best interests of its members.

Efforts to compel the release of its IRS correspondence have been rejected by the courts on grounds that it could prove harmful to the regulator, FINRA said.

On Thursday the industry will learn how many brokerages side with Johnson.

“To restore investor confidence, there needs to be greater transparency and disclosure from banks, brokers and investment advisers,” said Larry Doyle, a Wall Street veteran who has championed Johnson’s campaign and raised questions about FINRA in his blog “Sense on Cents.”

Doyle, president of Greenwich Investment Management, added, “If we need greater disclosure in the industry, those rules should apply to FINRA as well.”

Given all that we have experienced in our nation over the last few years, we would be best served by requiring greater transparency and disclosures throughout our financial system, including our regulators, and especially FINRA.

Who’s with me?

Comments, color, questions, constructive criticisms always encouraged and appreciated.

LD

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  • Brad

    Time for the smaller broker dealers to voice their opinions as a bloc. ..will it happen? Let’s hope so.

  • disenchanted

    I hope the small broker dealers were not afraid of retribution and voted for all the proposals, and voted in the Board Members that whould work at enacting those proposals.

    • Lou

      Disenchanted…there is strength in numbers. Would FINRA thing about exacting retribution on hundreds if not more of smaller broker-dealers? I think not.

  • John W

    I wish I could raise a hand in those hearings on Aug 12th and ask the FINRA “boobs” about their sales of Auction Rate Securities in the summer of 2007, and how they secretly warned “member firms” to unlaod them asap in the fall of 2007… onto thier clients’ base if necessary.

    FINRA is a broker pawn and mother bear all in one.. thieves, imo.

  • O. Zabotni

    Amerivet and its president have a disciplinary history of violations of NASD now FINRA rules which occurred some years ago. Details are on the website FINRA.ORG with just a word search. Apparently Amerivet and its president have been grinding an axe ever since. Their story about complaining about the $35,000 payment to members and Mary Schapiro’s compensation is getting kind of old. Some individuals are very vindictive when fined as they think rules are beneath them. FINRA regulates broker dealers and would not have jurisdiction and be required to examine Madoff in his investment advisor role. It was the SEC and State Regulators who had that responsibility.

    Why is it we never hear about NYSE Grasso’s $40 Million any more. He’s probably sitting home still laughing.

  • disenchanted

    Unless you are a small broker dealer, it is hard to comprehend how it feels to be helpless. Unless the disciplinary history involves customers, fraud, theft etc, you can bet it had to do with not having an up to date manual, not filing a form on time, or some other administrative issue. I will never defend a firm that has agregious issues, big firm or small, but having to spend three or four weeks with three or four agents looking at administrative paperwork, thats ludicrous, espcially when you are fighting in Iraq, as the principal of Amerivet was at that time.

    Finra should not get off the hook for Madoff. He did have a broker dealer. Where was his Investment Advisor executing the trades? Why would a firm that is dually registered send it’s trades to another Broker Dealer and pay ticket charges plus commissions? Why wouldn’t they want to keep the commissions? I think if I were an auditor, that alone would make me want to audit the Broker Dealer.






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