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Forbes’ Emily Lambert Slams FINRA

Posted by Larry Doyle on October 21, 2011 7:00 AM |

“Justice is truth in action.” ~ Benjamin Disraeli

Regular readers are very aware of my strong concerns about the lack of transparency emanating from Wall Street’s self-regulatory organization FINRA (Financial Industry Regulatory Authority). Having first written about FINRA in January 2009, I have highlighted my concerns extensively over the better part of the last three years. (To reference my writing, go here, Sense on Cents/FINRA).

For a period of time, I thought I was shouting into the darkness regarding FINRA. I still maintain that FINRA specifically and Wall Street regulation as a whole remain great unknowns to an overwhelming percentage of our population including those involved in the markets. To this end, I am heartened when broadly distributed public periodicals address concerns I have held about FINRA for the last few years.

The widely respected financial magazine Forbes weighs in on FINRA just yesterday. 

Forbes’ Emily Lambert asks a number of hard questions and simultaneously slams FINRA for past shortcomings. I commend Ms. Lambert and welcome highlighting her inquisitive analysis. She inquires,

How well does the Financial Industry Regulatory Authority exer­cise its power?

I would maintain that this question has never been fully and thoroughly addressed and exposed by those within the SEC and on Capitol Hill charged with overseeing FINRA. She continues,

Should it get even more power?

Why should we reward failure? How about we have a full and open public hearing on FINRA to address questions and topics which remain unanswered but which I have highlighted and asked repeatedly here at Sense on Cents. Please see the previously referenced link above.

Does an SRO sound like the fox guarding the henhouse? Finra spokesman Howard Schloss responds that the board has a majority of public members. “There is industry input, but there is not industry control,’’ he insists.

Oh really!!?? Perhaps Mr. Schloss may care to launch a survey of FINRA’s standing within the industry. Why did an overwhelming percentage of FINRA’s own member firms—predominantly the smaller broker dealers—vote to request greater transparency on a host of issues in mid-2010. I highlighted a press release which incorporated these votes in August 2010 in writing, Truth, Transparency, and Accountability,

In an extraordinary repudiation of a securities industry self-regulator, at the August 12th Annual Meeting two-thirds or more of FINRA members approved these seven common sense reforms many of which similar organizations have in-place:

*  Compensation for FINRA’s top ten most highly paid employees should be reported regularly in the annual report (83 percent support);

* Management’s relationships with Bernie Madoff and his family should be independently investigated (68 percent support);

*FINRA investment transactions should be disclosed to members and the public (76 percent support);

* FINRA Board of Governors meetings should be held in the “sunshine” open to the public (77 percent support);

*  Members should have a “say on pay” for the top five compensated FINRA employees (72 percent supported);

* An independent private inspector general for FINRA should be appointed (67 percent support);

* All IRS correspondence on management’s demonstrably false claims of a $35,000 ceiling on payments to NASD members related to its merger with NYSE to form FINRA should be released (70 percent supported).

FINRA’s board responded to these votes largely with lip service. The substance of many of these topics and the embedded questions within remain largely unanswered. In my opinion, a compelling case could be made that the large Wall Street banks do in fact control FINRA.

Let’s get back to Ms. Lambert’s hard hitting reporting. She continues,

Significantly, Finra’s critics are a diverse lot—and not just the predictable investor advocates and disaffected brokers. In October a federal appeals court ruled Finra couldn’t go to court to collect a $1 million fine it had levied against a mem­ber firm (for alleged improper short-selling) and criticized it for adopting the rule allowing for court enforcement without taking public comment.

Some lawyers now worry that the court’s decision could limit Finra’s ability to collect restitution it finds is due to wronged investors—if the guilty parties have quit the industry and Finra.

Wow!! Sounds like FINRA just got neutered by this federal appeals court. You can’t make this stuff up but perhaps FINRA’s blind approach is a function of a mentality and culture which has gone unchecked for far too long.

Even the Chamber of Commerce had harsh words for Finra in a report this summer. Rather than being beholden to industry, the chamber griped, Finra now behaves like an aloof government regulator but without “the traditional checks and balances placed on government agencies.”

It has a point. On the one hand, Finra has gotten lawsuits against it tossed out of court on the grounds it is immune, like the government. On the other, the chamber observed, Finra doesn’t consider itself subject to government disclo­sure requirements and provides only “limited and superfi­cial” transparency about its own budget and pay practices.

Sweet Georgia Brown. Lambert nails it. Immunity without transparency DOES NOT WORK!!

Yes, that prized virtue of transparency continues to escape FINRA and those who might care to oversee it.

Thank you Ms. Lambert for adding fuel to this fire as America deserves far better when it comes to the regulation of our markets and Wall Street as a whole.

I strongly encourage readers to fully review Should We Outsource More Policing of Wall Street and Financial Advisors.

Larry Doyle

Isn’t it time to  subscribe to all my work via e-mail, an RSS feed, on Twitter or Facebook? Do your friends, family, and colleagues a favor and get them to do the same. Thanks!!

I have no affiliation or business interest with any entity referenced in this commentary. The opinions expressed are my own. I am a proponent of real transparency within our markets, our economy, and our political realm so that meaningful investor confidence and investor protection can be achieved.


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