July 29, 2019
The FINRA Small Firm community is once again up in arms over the ongoing election for the open 2019 Small Firm Member Board of Governors' seat. "UPDATE: 2019 FINRA Contested Small Firm Election: Vote for Linde Murphy" (BrokeAndBroker.com Blog / July 26, 2019). In this latest dust-up, FINRA's National Nominating & Governance Committee nominated sitting Small Firm Governor Robert A. Muh for re-election and, thereafter, transmitted an email on July 25, 2019, urging eligible voters to support their nominee's candidacy despite the existence of Small Firm Member Petition Candidate Linde Murphy. Murphy needed to obtain the requisite 3%-plus petitions in support of her candidacy, whereas Muh, who previously ran for his first term as a petition candidate, avoided that inconvenient qualifying step by accepting the Nominating Committee's nod.
Why does any of this matter?
A Board of 24
The FINRA Board of Governors consists of 24 members:
- Chief Executive Officer of FINRA;
- 13 Public Governors;
- 1 Floor Member Governor;
- 1 Independent Dealer/Insurance Affiliate Governor;
- 1 Investment Company Affiliate Governor;
- 3 Small Firm Governors (1 to 150 registered representatives);
- 1 Mid-Size Firm Governor (151 to registered representatives); and
- 3 Large Firm Governors (500 or more registered representatives)
A Powerful Committee
According to FINRA's website:
NOMINATING & GOVERNANCE COMMITTEE (NOMINATING COMMITTEE)
The Nominating and Governance Committee is responsible for nominating persons for appointment or election to the FINRA Board, as well as nominating persons to fill vacancies in appointed or elected governor seats on the Board. The Committee also nominates Industry and Public members for positions on FINRA's National Adjudicatory Council.
The Committee is responsible for periodically reviewing and recommending changes to standing committee charters and, in consultation with the CEO, nominates the members and chairs of each standing committee of the Board. Also in consultation with the CEO, the Committee develops and recommends to the Board guidelines for effective corporate governance. In addition, the Committee reviews and approves appointments to each of FINRA's advisory committees and changes to the advisory committee enabling resolutions.
3,261 FINRA Small Member Firms
https://www.finra.org/sites/default/files/notice_doc_file_ref/Election-Notice-052419.pdf, we are informed that:
As of the close of business on Thursday, May 23, 2019, the number of FINRA large firms was 174, and small firms was 3,261.
According to FINRA's online "Statistics" https://www.finra.org/newsroom/statistics, as of June 2019 there were 3,589 Member Firms. As such, FINRA's 3,261 Small Firms account for 91% of the self-regulatory-organization's membership; however, that 91% majority has been allocated only 3 out of 24 FINRA Board of Governors seats -- which amounts to 12.5% of the Board seats for 91% of the organization's member firms!
The Power to Appoint. The Power to Nominate.
Somewhat lost in all the verbiage of the FINRA Election Notice is this nugget:
Of the 24 Board members, the following seats are appointed by the FINRA Board from candidates recommended by the Nominating Committee: the Public Governors, Floor Member Governor, Independent Dealer/Insurance Affiliate Governor and Investment Company Affiliate Governor (Appointed Governors).
The Nominating Committee also may nominate individuals to run for election for the seven elected governor seats that comprise the three Small Firm Governors, one Mid-Size Firm Governor and three Large Firm Governors (Elected Governors). . . .
FINRA's Nominating Committee of three industry and four public governors appoints 16 of the Board's 24 Governors (which works out to 67% of the Board): 13 Public Governors and the 1 Floor Member Governor and the 1 Independent Dealer/Insurance Affiliate Governor and the 1 Investment Company Affiliate Governor. In addition, the Nominating Committee "may nominate" the 7 industry governors. Apparently, FINRA's CEO gets a free pass and is neither appointed nor nominated. We should all be so lucky!
91% With Little Proportionate Power -- FINRA's Dirty Little Governance Secret
Consider these extracts from the FINRA Nominating Committee's July 25th email in support of Muh's nomination:
[O]ur committee is comprised of three industry governors and four public governors. . .
The role of the small firm representatives on the Board, representing over 3,200 such institutions, is a crucial one that demands significant industry experience. . .
The majority of the FINRA board are not from the industry and they have all looked to Bob to get an understanding of the impact of rule proposals on the small firm. . . .
Given how the small firms' Board representatives roles are "crucial" since the majority of FINRA's Board "are not from the industry," it's no small wonder that such non-industry folks would look to Bob Muh in order to "get an understanding," Thankfully Bob sits on the all-power FINRA Nominating Committee. Having been unfairly restricted to disproportionate representation on the Board, at least the Small Firm community has 1 of 7 seats on the all-powerful Nominating Committee, which is about 14% of the Committee's seat and a modest bump-up from the 12.5% of the Board seats.
Ummm . . . hold on a sec. What???
I see from the 2019 roster of the FINRA Nominating Committee that, in fact, Robert Muh is not a member of the Nominating Committee.
So . . . which Small Firm Member Governor is a member of the Nominating Committee?
I don't see the name of Small Firm Member Governor Stephen A. Kohn.
I don't see the name of Small Firm Member Governor Page W. Pierce.
That's all there is. There ain't no more Small Firm Governors.
Omigod, FINRA engineered its Small Firm Member community out of any Nominating Committee seats! There are three "industry" seats set aside on the Nominating Committee. There are three "industry" categories of Large, Mid-Sized, and Small. Shamefully, there is not a single set-aside for a Small Firm Member Governor to sit on the Nominating Committee. 91% of FINRA's member firms have 0% representation on FINRA's Nominating Committee.
As to the so-called independence of the National Nominating Committee, consider this from "Upcoming FINRA Board of Governors Election" (FINRA Election Notice / May 25, 2018)
FINRA Nominating Committee Nominee
FINRA's Nominating Committee has nominated the following individuals:
Large Firm Governor Candidate: Timothy C. Scheve, Janney Montgomery Scott LLC
Mid-Size Firm Governor Candidate: Brian J. Kovack, Kovack Securities, Inc.
Small Firm Governor Candidate: The Nominating Committee determined it would not
nominate a candidate for election in 2018. Instead, any eligible candidates who obtain the
requisite number of petitions will be included on the ballot.
At the July 2017 meetings, the Nominating Committee nominated and the Board made a number of appointments to the Board that became effective at the Annual Meeting. Governor Kathleen A. Murphy, President of Fidelity Personal Investing, was appointed to succeed Governor John J. Brennan as the Investment Company Affiliate on the Board. . .
All three of the industry member firm governors sitting on FINRA's Nominating Committee were appointed or nominated by that same committee, and not one of those appointed/nominated industry governors is designated as a Small Firm Member Governor.
So those who do the appointing are appointed to appoint those who do the appointing -- and that's a conflict-free, democratic process?
And that's not designed to marginalize and silence the voice of 91% of the organization's member firms?
Just imagine how one of the many public companies traded by FINRA's member firms would fare if they proposed to restrict 91% of their public shareholders to 12.5% of their Board seats and shut them out of any role on the Nominating and Governance Committee!
And FINRA wonders why its Small Firm Member community feels isolated? Why some 3,261 firms feel marginalized? Why the Small Firm community looks upon the Nominating Committee's email as an unwanted interference in a contested election?
The Protest Vote for Candidate Linde Murphy
As you know, my name is on the ballot this year because I went through the petition process to get it there. Let's not forget the efforts of a small group of dissidents that first contested the FINRA nominee years ago. They fought for the rights of small firms and against what they felt was a nominee handpicked by FINRA.
At no point in the future would I accept the FINRA nomination for the Small Firm Seat for the Board of Governors. The person who represents small firms at the board level should go to the members and ask for their support by signing a petition.
The FINRA Small Firm community must send a clear and unequivocal message to FINRA to "remain strictly neutral" when it comes to Small Firm politics.