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FINRA's Dubious Report (Madoff, Stanford, et al.)
Written: October 2, 2009

The Financial Industry Regulatory Authority (FINRA) just issued the following press release (October 2, 2009) :

Statement From FINRA Chairman and CEO Richard G. Ketchum on the Report of the Special Review Committee of the FINRA Board of Governors 

Today's report by a Special Review Committee of the FINRA Board of Governors is one of a number of significant initiatives undertaken by FINRA in the wake of the Madoff and Stanford scandals to better understand and correct shortcomings in our examination program. As regulators, we owe it to investors — especially those harmed by recent scandals — to develop a better, more comprehensive response to fraud, and I am committed to taking the lessons from the report's findings to make FINRA even stronger.

As the findings have concluded, a number of key points are apparent. First, FINRA must institute a number of internal reforms to better safeguard investors and the broader financial system. Second, the report calls attention to the many regulatory challenges related to jurisdictional issues and product definitions. Finally, the review points to the urgent need for financial regulatory reform that ensures comprehensive oversight, reduces jurisdictional confusion, streamlines enforcement and improves coordination and communication among all regulators.

FINRA has already taken many steps to improve its examination and fraud detection capabilities since these scandals happened. One major initiative FINRA is announcing today is the creation of a new Office of Fraud Detection and Market Intelligence. This office will provide rapid response to fraud by a staff with expertise in fraud detection and investigation. 

My reaction to the above?  Well, I can pretty much encapsulate that into a few choice words. Self-serving garbage. Nonsense. Disgraceful.

On December 12, 2008, when I was among the very first to point an accusatory finger at FINRA for the then unwinding Madoff scandal, , a number of folks said that I was way off base. They said that FINRA had no jurisdiction, no knowledge, and that I was being unfair --UNFAIR!!

In March 2009, I sent a thoughtful, constructive letter to FINRA, seeking a meeting to discuss my ideas for reforming the ineffective self-regulatory organization .  As is keeping with the bunker mentality of FINRA, I never got so much as the courtesy of a reply.

Finally, what kind of Report did FINRA's Special Committee author?  I see no reference to any meetings or interviews with any prominent FINRA critics -- I sure as hell didn't get a phone call or email asking my input or assistance.  How could that be?  How could an internal review of FINRA's regulatory blunders and failures have been accomplished without resort to outside critics of long-standing stature?  Or was the purpose here to simply put together something, anything, and do so with whatever damage control was credible?

I see that the "Board Advisors to the Committee" were Mari Buechner, W. Dennis Ferguson, and G. Donald Steel.  Ms. Buechner's nomination by FINRA as its Board Candidate met with opposition from three separate petition candidates in 2008. In 2007, both G.Donald Steel and W. Dennis Ferguson were FINRA nominated Board Candidates who were opposed by a number of petition candidates.  If you note the attribution over the SRO's nominees, you will see that it clearly states "FINRA Candidate" in contradistinction to "Petition Candidate."  

Seems to me, that if you're going to make an effort to produce a truly unbiased report, that you have to recognize the troubling nature of designating as Board Advisors three folks whose nominations by the FINRA Nominating Committee was found to be so unpopular as to engender grassroots opposition candidates and cause historic contested elections.  That's not to say that those three Board Advisors should not have been appointed to the Special Review Committee; but it does mean that if you are concerned about appearances and want to get to the heart of the matter, you should also have brought outsiders on board. 

Which begs the question: Why didn't the Special Review Committee also seek out those of us within the FINRA Dissident/Reform community to serve as advisors?  Sadly, I think the answer is all too obvious.

Among the four lawyers listed as Of Counsel to the Special Committee was Dennis Hensley.  I note this disclosure on Mr. Hensley's webpage at Sidley Austin

  • Current member of the NASDAQ Review Council 
  • Former member, NASD Board of Governors
  • Former member, NASD Regulation Board of Directors
  • Former member, NASD National Adjudicatory Council
  • Former member and Chair, NASD District Business Conduct Committee for District 10 (New York)
  • Former member, SIA Compliance and Legal Division Executive Committee
  • Industry-Regulatory Council on Continuing Education, the body that develops and interprets continuing education requirements for broker-dealers in the US, former member
  • NASD Institute for Professional Development, created to provide a certificate program for regulatory and compliance professionals, led the design and development of the Institute’s program jointly with the Wharton School at the University of Pennsylvania, first Executive Director

Not noted on Mr. Hensley's webpage is this tidbit from his history   Geez, didn't anyone think that his inclusion in the Of Counsel array might cause some folks to cringe given the facts noted above?  

Finally, there is the question of naming names.  I cannot for the life of me find the name of a single high-level NASD or FINRA executive that the Special Committee believes was negligent, should be held accountable, and should be severely reprimanded.  I see no recommendation to fire anyone.  I guess that they just want to reshuffle the deck. Keep the same cards but let's change some names and create yet more departments.  

What is lacking in this report is what is always lacking in these types of reports. A simple recognition that there was a systemic failure at NASD and FINRA, and that the failure is largely attributable to a culture of bureaucracy and cronyism that will perpetuate itself. If heads don't roll and wholesale reforms are not enacted, you are ensuring the return of the same malfeasance and nonfeasance cited in the report.




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