Mean Spirited FINRA Must Respect Membership Median

August 10, 2018

In response to the March 21, 2017, Financial Industry Regulatory Authority ("FINRA") "Special Notice: Engagement Initiative / FINRA Requests Comment on Potential Enhancement to Certain Engagement Programs / Comment Period Expires May 5, 2017," Blog publisher Bill Singer submitted a comment on May 30, 2017.  "Bill Singer Submits Rare FINRA Comment" ( Blog, June 1, 2017) 

In  part, Bill Singer's submitted comment  raised the following issue [Ed: corrected to 24 Board members]:

Board Beyond Belief 

The Special Notice seems a familiar effort to manicure the hand of FINRA, which remains within a metal gauntlet. In the face of years of regulatory failure, the Special Notice implores us to believe that FINRA is dedicated to reform and involving its so-called stakeholders. That same notice, however, admonishes us to not suggest anything meaningful like reconstituting the Board. At present, FINRA's Board of Governors consists of the following 24 members: 

Chief Executive Officer of FINRA; 
13 Public Governors; 
10 Industry Governors:
1 Floor Member Governor; 
1 Independent Dealer/Insurance Affiliate Governor; 
1 Investment Company Affiliate Governor; 
3 Small Firm Governors; 
1 Mid-Size Firm Governor; and 
3 Large Firm Governors 

The three FINRA member firm sizes are determined by this formula: 

Small Firm: 1 to 150 registered representative 
Mid-Size Firm: 151 to 499 registered representatives 
Large Firm: 500 or more registered representative 

When FINRA's Board was purportedly rebalanced along the lines of the numbers of registered persons employed by each member firm rather than the previous one-firm-one-vote standard, the professed rationale was that such a restructuring better reflected the membership. I never accepted that explanation and still refuse to drink the Kool-Aid. Registered reps are counted when it comes to allocating seats on the Board; however, those same reps are denied any vote on any matter at the SRO. The message sent by such a duplicitous policy is that those who serve in Wall Street's trenches cannot be trusted to further self-regulation but those who sit in the C-Suites can. Really? Since when? Or, more aptly: How's that worked out for you? Should I mention Madoff? Should I raise the painful history of the Great Recession? Do you want to talk about Lehman Brothers and Bear Stearns? When would you like to discuss FINRA's granting of a requalification waiver to Jon Corzine? When should we tackle Muni-Bond and LIBOR rigging? That all went on while NASD's and FINRA's Large member firms pretty much ran the shop. 

Lies, Damn Lies, and Statistics 

According to FINRA's online "Statistics" page, five years ago in 2012, FINRA had 4,289 firms with 630,391 reps. As of April 2017, the SRO had 3,813 member firms employing 633,822 registered representatives. As such, 476 firms (about 11%) have vanished from the ranks in half a decade. According to FINRA's "Upcoming FINRA Board of Governors Election" (FINRA Election Notice, May 23, 2017) at 

As of close of business on Monday, May 22, 2017, the number of FINRA small firms was 3,455, and the number of large firms was 180. 

Using the May 2017 Election Notice numbers and roughly backing them into FINRA's current statistics, about 91% of FINRA's member firms fall within the "Small" category and only about 5% fall under the "Large" (by extrapolation, about 4% fall under the "Mid-Sized" category). Notwithstanding that lop-sided distribution in favor of Small Member Firms: 
  • 91% of FINRA's Small firms are allocated only 3 seats or 13% on its Board; and 
  • 5% of FINRA's Large firms are allocated 3 seats or 13% on its Board. 
It doesn't look right because it isn't right. FINRA is run by a gerrymandered Board that was engineered in order to entrench powerful industry participants and to slowly strangle the influence of smaller firms and other industry stakeholders. 

Getting Mean (When We Need Median)

I have seen studies that place the average height for an American male at 5' 10," with 25% of the population at 5'8" or shorter and another 25% of the population at 6' or taller. Let's call males 5'8" and shorter "Short;" those taller than 5'8" but shorter than 6' "Mid-sized;" and those taller than 6' "Tall." Let's guesstimate that 91% of males are 6'2" or shorter. Although such labels as short or tall may be somewhat arbitrarily assigned, they should not change simply when a member of one group is compared to that of another. For example, if you are 6'10" and I am 6'1," I am not "short" simply because I am compared to someone who is taller. Short is not the same as shorter; large is not the same as larger. There is a difference between absolute and relative terms. 

Simply comparing a business with 100 employees to another business of 2,000 employees, does not allow us to determine whether the 100-employee firm is "small" or the 2,000- employee firm is "large" because those definitions are derived from the population being measured. If there are 10,000 firms in an industry and 9,000 have no more than 20 employees, then a firm with 100 employees and a firm with 2,000 employees are likely "Large" firms. Similarly, if in another industry with 10,000 firms, 9,000 have 4,000 or more employees, then a firm with 100 employees and a firm with 2,000 employees are likely "Small" firms. 

Dividing FINRA's April 2017 tally of 633,822 registered representatives by 3,813 member firms shows that FINRA's average firm employs 166 registered representatives. This version of "average" is calculated by the mathematical "mean" formula. FINRA's By-Laws artificially define a "Small" member as one having no more than 150 reps. When you consider that FINRA's average sized firm employs only 16 more reps than what is characterized as a "Small" firm, you begin to understand why the labels are more political than accurate. 

Consider an array of nine firms with 1, 2, 8, 15, 20, 60, 75, 500, and 1,000 reps: 
  • the "mean" would be 1681/9 = 186.78; and 
  • the "median" (the fifth firm) would be "20." 
In an effort to revise FINRA's arbitrary member firm classifications and instill some apolitical methodology into the process, FINRA should calculate its "average" member size pursuant to the mathematical "median," which is the actual size of its mid-point member firm (the 1,907th member firm). In addition to publishing its "median" firm size on its Statistics page, FINRA should provide us with similar breakpoints for the bottom 25% and the higher 25% of its membership range. I would then amend the By-Laws so as to classify the bottom 25% of FINRA's membership as "Small;" the upper 25% as "Large;" and the 50% of the firms between the two extremes as "Mid-sized."

Basing FINRA's three membership classes on the median metrics would better frame the nature of the organization's constituent parts. FINRA Board membership should be revised to seat twice as many Governors from the "Mid-size" membership versus either of the "Small" or "Large;" and the voting of the "Mid-sized" Firm Governors should equal the combined vote of the "Small" and "Large" Firm Governors. 


Unquestionably, FINRA's 180 Large firms employ the bulk of the 633,822 registered representatives. As I have long noted in the press and my published works, it is unconscionable that there is no seat on FINRA's Board specifically set aside for a Registered Representative Governor and that there is no voting afforded to registered men and women. It all smacks of the constitutionally discredited practice of deeming certain human beings as 3/5ths of a person for purposes of allocating a state's voting power but a non-person for all else. In response to legitimate calls to democratize its Board, FINRA thinks it is cleverly deflecting the criticism by cynically offering to adjust its committee structures and so-called engagement programs: 

Because they are established by statute, regulation and FINRA's By-Laws, the checks and balances described above-FINRA's Board composition, the comprehensive SEC oversight of FINRA and the limitations on FINRA's powers-operate as effective constraints on FINRA's Board and management and cannot be changed by them. However, FINRA's Board and management can adjust many aspects of FINRA's committee structure and other elements of its engagement programs described below. In reviewing comments on these engagement programs, FINRA intends to evaluate any potential changes in light of this framework of checks and balances governing FINRA, the policy objectives it reflects and the extent to which such changes would enable FINRA to more effectively protect investors and promote market integrity while helping to support vibrant capital markets. 

Page 4 of the Special Notice

The above concluding paragraph from the "Background and Importance of Engagement" section of the Special Notice is nothing more than calculated disinformation designed to maintain the failed status quo at FINRA. FINRA altered the composition of its Board so as to dilute the voting role of its smaller member firms and diminish their influence. That reallocation of power was accomplished via SEC-approved rulemaking, and it can be reformed via that same route. In 2017, FINRA pretends that its Board composition "cannot be changed." We are indeed in the age of alternative facts. As if proposing a By-Law amendment to restructure the Board so as to make it fairer and more representative is illegal? 

FINRA's First Annual Industry Snapshot

On August 9, 2018, FINRA published "FINRA Publishes First Annual Industry Snapshot / Statistical Overview of Brokerage Firms, Registered Individuals and Trading Activity (FINRA Press Release)
As set forth in the FINRA Press Release:

FINRA today published the FINRA Industry Snapshot 2018, its first annual statistical report on the brokerage firms, registered individuals and market activity that FINRA regulates.

The publication includes data ranging from the size and geographic distribution of the firms FINRA regulates to the number of individuals in the industry; from trading activity to how firms market their products and services. All of the data appear in aggregate form to respect the confidentiality of regulatory information.

The Snapshot is designed to increase awareness and understanding about the broad range of firms, individuals and trading activity that FINRA oversees. Consistent with the transparency goals of the FINRA360 organizational-improvement initiative, for the first time FINRA is sharing a statistical overview based on the data it collects in the course of its work.

Without any hesitation, I applaud FINRA for finally publishing what I deem the most accurate and unblemished statistical report in the organization's history. I urge all serious industry participants and investors to read the report. READ the FULL TEXT Report.

Although I am not credited with having brow beat NASD and then FINRA into revising the regulator's published industry statistics, I will, nonetheless, take my own personal victory lap with the satisfaction of believing that my my unceasing, years' long, harangue prompted the disclosure of data that I proposed be calculated in my above Comment. As I worked my way through what comes off largely as a FINRA member firm community in decline over the years, I came upon a nugget on Page 4 of the FINRA 2018 Snapshot, which, at long last, proves my suspicions and confirms my assertion. Under a page heading "Average and Median Number of FINRA-Registered Representatives per Firm," we learn that for the last calculated year of 2017 that the "Average" number of registered reps per member firm was 171 but the "Median" number was only 11!!! 


The question and challenge for FINRA is how the self-regulatory-organization responds to that glaring data point of 11 reps per member firm. It would be the height of cynicism and unfairness for FINRA to somewhat reluctantly disclose the statistic but then shrug it off. Confronted with the inescapable proof that its truly average member firm has only 11 reps, it is imperative that FINRA re-order its priorities to adjust to that reality. 

I give all the credit in the world to CEO Robert Cook for instigating the study that produced the uncomfortable industry data. It is now incumbent upon Cook to constructively respond to the truth about his organization's membership and its composition and implement reforms that will give a fuller, more robust, more representative voice to thousands of firms that have largely been relegated to a somewhat dismissive membership category of "Small," when, in fact, they are truly representative of the "average" size of the organization's membership. Rather than reiterate my arguments and restate the compelling justification for overhauling FINRA's mission and Board to better reflect its membership, I will refer you to my full May 30, 2017, Comment at

Finally, to those of you who often ask and in anticipation of those who will ask in response to this article, "no," I do not get invited to work with FINRA and have not been offered any in-house position. Some 20 years ago, then NASD CEO Frank Zarb asked me to join a panel, but we basically met twice over lunch and I knew that the position was merely a sinecure-without-pay to shut me up. As is obvious, I didn't shut up. Yes, from time to time, over the years, I've met with virtually everyone who was anyone at NASD and FINRA, but you could tell that those meetings were conducted behind gritted teeth and likely after the application of a tube of Preparation H. I don't do "nice" for the sake of going along and getting along. I am polite but blunt and persistent. Some might say I'm a pain in the ass. That's okay, I've always taken that as a compliment because it reflects the sincerity with which I champion the reform causes of small FINRA firms and their associated men and women. 

After some 36 years in our biz, I ain't going to start apologizing for hectoring those in regulatory power who don't do their jobs or do so in a half-assed manner. There are millions of individuals who work in the industry and invest in its products -- those employees and investors need to be better protected from fraud and misconduct. Industry reform isn't a game. We're never going to get there over a salad, breast of chicken, and oh-so polite conversation during a meaningless lunch. We've had enough photo-ops and blue ribbon/white paper panels on Wall Street in the name of elusive reform. FINRA CEO Cook seems to be on the right track, at times. He seems to be turning the clumsy battleship of FINRA, somewhat. Regardless, I will persist in speaking truth to power and reveling in my role of the cranky gadfly bastard. I may be getting too old to continue the good fight for much longer but I'm not going quietly into the darkness. As such, yes, I take the recent FINRA report as an overdue victory. If you could see me, you'd notice that rare smile on my face. If you see Cook, send him my compliments but let him know that this is only a first step. I'll be around to urge him on.