The Regulatory Hypocrisy of the SEC's New Clearing Agency Governance and Conflicts Rules

November 16, 2023

The SEC adopted new rules for clearing agencies to purportedly establish governance requirements regarding board composition, independent directors, nominating committees, and risk management committees; and, further, to require new policies and procedures regarding conflicts of interest, management of risks from relationships with service providers for core services, and a board obligation to consider stakeholder viewpoints. SEC Adopts Rules to Improve Clearing Agency Governance and Mitigate Conflicts of Interest (SEC Release)
In part the SEC Release asserts that:

The rules improve the governance of registered clearing agencies by identifying certain responsibilities of the board, increasing transparency into board governance, and, more generally, improving the alignment of incentives among owners and participants of a registered clearing agency. In support of these objectives, the rules establish new requirements for board and committee composition, independent directors, management of conflicts of interest, and board oversight.

Bill Singer's Comment

An absolutely abysmal bit of hypocrisy spewing from Wall Street's federal regulator. Sure, implement all the rules you need to ensure that clearing agencies abide by ethical governance and avoid conflicts. I have no issue whatsoever with those laudable goals. On the other hand, when the hell will the SEC demand that Wall Street's self-regulator, the Financial Industry Regulatory Authority ("FINRA"), toe that same line? 

On September 6, 2023, FINRA declared the victories of two unopposed candidates in its Board of Governors elections; however, nearly three months later, FINRA still declines to publish the tally of the votes cast for each candidate and, critically, fails to publish the tally of votes cast in Abstention"FINRA Announces Results of Governor Elections" (FINRA  / September 6, 2023)

FINRA's conduct seems more in the nature of a cover-up than the robust disclosure expected from a regulator: so much for high standards of corporate governance. Worse, no sitting FINRA Governor has spoken out against the organization's unacceptable failure to promptly disclose the actual votes in the 2023 election; but, in truth, such equivocation is all too characteristic of FINRA's lackluster Board.

FINRA's oft-voiced advocacy for ESG and diversity/inclusion and ethical corporate governance comes off as insincere and hollow when the self-regulatory-organization fails to timely release the actual vote tallies in its elections -- all the more so when a given election is the subject of a boycott and the two Board candidates ran unopposed. FINRA's duplicity is indefensible given this assertion in "Board Reaffirms FINRA’s Financial Guiding Principles; Receives Updates on Regulatory Operations" (Report From FINRA Board of Governors Meeting – September 2023 / September 26, 2023)

FINRA’s Board of Governors met on September 13-14 in Philadelphia. In addition to continuing discussions around FINRA’s Regulatory Operations, the Board reaffirmed FINRA’s Financial Guiding Principles.

“Transparency around FINRA’s finances benefits everyone in our industry,” said FINRA Board Chair Eric Noll. “Through reaffirming the Financial Guiding Principles, the Board continues to provide clarity and direction on how FINRA can best fulfill its regulatory mandate.” . . .


Transparency, Chair Noll -- seriously??

Where is the transparency, where is the clarity, what is the direction in your failure to fully disclose the vote tallies in your 2023 Board elections? And you know that those very elections were targeted by a boycott. And you know that FINRA hired a proxy solicitor to press non-voting firms to vote "Abstain." And you know that there are reports -- troubling reports -- that the proxy solicitor did not disclose that a non-vote did not count towards a quorum but that an Abstention did. And despite all of that, you will not publish the tally of the votes cast replete with those case in abstention.

Where the hell is the SEC in terms of demanding that FINRA accept the same standards that are now being imposed on clearing agencies?

READ: "Lackluster FINRA Board Mishandled 2023 Election And Refuses To Disclose Vote Tally" ( Blog / September 18, 2023)



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