FINRA's bedrock regulation is Rule 2010: STANDARDS OF COMMERCIAL HONOR AND PRINCIPLES OF TRADE: A member, in the conduct of its business, shall observe high standards of commercial honor and just and equitable principles of trade. What grotesque hypocrisy for this self-regulatory-organization with that core rule to pursue its indefensible course of conduct by not fully and timely disclosing the vote tallies of its Board elections. Three months ago, on September 6, 2023, FINRA declared the victories of two unopposed candidates in its Board of Governors elections; however, 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'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 this lackluster Board. There is no honor in this ongoing cover-up. There is nothing just and equitable in holding an election but not disclosing the actual vote.
The FINRA 2023 Election Boycott
In May 2023, I called for a boycott of all 2023 FINRA elections. The published goal of the boycott was to persuade the majority of FINRA Small Firms (1-150 registered representatives) to not return their firm's proxy. FINRA's most recent disclosure of 3,039 Small Firms required that 1,520 join the boycott.
The FINRA Small Firm community boycotted the petition phase of the 2023 Board elections; and, as a result, only one FINRA Small Firm candidate received enough petitions to move forward to fill one of the three Small Firm Governor seats. Those three seats amount to about 13% of the overall Board despite representing about 90% of the organization's member firms. Not much representative democracy with that bit of social engineering. Not much of an election when there's only one candidate running to fill one vacancy. There is no point in casting a worthless vote. It is a quiet, elegant form of protest.
[F]urther, until such time as FINRA demonstrates a sincere commitment to reform, all FINRA member firms should instruct their Executive Representative to not cast a vote for any candidate in any FINRA election by way of a boycott.
In January 2021, the FINRA Board of Governors appointed Goldman Sachs' General Counsel to fill the Floor Member Governor's seat. There was no election. The Governor was hand picked, and her appointment was approved by the full Board. The Governors who voted to approve the nomination knew or should have known about the troubling allegations set out in the pending 2010 Class Action against Goldman Sachs.
In 2021, no FINRA Governor reportedly challenged the appointment of Goldman Sachs' General Counsel to the Board of Governors of Wall Street's leading self-regulatory-organization. In 2022, as the shocking allegations mounted, no FINRA Governor reportedly requested the resignation of Goldman Sachs' General Counsel. Even in 2023, amid a flood of allegations and evidence, FINRA's Board of Governors said nothing.
FINRA's Board of Governors is a lackluster amalgamation that is tone deaf to the legitimate needs of its smaller members and resistant to implementing the necessary reforms to protect the investing public and the industry's financial professionals. FINRA's Small Firm members represent some 90% of the membership but are gerrymandered down to about 13% of the Board Governors. Since the Small Firm Members are of no apparent consequence, I urge the Small Firm community to boycott all 2023 FINRA elections. Further, until such time as FINRA demonstrates a sincere commitment to reform, I urge all FINRA member firms to instruct their Executive Representative to not cast a vote for any candidate in any 2023 FINRA election by way of a boycott.
[T]he goal of the boycott is to persuade 1,520 FINRA Small Firm Executive Representatives to not return their firm's proxy. . . .
Members of the FINRA Small Firm community received a PROXY seeking your vote for a candidate for the 2023 FINRA SMALL FIRM Governor seat. DO NOT RETURN ANY PROXIES to FINRA.
Troubling Proxy Solicitation to ABSTAIN
During the unopposed election for the one FINRA Small Firm Governor seat, FINRA Small Firm Executive Representatives and industry compliance/regulatory consultants were contacted by a company that was retained by FINRA for the purpose of soliciting proxies in order to ensure the satisfaction of a quorum. Apparently, when the proxy solicitor was informed of a firm's decisions to boycott the election via the non-submission of a proxy, the solicitor pressed (some might say "pressured") the firm to cast a vote in "Abstention." The caller allegedly suggested that they could opt to "not vote" by also casting a vote in "abstention" -- not disclosed was that the abstention would count toward the quorum whereas a non-vote would not count towards the quorum. In response to criticism of its interference in the election, FINRA published this in "FINRA Weekly Update / August 23, 2023 / Volume 34":
All small and large firm members are encouraged to vote in the current Board of Governors election which concludes on September 6, 2023. Election Notice 8/7/2023 contains more information on the candidates and the election process.
Although the small and large firm elections are uncontested, FINRA must still meet its quorum requirement to finalize the elections.
A proxy solicitor was engaged by FINRA to contact firms to ensure that they received the proxy card, to encourage broad participation in the election and to help FINRA meet its quorum requirement. FINRA’s election agent is also sending email reminders to the executive representative of each firm with voting instructions (if you have your proxy, you can vote online here).
If you have questions or need a replacement proxy, please email the Office of Corporate Secretary or call (202) 728-894
FINRA cynically asserted that the "proxy solicitor was engaged by FINRA to contact firms to ensure that they received the proxy card, to encourage broad participation in the election and to help FINRA meet its quorum requirement." Notably, there is no mention in that quote of any engagement of the solicitor to pressure firms to vote their proxy -- but according to reports, that's exactly how many firms perceived the so-called "contact." Absent from FINRA's Weekly Update is any acknowledgment that in this year's uncontested Small Firm Governor's election that a call for boycott was raised and that only one candidate emerged from the petition process. This is a critical distinction because the only possible outcome of ensuring a quorum in an uncontested race is that the sole candidate would be certified the winner -- one would be hard pressed to imagine a scenario more indicative of FINRA showing inappropriate favoritism or partiality in such elections.
In an era when talk about stolen elections and corrupted voting is all the rage, Wall Street's preeminent self-regulator asks the industry and the investing public to believe that it has an unfettered right to ensure that a quorum is met in order to "finalize" its Board of Governors election. Given the context, FINRA is asking us to accept a self-serving, disingenuous excuse to provide cover for its mishandling of an uncontested Board election. And this from a Wall Street regulator that has amassed a history of prosecuting and sanctioning brokerage firms and brokers who resort to omissions and commissions of facts in an effort to fraudulently finalize securities offerings.
I challenge FINRA to produce any prior notices containing a similarly worded comment along the lines that the organization "must still meet its quorum requirement to finalize the elections." Additionally, FINRA excuses the proxy solicitor's efforts as merely designed to "encourage broad participation in the election and to help FINRA meet its quorum requirement." Really? That's all that's going on here?? Just some old-fashioned encouragement???
The Evasive September 6th FINRA Election Announcement
On September 6, 2023, FINRA published "FINRA Announces Results of Governor Elections" at https://www.finra.org/media-center/newsreleases/2023/finra-announces-results-governor-elections, and the very first sentence states: "FINRA announced today the results of its election of two Governors to its Board of Governors."
The "results" that FINRA announced were that the unopposed candidates for the Small Firm Governor seat and for the Large Firm Governor seat won. It was not unexpected, however, that each unopposed candidate won their election because in response to an historic call for a boycott, no other candidate opposed them. What else would we have expected?
1996's Troubling Election-Interference Legacy
In the SEC’s historic “REPORT PURSUANT TO SECTION 21(a) OF THE SECURITIES EXCHANGE ACT OF 1934 REGARDING THE NASD AND THE NASDAQ MARKET” (August 8, 1996)
https://www.sec.gov/files/litigation/investreport/nd21a-report.pdf, the federal regulator found, in part, that the NASD self-regulatory-organization (FINRA’s predecessor) had “violated Section 19(g) of the Exchange Act by failing adequately to comply with certain NASD rules and, without reasonable justification or excuse, to enforce compliance with the Exchange Act . . .” at Page 1 of the 21(a) Report. Further, “C. Other Areas of Regulatory Concern” set out four enumerated topics of which the third was “The Contested Election Process. “ at Page A-iii of the Appendix to the 21(a) Report [Ed: footnote omitted]:
3. The Contested Election Process
In the Report issued by the Rudman Committee in its review of the NASD's operations, the Committee discussed the NASD's District Nominating Committee and made particular reference to a contested election in 1994 in District 10.
The Rudman Committee stated:
[The NASD] addressed issues that arose on an ad hoc basis, and generally handled the election inappropriately - particularly insofar as NASD staff appeared to take sides in the matter. NASD officials have acknowledged that the election was mishandled.
The gist of the Rudman Committee's concerns arose out of two letters sent by the District 10 Nominating Committee, the first of which was on NASD letterhead, endorsing the candidacy of one person over the challenger. In addition, volunteers recruited by the NASD's District Nominating Committee actively campaigned in support of the successful candidate. The NASD's By-Laws only specifically authorize the Nominating Committee to select the regular candidate. The NASD, its committees and its staff should not in any way exhibit favoritism or partiality in such elections.
at Page A-83 of the Appendix to the 21(a) Report:
The Existential Lawsuit
At present, FINRA is embroiled in a high-profile lawsuit challenging its very existence.
Alpine Securities Corporation, Plaintiff-Appellant
Scottsdale Capital Advisors Corporation, Plaintiff-Appellee, v.
Financial Industry Regulatory Authority, Inc., Defendant-Appellee,
United States Of America, Intervenor For Defendant-Appellee.
(United States Court of Appeals for the District of Columbia Circuit, No. 23-5129).
As summarized in the "Introduction and Summary of Argument" in the Brief of the American Free Enterprise Chamber of Commerce as Amicus Curiae in Support of Plaintiff-Appellant and Reversal
The U.S. government has given the Financial Industry Regulatory Authority (FINRA or Authority) an effective monopoly over securities brokers and dealers, allowing it to exercise substantial regulatory authority over major components of the U.S. financial system. As its name implies, the significant governmental powers the Authority wields are quintessentially executive in nature. It has the authority to issue binding rules; to investigate, prosecute, and adjudicate alleged violations of those rules and federal laws; and to impose serious sanctions on members—including, as relevant here, effective exclusion from the financial industry.
Despite exercising such sweeping executive powers, FINRA claims broad immunity from any of the Constitution’s structural limitations designed to ensure government actors remain accountable to political officials and, ultimately, to the people. Its leadership and hearing officers are not appointed by the President, a court, or agency head, in clear contravention of Article II’s Appointment’s Clause. And they may be removed only through a byzantine process that has the effect of providing them with multiple layers of for-cause protection, which the Supreme Court has found inconsistent with the President’s authority to control subordinate officials exercising executive authority. In our system of government, “[l]iberty requires accountability.” U.S. Dep’t of Transp. v. Ass’n of Am. R.R., 575 U.S. 43, 56 (2015) (Alito, J. concurring) (Amtrak II). FINRA has essentially none.
FINRA cannot sidestep these constitutional defects by claiming, as it has before this Court, that it is a purely private body immune from the constraints of the President’s removal power and the Appointments Clause. The private nondelegation doctrine on which FINRA relies serves the same constitutional purposes as the President’s appointment and removal powers. It ensures that executive authority is wielded only by officers subject to political control and accountability. And because FINRA wields an astonishing amount of executive power without adequate control or accountability, it violates the Constitution no matter which analysis the Court applies.
FINRA thus seeks shelter in what would be, effectively, a Constitution-free twilight zone—private enough to avoid Article II’s structural appointment-and removal safeguards, but public enough to garner immunity from private suit and sidestep non-delegation concerns. And it does so all while maintaining a remarkable degree of operational independence in its enforcement of the federal securities laws that effectively prevents any meaningful supervision or control from the elected President or those accountable to him. Put simply, the Constitution cannot and does not tolerate such an unaccountable arrangement. FINRA’s structure is unconstitutional.
at Pages 3 - 4
In contrast to the above arguments, in Intervenor United States' Opposition to Emergency Motion for Injunction Pending Appeal
https://fingfx.thomsonreuters.com/gfx/legaldocs/xmpjlnbbkpr/frankel-finrachallenge--dojonstay.pdf, the Department of Justice asserted in part that:
[Alpine's] Appointments Clause and removal arguments rest on the mistaken premise that FINRA is itself a governmental entity, rather than a private entity subject to pervasive SEC oversight. As such, FINRA’s directors are properly appointed and removed by its members, and its executives, and other officers are properly appointed and removed by its board. They are thus not subject to constitutional strictures regarding the appointment and removal of officers of the United States. Because Alpine has no likelihood of success on the merits, there is no basis for an injunction pending appeal.
at Page 2
Contrary to DOJ's assertion, FINRA has no "directors" -- the Board is a Board of Governors. In defending FINRA -- in defending FINRA's very existence -- DOJ alleges that FINRA's "directors are properly appointed." FINRA's intervention into the unopposed but boycotted 2023 Board race was not proper but improper. FINRA's interference in the 2023 elections seems designed not to ensure that Governors are properly elected, but, as DOJ so cynically asserts, that they are properly appointed.
Form TCR Filed
In August 2023, I filed a Form TCR with the SEC and asked the federal regulator to investigate FINRA’s conduct of the 2023 Small Firm Governor election. In furtherance of such an investigation, the SEC should require FINRA to conduct a statistical analysis to determine whether the number of votes cast in "Abstention" in this year's Small Firm election have meaningfully increased from prior years; and, as such, would confirm the reports of pressure from the proxy firm to elicit a vote in abstention rather than accept a representative's decision to boycott the election by not casting any vote.
Additionally, the SEC should demand production of all communications between FINRA and its officers/Board, on the one hand, and the proxy solicitation firm and its agents, on the other hand. Such an inquiry should be designed to determine whether any guidance was provided by FINRA to the proxy firm in terms of how "abstentions" should be solicited and what disclosures were warranted about the impact of such abstentions on validating the uncontested election per satisfaction of the requisite quorum.
If there was pressure by FINRA on its member firms to vote in abstention, I would ask that the SEC deem FINRA's actions via its proxy solicitor as the inappropriate intrusion into the election process. Consequently, the SEC should decertify the results of such an election and demand a new election. Further, I would urge the SEC to impose significant monetary penalties upon FINRA and demand substantive election-rules reforms.
I asserted in the Form TCR that FINRA mishandled its 2023 Board elections. Among the issues raised against FINRA in the Form TCR is that the regulator meddled in two uncontested 2023 Board elections (subject to an ongoing call for a vote boycott) by hiring a proxy solicitor to actively solicit Abstention votes from member firms in an effort to fraudulently ensure that a quorum of one-third of eligible voters cast their proxies.
There are reports that the proxy solicitor hired by FINRA had misled members eligible to vote by failing to disclose that a vote-in-abstention counted towards achieving a quorum whereas the decision to not cast a vote did not. This subterfuge becomes all the more improper when viewed against the context of an ongoing call to boycott the vote. In fact, FINRA publicly acknowledged that it was doing its best to foster a quorum despite there being no contest for the Large and Small firm races because each election involved one and only one unopposed candidate. FINRA's questionable activity occurred notwithstanding that NASD (its predecessor-in-interest) was criticized for election interference in the late 1990s.
A Lackluster Board's Equivocation
Despite having declared the unopposed candidates as the winners of their respective races on September 6, 2023, FINRA still declines to publish the tally of the votes cast for the victorious candidates and, critically, fails to publish the tally of votes cast in "Abstention." 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 this lackluster Board.
Former Principals Of Private “Pre-IPO” Funds Charged In Connection With $386 Million Fraud Scheme / Michael Castillero, Francine Lanaia, and Brian Martinsen Are Alleged to Have Defrauded Investors in Straightpath Funds by Selling Shares in Non-Public Companies at Arbitrarily Inflated Prices and Pocketing Hidden Markups (DOJ Release)
Vancouver Man to Plead Guilty to Securities Fraud Conspiracy / Defendant allegedly conspired to facilitate pump-and-dumps of microcap securities using nominee entities under his control (SEC Release)
Former Insider At Major Financial Services Organization Admits Involvement In Multimillion-Dollar Insider Trading Ring (SEC Release)
FINRA Arbitration Panel Grants Motion for Stipulated Award
In the Matter of the Arbitration Between NYLife Securities LLC and
New York Life Insurance Company, Claimants, v. James Myers, Respondent (FINRA Arbitration Award)