August 4, 2007
On August 3, 2007 the new Financial Industry Regulatory Authority (FINRA) announced its seven nominees for its first Board: three from the Small Firm pool, one from the Mid-Size, and three from the Large Firm. Individuals seeking to contest FINRA's slate must file petitions within 45 days (needing 3% of member signatures for each category or 10% if running as part of a multi-category slate).
In reviewing the list of FINRA's official nominees, I sadly see a predisposition to regurgitate familiar faces (and firms) through a system desperately in need of innovation and reform. Despite a vibrant dissident/reform community that won dramatic contested elections during last year's District, NAC, and Board levels, FINRA persists in pretending that such opposition does not exist.
FINRA is not supposed to be a politicized regulatory organization. It is supposed to fairly represent the panorama of the securities industry, and it is supposed to draw upon the wellspring of its members' expertise to both root out misconduct and to generate rational, effective regulation.
In recent years the regulator's misguided, insular policies and bunker mentality have prevented it from becoming meaningfully pre-emptive. Worse, by antagonizing its dissident/reform members, FINRA has only nurtured such opponents and motivated them to better organize and obtain ever-increasing numbers of members.
If FINRA were truly sincere in mending its fences and transforming itself into a partnership with the regulated, it should have engaged in substantive, confidential discussions with the dissident/reform community BEFORE selecting its current class of nominees. By not doing such, FINRA not only delivered an unnecessary slap in the face of hundreds of firms hostile to its past policies, but it has also made it more difficult for folks such as me to support any official nominee. As such, I and others who share my opinions about unfair and biased industry regulation, are given further pause before we trust anyone nominated by a still antagonistic regulator.
Last month I resigned from the Financial Industry Association (FIA). As such, I am now a classic free agent -- beholden to neither FINRA nor its most successful trade-group critic (FIA). I have been asked by both factions to consider supporting their candidates and likely candidates, but have withheld any commitment until I better understand how such nominations were obtained and what the nominees stand for.
I would urge all FINRA voting members not to engage in knee-jerk voting for either FINRA's or FIA's nominees. Your future is too important to simply vote a party line. You don't want political hacks sitting on the Board. First and foremost, that man or woman should want to be sitting there, and should want to undertake such service in an effort to better our industry. If the only motivation to run for the Board is to put that title on one's resume and to curry favor with FINRA, you should not cast your vote for such a nominee.
Wall Street stands at the precipice and any further stumbles may be an irreversible fall into the abyss. This is not the time for amateur hour. We need competent men and women at FINRA's helm -- and individuals who have worked on the Street and understand that their role is not to smile and always say "yes." Similarly, their role is not to always grimace and say "no." Now, more than ever, we need dialog, innovation, and a consensus.
Here are the questions I intend to ask any nominee seeking my support, and I would urge you to put such folks to a similar test:
1. FINRA's August 3, 2007 Election Notice states "As of the close of business on August 2, 2007, FINRA had 4,655 Small Firm voting members, 224 Mid-Size Firm voting members and 193 Large Firm voting members."
QUESTIONS: Do you think that it is fair for 4,655 firms to have no more say in FINRA's affairs than 193 firms (both are limited to three nominees)? If you are elected, will you support a petition to return FINRA to its former one-firm-one-vote status? If not, why do you think the present status is fair?
2. FINRA's policies in processing new member applications and in processing requests for modification of existing membership agreements (notably to acquire additional branches or to add staffing) continue to come under attack as taking too long.
QUESTIONS: Will you support efforts to demand more aggressive timeframes for completion of such applications? What, if any, suggestions do you have to reform that process? How long do you think the approvals should take (barring any unusual circumstances)?
3. FINRA members have increasingly complained about unreasonable regulatory policies/practices during examinations and investigations. Pointedly, members and registered persons complain about arbitrary staff decisions involving the scheduling of on-the-record interviews (the time, duration and place), and in the deadlines and scope of document production. Although such issues are codified when they arise during hearings, the FINRA code is virtually silent on resolving such disputes during investigations/examinations and essentially leaves full discretion to the adversarial Staff
QUESTIONS: Will you support efforts to codify fair and reasonable policies and procedures to be used during examinations and investigations? Will you support the creation of an independent magistrate (not a Staff member) to rule on such disputes? What ideas do you have to reform this area?
4. As demonstrated in numerous decisions on appeal within FINRA and subsequently to the SEC and federal courts, the Staff's initial demands for settlement of violations often exceeds the fines/suspensions imposed at the hearing level or on appeal. Many respondents complain that the Staff routinely high-balls settlement demands in a tactical attempt to pressure unfair resolutions. In the civil courts there are checks-and-balances to ensure that settlement demands are reasonable, but no such option exists at FINRA.
QUESTIONS: Would you support reforming FINRA's enforcement protocol by requiring the Staff to announce at the beginning of all hearings its final offer of settlement; and implementing a series of rules that would provide incentives for such offers to be fair and reasonable? Would you support a rule that would allow a full set-off for incurred reasonable legal fees up to the amount that a hearing panel imposes a fine below that proposed by the Staff in its final offer (e.g., the Staff asked for $20,000 fine and the panel imposed a $5,000 fine -- the respondent would be given a $15,000 "rebate" to be applied against payment of the fine and all forum fees)? Would you support a rule that would allow a prevailing respondent to seek compensation for all reasonable fees and costs from FINRA in the event that a panel determines that there was no reasonable basis for the filing of charges?
5. Many members complain about the costs of preparing extensive Written Supervisory Procedures (WSPs) and FINRA's dilatory practices in approving such materials -- and then subsequently charging a member firm with failing to maintain adequate WSPS despite the fact that they had been previously approved. For many years there have been calls from the industry to require FINRA to adopt pre-fabricated WSP paragraphs that are typically boilerplate in nature and adequate for many members and many business-lines, and to permit such paragraphs to be included in an effort to streamline the review. There is no suggestion that FINRA adopt a one-size-fits-all WSP as we recognize the need to tailor WSPs to each firm. Nonetheless,it is cynical for FINRA to persist in denying that much of the industry's WSPs cannot be subjected to a pre-approved language process.
QUESTIONS: Will you support a reform to the WSP process? Do you have any suggestions as to how to achieve such a goal?
6. Finally, FINRA seems to have fallen into a mind-set (largely during the Glauber administration at NASD)in which it sought to isolate dissidents/reformers within the NASD community from meaningful participation with the regulator, and further attempt to balkanize our industry by playing trade groups off against each other.
QUESTIONS: Do you believe that firms should be encouraged to voice their opposition to FINRA proposed rules and existing policies in a courteous and constructive manner? Do you support broadening FINRA's mandate by inviting all industry factions to the table? What specific ideas do you have to heal the wounds within our community?