The Great Debate: FINRA

January 25, 2010

My recent blog entry FINRA Fires (Streamlines) Five Regulators certainly touched some nerves and elicited quite a bit of email. That's good because it shows that I continue to raise provocative, relevant issues.

Among the issues that some readers and I debated, were my contentions that

  • FINRA is overpaying some of its executives,
  • FINRA's CEO should not be permitted to serve on public company Boards,
  • Service on public Boards should not be a sinecure that undermines corporate-governance reform,  
  • Regulatory organizations should not be investing in risky securities, 
  • The promised NYSE-NASD consolidation is taking too long, 
  • FINRA should be broken up into smaller, more nimble regulatory organizations, and 
  • FINRA's recently announced layoffs are counter-productive.

Below, I present one ongoing email thread with a reader who requests anonymity.  While we do not a agree on a number of issues, I believe that the debate is interesting and fairly presents the considerations on both sides of several divides. Note, I have edited to preserve anonymity and confidences.



READER: Bill, I normally agree with much of what you say. Some of the things that you said in the recent BrokeAndBroker Blog on FINRA don't make much sense to me and I thought it incumbent of me to mention them.

Paying senior people decent salaries does not offend me. They shouldn't get paid much less in a loss year than in a gain year so long as their mission is not to produce profits. You may argue that based upon their competencies or the fact that they don't have business risk that they should earn less than people in the private sector. I accept that argument. If FINRA doesn't pay people fair and reasonable compensation, the only people that will attract are incompetents or people who would work there for the glory of it or who are independently wealthy.

BILL SINGER: I am all in favor of getting paid as much as you can. Nonetheless, to be paying the SEC Chair $162,000 per annum but paying that same individual nearly $3 million at FINRA does suggest something amiss in these days - particularly given the atrocious record of FINRA under Mary Schapiro's stewardship. Moreover, given her FINRA salary, I find it reprehensible that a regulator would have sufficient time to sit on two public and one private board - and to do so in a compensated manner! Either she abused her position at FINRA by not allocating sufficient time to the self-regulator or she abused the concept of fair governance by taking money from public companies for services not commensurate with her fees. More to the point, FINRA may have saved some $30 million through early-retirement and the recent layoffs; however, did it first eliminate its asinine advertising campaign, its effort to supplant the CFP Board as the new RIA/Financial Planning self-regulatory organization, and its million dollar lobbying campaign? Finally, you forget that I was a regulator at both the AMEX and NASD - under no circumstances have I ever suggested that the rank-and-file of regulators are over-paid. This is purely a shot at senior management.

READER: If you believe that a large organization like FINRA can be led effectively by a bureaucrat whose services are worth about as much as those of a government bureaucrat, you are correct. I believe that $200K per year is generally not enough to attract competent leaders. I do recognize that they should earn much less than people whose companies are at risk. On the other hand, seven-figure salaries may be appropriate for good leaders.

BILL SINGER: While we seem to have resolved all the other issues, it is clear that we certainly do not agree on your above position. What we can agree on is that $200k per annum is inadequate compensation for leading either the SEC or FINRA, if the jobs are to be taken seriously and the organizations are to be stewarded by competent professionals. We also agree that under some circumstances a million-dollar plus salary is appropriate - even for FINRA's CEO.


READER: The fact that Mary had been a board member of public companies is not relevant unless you know how much time she spent in doing that. I am on the boards of several public companies. All told, it amounts to less than 100 hours a year for me.

BILL SINGER: Where we part company is that I am a staunch, uncompromising advocate for corporate-governance reform and have long targeted the cronyism and incompetency of public Boards as the source of much of corporate America's failures.

A Director is supposed to serve a meaningful role on a public company. First off, by definition, such companies owe fealty to their shareholders rather than reflex-like support for the CEO. Second, independent Boards are necessary for sound management and should not be compromised by rotating doors that substitute one friend for another with the understanding that managerial pay packages are rubber stamped and that foolish growth plans are given deference by overly compliant directors.

The time served on any public Board by Mary during her tenure at FINRA is not relevant for a number of reasons. No Director should be paid an honorarium for a year's Board service, separate per meeting attendance fees (with travel and board), plus grants of stock/options simply to rent their name. If such directorship services are perfunctory, then they are of no value and should not be in existence. You seem to suggest that if the Marys of the world are only showing up for a few hours a year that it's okay to pay them because it's not interfering with their "day job."  I would not concur. I feel that such hypocrisy undermines the system and turns board service into a mere sinecure. Moreover, Mary was a regulator and I find it disgraceful that she would serve on "public" companies of the size of Kraft and Duke when such companies have significant financial ties to many Wall Street underwriters and market makers that she oversaw.

The head of FINRA must walk the walk and talk the talk. If regulation depends upon integrity, then it is absurd for FINRA's CEO to sit on a public board and argue that the service is merely "honorary" and not detracting from her duties regulating the FINRA market. There should be no "honorary" board service - particularly post-Madoff or post-Bear Stearns or even post-Enron. Schapiro should have championed the integrity of the Board system and declined. Moreover, given FINRA's horrendous regulatory record for the past two decades, how the hell did she have time to provide services to two public companies and a college - and you should note that she did not merely serve as a Director at Kraft but as a Lead Director!

You are not a regulator and, as such, your Board service does not raise the ethical question of whether your Board service harms the investing public and investment community by distracting you from your job as a regulator. I would no more support President Obama serving on two for-profit and one non-profit Board than I would the CEO of FINRA.

READER: I agree with you that from an appearances standpoint she should have given up her board directorships as I imagine she has already done now that she is SEC chair.  The issue you had raised seemed to be that she was spending much time on those functions.  I imagined that that was not the case and that her heart and soul was in FINRA activities even if her performance was substandard in your opinion. I also agree that board membership is not meant to be a rubber-stamp function and it should not be so.  At this point, even Dick Grasso might agree.


READER: Losing $700 million, mainly on investments, is an outrageous demonstration of incompetence. A non-profit organization should not have had its money invested in investments which were not suitable for a non-profit organization. We need not wonder about whether the investments were made by a fiduciary or by others who are subject to a suitability standard. These investments failed both the fiduciary and suitability standards. It is not the magnitude of the losses that influences my judgment. Rather, it is the fact that the investments were ever made in the first place. The fact that the investments yielded successful results in the past doesn't justify using the organization's money to gamble.

BILL SINGER: We concur


READER: It does take time to create a single rulebook with a single regulatory staff. Some of the consolidation is very complex. There will be savings for FINRA as well as for the industry. FINRA will still be a bloated behemoth staffed by many unhappy people when all is done. Yet some of the change will be for the better and will be quite noticeable. We should all give credit where it is due.

BILL SINGER: We disagree The rulebook consolidation process has taken far too long and I do not see likely savings because I oppose the creation of a one-size-fits-all SRO. I still believe that FINRA should be broken up into three more nimble regulators and that the fragmentation should likely be along the fault lines of

1.   150 RRs or less;

2.   151 to 1000 RRs; and

3.   1,001 RRs and greater.

Unfortunately, as a former NASD and AMEX employee, I have little confidence that the ultimate legacy of this merger will be change for the better. I applaud you for your optimism and hope to be proven wrong.

READER: We agree that there should be a breakdown of firms with smaller firms not subjected to the bullshit to which the larger firms are subjected. Your solution of a different regulator for them is a possibility. I have instead advocated a functional breakdown, e.g. those that never have custody of customer cash or securities such as private placement firms, firms that simply provide technology platforms, or firms that only do non-market making proprietary trading, should be regulated separately whether within or without FINRA. Currently, many prop trading firms are separate; they are regulated by regional exchanges such as PHLX or CBOE only.

The NYSE website is a regulatory website only insofar as its markets are concerned. FINRA doesn't regulate those markets.

BILL SINGER: We disagree The NYSE continues to separately adjudicate and publish disciplinary cases and resorts to the SFC in lieu of FINRA/NASD's AWC process. Moreover, all NYSE online cases include a link to the underlying settlement/decision, whereas FINRA does not attach such links to its monthly disciplinary squibs. That is not consolidation but a perpetuation of two different SROs.

READER:That's a difference. Actually, there still are some differences and will be for the near future but in terms of day-to-day business conduct, etc., the NYSE website will not govern. Only FINRA's will as the consolidated rulebook evolves. 


READER: From what I heard from you and others, the layoffs do seem ridiculous. They continue to water the weeds and pull the flowers.

BILL SINGER: Nice imagery!