Elusive FINRA Reform

August 28, 2010

I started my career on Wall Street in the early 1980s, and, by now, I've pretty much seen it all and know where far too many bodies are buried.  If you look at my resume at http://www.rrbdlaw.com/bios_singer.html you will get a better sense of my career arc: Smith Barney, the American Stock Exchange, the NASD, mutual funds, investment advisors, public customers, registered representatives, trade groups, and more.  I've been on both sides of the litigation table and both sides of the regulatory table.  I am a proud pariah to those who blindly defend self regulation of our securities markets and to those who just as blindly advocate the end to all regulation. 

The Battle Rages

Let me be clear, I am not a fan of self regulation.  I believe that it was a commendable concept in the 1930s when first promulgated and that it had its heyday in the late 1970s and early 1980s.  However, since Black Monday on October 19, 1987, when the world's stock markets crashed, self regulation has been a dangerous anachronism propped up by Wall Street forces seeking to insulate themselves from state and federal regulation and to further the agenda of the now discredited,so-called financial superstores. 

The army that protects self regulation is formidable. There are the professional regulators who often seem to desire little else than the preservation of their turf and highly-compensated jobs. Add to those numbers the career politicians with their ever-present outstretched hands seeking campaign contributions and regulatory jobs for their cronies.  And add in to that mix, the wirehouses and financial superstores that have used self regulation as a bulwark against competition from the smaller regional/independent community. 

In 1998, I was one of the first four individuals to have the audacity to run as a contested candidate against the NASD's hand-picked slate of nominees for its Board. In what was then an incredible upset, two of the contested candidates won seats on the NASD Board.  I lost my bid for a seat; however, since that time, I have worked with many individuals and groups to field additional contested candidates at the local and national level of NASD and more recently at its successor FINRA.  I have also  continued to agitate over  the years for meaningful regulatory reform.  

Toss the Dogs a Bone

Recently, three contested candidates swept FINRA's Small Firm election and will soon sit on that organization's Board. While an impressive result, the outcome more form than substance.  Frankly, the system is rigged at FINRA to ensure that the majority of the organization's membership cannot force through reform.  Reuters Reporter Joseph A. Giannone nailed it on the head when he published his recent article: "ANALYSIS-FINRA Rebels Prevail But Change Unlikely" at http://www.reuters.com/article/idUSTRE67Q5M820100827 The opening paragraph of Giannone's article admonishes:

Despite an uprising among thousands of small U.S. brokerage, Wall Street watchdog FINRA is unlikely to adopt several proposals that would change the way it operates.

Three small-broker executives became on Aug. 12 the first dissidents ever to win election to the Financial Industry Regulatory Authority's governing board, besting the regulator's nominees. Brokers at the annual meeting also approved, by a wide margin and over FINRA's objections, seven proposals that could compel FINRA to open up to members.

FINRA said its board of governors would "carefully review" the proposals at its next meeting. Still, the structure and the composition of the board would make it difficult for dissidents to push through significant change...

As I see it, the FINRA Dissdent/Reform Movement can continue to nominate and elect contested candidates.  It's nice to think that you are flexing your muscles and taking on the bully.  However, as John Giannone's article correctly points out, the way things are structured at FINRA, such victories will never translate into wholesale reform. 

Unheeded Warnings Come True

As far back as 2001, I predicted that the self regulator's manipulation of its election rules would result in precisely the entrenched bureaucracy that now exists.  I also predicted that by imposing considerable barriers aginst those seeking to contest the self regulator's offical nominees to its Board, that such misguided efforts would marginalize more radical elements of the Dissident/Reform Movement and give birth to a hardcore rump.  All of this has transpired. See, "NASD Builds a Maginot Line." at http://www.rrbdlaw.com/2001/Q1/contelect.htm.

What is FINRA's response to the recent electoral successes of the FINRA Dissident/Reform Movement?  According to many in the press, the self-regulatory organization is now spinning an old yarn about how brokerage firms, particularly those nasty, small ones, can't be trusted -- that if given the choice between meaningful regulation and the ability to rip-off and cheat the public, that those little firms will always opt for the latter.  The jaw-dropping aspect of this publicity campaign is that a self-regulatory organization is essentially questioning the integrity of its members and their employees, and then, in the same breath, defending the very principle of self regulation. I mean, seriously, if FINRA's career regulators don't trust FINRA's member firms and their registered persons to do the right thing, then what exactly is the justification for self regulation?

It's not a new public relations ruse that FINRA pursues.  Nearly a decade ago, I wrote an article: "NASD Spokesperson Finally Spells it Out: You Can't Trust RR's to Push for Wall Street Reform" at  http://www.rrbdlaw.com/2002/Q3/hollomon.htm, in which I noted :

On August 1, 2002, On Wall Street magazine published an article entitled: Attorney Seeks Broker Voice on NASD Board. The column discussed several proposals I had made, among which were that:

  1. NASD consider allowing some 700,000 registered persons the right to vote on rule proposals involving their careers --- as of now NASD solely offers voting to its member firms, some 5,500.  I believe that this process often favors employer over employee and management over labor.  I believe that registered persons will feel more involved in the regulatory process if they have a voice.
  2. Forms U-4 be filed directly by the RR with CRD (full copies to BD) and not through the member firm.  No change at all would be involved in supervision or any other rules and regulations.  I believe that RRs must have the ability to directly access their registration and that this is an important step to ensure that such individuals are viewed as professionals rather than mere salespersons.  It is the same process required of lawyers and doctors --- we do not file through our employers.  On a more basic level,  each of us applies for our driver's licenses directly with the Department of Motor Vehicles rather than through our employer.  There is simply no sensible justification as to why the U-4 may only be submitted by the member firm --- it simply makes life difficult for too many RRs, and at times with regulatory consequences. 

In response to those two proposals, On Wall Street noted the following reaction from NASD:

In response to a request for comment, Tom Holloman, a spokesman for NASD Regulation Inc., said: "Mr. Singer's agenda is clearly out of step with the times, pandering to those who would seek less, not more oversight and accountability. For example, Mr. Singer's proposal that registered representatives vote on all regulatory changes governing their behavior would almost certainly block or delay any effort to enact meaningful reforms. We will resist proposals that would water down industry oversight."

Only the Dates Change

Nearly a decade later, FINRA sounds the same refrain as it predecessor NASD. The regulator that failed to catch Madoff, failed to detect Stanford Financial, failed to anticipate the flash crash, still deludes itself into believing that it has aggressively implemented "meaningful reforms."  Worse, having clearly expressed its mistrust of the men and women who man the trenches, day in and day out, of FINRA's member firms, and having clearly shown its distrust of the intentions of its small member firms, FINRA fails to see its own hypocrisy.  Where, in all these years, did FINRA ever utter such similar contempt of its largest members? Show me the criticism of Bear Stearns or Lehman Brothers. Point out the barbed regulator's language against Merrill Lynch or Smith Barney.

For FINRA, it's simple. You can't trust the men and women who are the registered persons on Wall Street. They're all crooks and dishonest. You can't trust the smaller FINRA member firms. They're all cheats and thieves. Only those in regulation, the professional cops of Wall Street, know what's best for the industry.

Yeah, right -- tell me another whopper! 

  • Did the professional regulators at NASD and FINRA protect the public from Madoff, or, as he was so lovingly known within the regulator's inner circles: Bernie?
  • Did the professional regulators aggressively pursue Stanford Financial when the first tips and warnings became clear?
  • Did the professional regulators ever direct the same zeal and resources to going after the major financial FINRA member firms who brought about the Great Recession with a fraction of the zeal and resources that they historically allocated to going after their smaller members?

Big Boys and Small Fry: Disparate Treatment

At FINRA, the big boys are vested with veto power over the desires of the overwhelming majority of the organization's membership.  Of course, history is sometimes a cruel light.  We have seen that FINRA's largest member firms pushed us into the Great Recession and pulled us all back under as we tried to save our economy.  The slimy individual stockbroker and the reprobate small firm did not cause this current mess. This time, blame the financial superstores and the bloated national firms.  And while you're at it, understand that those same big boys retain the reins of power at FINRA and work to prop up a failed system of self regulation. A system that has been very accomodating to the needs of the mega-firms.

Self Delusion?

I could go on -- and I often do -- but I think we all know, by now, the deal.  Elect as many contested candidates to the FINRA Board as you want. It won't make a damn bit of difference.  FINRA has tossed a a lousy bone in the form of three, and only three, so-called Small Firm Board seats to the majority of its members. The self regulatory organization has given the dissidents and the reformers something to play with and gnaw at. 

Look at the election rules. Look at the numbers. Look at the last vote. The overwhelming majority of FINRA firms want change but their wishes are of no consequence.  The seats on the Board are Gerrymandered. The system is rigged to preserve itself and suppress dissent, reform, and change.

A Lack of Cohesion

I've spoken to many industry trade groups over the years but just can't find a credible home for me or many of the folks that share my views about Wall Street reform. Either the trade groups are mere vehicles for self aggrandizement for some of their leaders or they devolve into intolerant cultures of personality. Over the years, trade groups for independent/regional NASD/FINRA member firms have come and gone but with little impact.  Certainly, no such organization has gained the credibility of the old Securities Industry Association (SIA) or the current Securities Industry and Financial Markets Association (SIFMA), which have impressively advanced the best interests of their larger firm constituents.

At the other end of the FINRA spectrum, where the smaller firms dwell, where the majority of FINRA's membership exists, it's little more than a history of jockeying for power whereby one trade group pulls ahead for a time, gets its folks seated on various FINRA committees, panels, and boards; and then, as fortunes change, another trade group emerges from the pack. All the while FINRA bides its time, cultivates its friends, isolates its foes, and smiles as it sees one dissident/reform faction fall upon another and devour its young. And all the while, the FINRA reform agenda suffers.

In my conversations over the years with trade groups and those seeking to form them, my prerequisites have been fairly consistent:  For a FINRA trade group to be credible, it needs to abide by a number of key policies.

  • The Board of a trade group must be openly and freely nominated and elected by the trade group's members; 
  • Executives managing a trade group must be openly and freely nominated and elected by the trade group's members;
  • The reform agenda of the trade group must be a published one with specific goals; 
  • Those who serve on trade groups should not be permitted to use their affiliation as a means to promote their business or burnish their professional reputations.
  • Women and minorities must be fairly represented on the boards, in the executive roles, and among the nominated candidates of the trade group; 
  • All primary elections and all initiatives of the trade group should be robustly contested, with open debate and an agreement among all factions to treat each other with dignity and respect. 

For those of you who have continued to ask me -- "no," I do not belong to any trade group and I have probably spoken to all of them.  It seems that my above points are a tad too daunting.

Knock, Knock

Finally, many of you have asked why I don't personally reach out to FINRA and try to open a dialog with the self regulator.  Unfortunately, I can only knock -- FINRA prefers to bar its door.  See this March 2009 letter from me that remains unanswered by FINRA. http://www.brokeandbroker.com/index.php?a=blog&id=143