Analysis: FINRA rebels prevail but change unlikely


NEW YORK (BestGrowthStock) – Despite an uprising among thousands of small U.S. brokerages, Wall Street watchdog FINRA is unlikely to adopt several proposals that would change the way it operates.

Three small-broker executives became on August 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.

“One way to maintain control is to balkanize your membership. The voting structure at FINRA will prevent any meaningful reform,” said Bill Singer, a Gusrae Kaplan Bruno & Nusbaum lawyer and blogger highly critical of FINRA.

Roughly 4,300 small firms, those with less than 150 employees, comprise 92 percent of FINRA’s members, but occupy just three seats on a board.

Outweighing that bloc are four seats representing 400 large and medium-sized firms, including giants such as Merrill Lynch and Morgan Stanley. The big guys soundly rejected six of the seven proposals.

Rounding out the board are 14 governors nominated by FINRA from the securities industry and from the public.

“If you look at the nay votes and where they came from, it’s clear the board will not support these changes,” Singer said.

FINRA declined to comment on the board’s upcoming meeting, which is scheduled for September 20.

In a statement on August 13, the board said it “continually reviews FINRA’s policies and practices in order to ensure they support its mission to protect investors and the integrity of our markets.”

FINRA wields enormous influence by policing brokers. It is also a private company created and controlled by the industry it watches over.

Lately, the watchdog has come under fire for failing to catch Ponzi schemer Bernard Madoff and not doing more to rein in Wall Street, while lavishing millions on its executives. Members continue to allege FINRA was lying when it said the Internal Revenue Services capped 2007 merger-related payments at $35,000 each.

Small firms showed their frustration by supporting proposals that would compel the regulator to detail how it pays executives; begin an investigation into alleged ties to Madoff and disclose how it manages a $1.6 billion portfolio.

Two of the three new board members, who campaigned as a slate, told Reuters they recognize the challenges yet are optimistic their presence on the board can make a difference.

“We’re going to take our message to the public governors and let them know we’re not Madoff. We’re entrepreneurs and honest business people,” said Jed Bandes, president of Mutual Trust Co of America Securities.

Bandes, who runs a small Florida firm with a long name, says smaller firms have suffered from overbearing regulation in recent years. Compliance issues that used to take up a fraction of the day can now eat up 70 percent of his time.

“I’ve had enough. I don’t think anyone up there is bad or purposefully doing things to be difficult, but they don’t understand small firms,” said Bandes. “We’re all concerned about our industry and we want to make it better.”

Ken Norensberg, head of Four Points Capital Partners in New York, said FINRA’s members are “extremely frustrated” by the lack of information available and their inability to reach top officials about grievances.

The overwhelming support for an independent inspector general at FINRA shows members are not satisfied with the results they get from FINRA’s ombudsman, said Norensberg.

“Like any company, FINRA takes feedback from the board and the members,” Norensberg said. “Our intention is to bring these issues that affect us to the forefront.”

(Reporting by Joseph A. Giannone; editing by Andre Grenon)

Analysis: FINRA rebels prevail but change unlikely