Finra governors accused of flip-flopping

Three independent governors elected to the Finra board in August are already drawing fire from critics who say that they have abandoned the reform platform that got them elected in the first place.

The three governors, who successfully challenged candidates picked by a Financial Industry Regulatory Authority Inc. nominating committee by actively campaigning in favor of seven controversial proxy proposals, wrote in an e-mail sent to Finra members this month that they favored the SRO’s decision to reject four of the seven recommendations.

“We support this decision [and] believe that action on the remaining four proxy proposals was not warranted,” wrote the three independent governors, Jed Bandes, Joel Blumenschein and Ken Norensberg. All three represent small firms.

The e-mail angered owners of firms who felt that the new governors had gone back on their word.

“Going by their campaign promises [to support all the proxy positions], they’ve failed miserably,” said Alan Davidson, founder of Zeus Securities Inc., a member of Finra’s National Adjudicatory Council and founder of the Independent Broker-Dealer Association, a group of about 250 small firms.

John Busacca, owner of the Broker Dealer Exchange LLC and one of the founders of the Securities Industry Professional Association, said that SIPA members are upset about the e-mail.

“I’m getting flamed” for having supported the three independent candidates, he said.

The proxy proposals, which were submitted by Amerivet Securities Inc., called for more disclosure and transparency on Finra’s part. They were overwhelmingly endorsed by Finra members in the August election, but because they were non-binding, the board had final say on their adoption.

The board agreed to take action in response to three of the proposals by disclosing executive compensation in its annual report, disclosing the investment managers it uses and publicly communicating some of its board actions.

But it rejected proposals that would give member firms a say-on-pay vote; force Finra to release an Internal Revenue Service opinion letter concerning the $35,000 paid to firms following the 2007 merger between NASD and NYSE Regulation that created the existing organization; open an inquiry into any potential involvement by Finra officers with Bernard Madoff’s firms; and create an independent inspector general for Finra.

Action on the three items “shows willingness on Finra’s part to listen and take seriously the feedback it receives from firms,” the three board members wrote.

“I think we got a great victory on the proxy thing,” said Mr. Bandes, president of Mutual Trust Company of America Securities Inc. “It’s not 100% of what members wanted, but it’s a lot.”

About the anger directed at him by some member firms, Mr. Bandes acknowledged: “I’d probably feel the same way if I didn’t know what was being done behind the scenes” to achieve more change.

“We’re trying our hardest to make things happen,” he said.

Another of the independent board members, Mr. Blumenschein, said that the e-mail was the result of a collaboration between Finra’s staff and the three board members.

“We did see a final version [of the e-mail], suggestions were made, [and] some changes were made,” said Mr. Blumenschein, president of Freedom Investors Corp. But the “tone and measure” of the e-mail was “verbalized by a corporate- communications person.”

The reaction “has been caustic,” he said. “It has made us want to change how we put out our next communication.”

Mr. Bandes and Mr. Blumenschein stressed that the three small-firm representatives, a small minority on the 22-person Finra board, have been to just one board meeting and that changing an organization such as Finra will take time.

“We’re three people willing to voice opinions and push for the best interests for small firms,” Mr. Blumenschein said. At the same time, he said, they have to “work within the framework of the organization.”

Mr. Norensberg, managing director of Luxor Financial Group Inc., didn’t return a call seeking comment.

In the e-mail, the three governors told member firms that the entire board and the senior Finra staff had been “extremely receptive” to their concerns.

But Mr. Davidson, who was elected to the NASD board as an outside candidate in 1999, said that he has heard that story before. He said that the board and staff “acted the same way to me” during his time on the board.

Ultimately, “they were not friendly at all and didn’t want to discuss anything with me,” said Mr. Davidson, who has always been an outspoken critic of the organization. “It was one of most frustrating experiences in my life.”

About a year later, Mr. Davidson, the lone outside challenger on the board, resigned.

“Will things really change? That question has come up, and all I can say is, I think it will, but it will be a gradual process,” Mr. Bandes said.

The e-mail from the small-firm governors also said that Finra has promised more risk-based exams, which should help eliminate unnecessary burdens on the firms.

The idea is to target high-risk firms and limit exams to likely problem areas.

“I’ve been hearing about risk-based exams for seven years now. How’d that work out?” asked Mr. Busacca, noting Finra’s failure to head off the collapse of major Wall Street firms. “There is no such thing as Finra doing a risk-based audit.”

E-mail Dan Jamieson at [email protected].

Related Topics: Financial Industry Regulatory Authority, Industry