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Finra plan to revamp district committees draws fire

Critics say move could strip small firms of chance to serve

The Financial Industry Regulatory Authority Inc. plans to revamp its business district conduct committees — a move that some critics say could disenfranchise smaller firms from Finra’s 11 local committees.
The self-regulator filed a proposal with the Securities and Exchange Commission to carve out three seats for small-firm representatives on the committees, three for large firms and one for midsize firms, the same as Finra does now on its board of governors.
Currently, committee members, who are elected by member firms in each district, are not categorized by firm size. Given that setup, committees tend to be staffed mostly by members from smaller firms.
Finra also wants to end its own nominating process for district members. Under that plan, those who want to run can throw their hats into the ring.
The district conduct committees’ primary role is to hear disciplinary cases brought by Finra enforcement staff. Committee members also advise Finra staff on regulatory issues.
“There are only 180 large firms, so all these district seats will end up being filled by compliance managers” from wirehouses, said John Busacca, owner of the Broker Dealer Exchange LLC and one of the founders of the Securities Industry Professional Association Inc., which represents firms and registered representatives.
“You will end up with a broker from Smith Barney or a branch manager for Edward Jones sitting at a meeting with an owner of a small firm who is being forced out of business, and these other two guys will have no idea what the problem is since all their compliance needs are taken care of by the mother ship,” he said.
Finra says in its rule filing that its by-laws require “appropriate and fair representation” of Finra member firms within districts.
In recent years, independent petition candidates from small firms have successfully challenged district candidates put forth by local nominating committees.
Fewer individuals are willing to serve on district committees and go through the nominating process, Finra said. By allowing self-nominations, more candidates are expected.
Mr. Busacca, who has been active in running independent district candidates, said the nominating process didn’t work.
“I’ll at least credit Finra for getting its hands around this faulty election system,” he said.