Finra proxy proposals may well wind up in the circular file

Corporate-governance experts think that seven proposals designed to make Finra disclose more information and give members a say on executive compensation may never be implemented — even though 67% of Finra member firms that participated in the vote approved them.

Because the proxy proposals are non-binding, the Financial Industry Regulatory Authority Inc. board doesn’t have to take any action on them. And the board made it clear that it opposed the proposals, urging members prior to the Aug. 12 election to reject them.

Finra members don’t have the same leverage as corporate shareholders have over company boards, said Les Greenberg, a securities lawyer who follows governance issues.

If corporate boards ignore shareholder wishes, they can vote the directors off the board, he said.

Even the threat of voting out board members gives shareholders “a little bit more leverage,” Mr. Greenberg said.

But 14 of the representatives on Finra’s 22-member board are appointed rather than elected.

The seven proposals ask Finra to give members a “say on pay” for top officials, improve disclosure of Finra executive pay, make board meetings public, disclose Finra’s investment activities and release an Internal Revenue Service opinion letter concerning NASD’s $35,000 payment to members following the 2007 merger with the New York Stock Exchange’s regulatory unit.

The proposals also ask for an inquiry into any connections that Finra officials might have had with the firms run by Bernard Madoff and the creation of an independent inspector general for the regulator.

A DIFFERENT RELATIONSHIP

As a regulator, Finra has a different relationship with its members than a public company has with its shareholders, said Jie Cai, assistant professor of finance at Drexel University.

“The mission for Finra is … to regulate member companies, and sometimes they may have to do something that’s really unpopular with members,” he said.

A say-on-pay process could create a sense of retaliation and “some sort of bargaining between Finra and the members it’s supposed to be regulating,” Mr. Cai said.

In its proxy, the Finra board made a similar argument, saying that a say-on-pay vote could “give an inappropriate perception of the membership’s influence on the Finra  regulatory program.”

But annual disclosure of executives’ compensation would create less of a conflict, Mr. Cai said.

Amerivet Securities Inc., the firm that petitioned Finra to put the proposals on the ballot, wants executive pay disclosed in the regulator’s annual report, rather than just in its tax filings, arguing that IRS filings are less timely and not distributed to members.

SAY ON PAY LIKELY?

The say-on-pay proposal and additional transparency for Finra’s investment process are the most likely items to be addressed by the board, said Lisa Roth, chief executive of Keystone Capital Corp. and chairman of the regulator’s small-firm advisory board.

She was also a small-firm candidate selected by Finra’s nominating committee, but lost to an independent candidate. Ms. Roth supported four of the seven proposals.

Say-on-pay proposals are already commonplace, she said. In addition, under the Dodd-Frank legislation, periodic non-binding say-on-pay proposals will be required for public companies.

The investment industry’s own standards of portfolio transparency could be followed by Finra, said Ms. Roth, who added that she doesn’t have direct knowledge of what the regulator’s board might be considering.

The small-firm advisory board will be discussing the proxy proposals, she said, and the full board is expected to start reviewing the proposals at its meeting next month.

“I’m anxious to see what Finra does with those proposals,” Ms. Roth said.

Smaller firms, defined as those with fewer than 150 registered representatives, supported the proposals by margins of 70% or more.

These small broker-dealers are upset that after several big Wall Street firms failed in 2008 — and Finra itself suffered $568 million in investment losses — executives at the -regulator awarded themselves significant pay and bonuses, said John Busacca, owner of Broker Dealer Exchange LLC.

That year, 11 Finra executives received total compensation of $1 million or more, some of which included retirement payouts. 

Then-Finra chief executive Mary Schapiro received $3.3 million in total pay, including $1.75 million in bonus and incentive compensation. Finra hasn’t yet filed its 2009 tax return, so more current pay data aren’t available.

Ms. Schapiro is now the chairman of the Securities and Exchange Commission.

Mr. Busacca is one of the founders of the Securities Industry Professional Association, which organized the successful slate of small-firm board candidates elected this month.

One of those winning candidates, Ken Norensberg, managing director at Luxor Financial Group Inc., thinks the Finra board is under some pressure to act on the proposals.

“When you get an overwhelming number of votes, the powers that be will have to look at them,” he said. “I won’t speak for the board, but clearly, the members have spoken.”

The proxy vote “is a mandate” for more transparency, Mr. Busacca said. “If the [Finra board] ignores it, I would not be surprised to see another proxy battle.”

Finra spokesman Nancy Condon declined to comment.

E-mail Dan Jamieson at [email protected].

Related Topics: Financial Industry Regulatory Authority, Industry