Members in uphill fight to make Finra transparent

Broker-dealers are in favor of several proxy proposals that urge the Financial Industry Regulatory Authority Inc. to become more transparent, but they doubt Finra will implement any of the ideas even if a majority of members approve them.

Most of the proposals — which are all non-binding — call on Finra to disclose more information to member firms, especially about management’s compensation, and to open its monthly meetings to the public.

Two others, however, call on the regulator to address specific issues — the question of whether Finra managers had any involvement with Bernard Madoff’s family or firms and an opinion letter from the IRS regarding payments to members following NASD’s merger with the New York Stock Exchange’s regulation unit.

In the proxy released last week, Finra urged members to vote against all of the proposals.

“A number of these [proxy] proposals could adversely affect Finra’s ability to fulfill [its] responsibility” for investor protection and market integrity, Finra said in its proxy.

That advice is falling on deaf ears.

“We’re going to vote for all of them, and I suspect most other [broker-dealers] will do the same,” said Ray Grenier, chief executive of Delta Equity Services Corp. “I’m mystified why Finra is resisting.”

The proxy items were submitted by Amerivet Securities Inc., which is involved in separate litigation with Finra over related governance procedures.

Finra’s staff believes that this is the first time a member firm has submitted proxy proposals, said Finra spokeswoman Nancy Condon.

Amerivet initially wanted the proposals to be mandatory, but when Finra balked, the firm resubmitted them as non-binding recommendations.

But because they are non-binding, Jim Biddle, founder of The Securities Center Inc., holds out little hope that Finra will embrace the proposals — even if the majority of members support them.

“I don’t think we’ll gain very much even if 60% [of member firms] vote for them,” he said.

One of the proposals asks for a study of whether any current or former Finra officers or directors had any involvement with Bernard Madoff’s family or firms.

Reviewing any ties is a “perfect way for Finra to say, look, [Finra management] didn’t have anything to do with” the Madoff fraud, said Joel Blumenschein, president of Freedom Investors Corp. Mr. Blumenschein is running for a small-firm seat on the Finra board.

In its proxy, Finra said that the proposed Madoff study would simply duplicate a 2009 inquiry by a Finra review committee. But Amerivet, in submitting its proposals, said that the Finra committee did not have the authority to review dealings between senior Finra officials and Mr. Madoff.

(In its report, Finra’s Madoff review committee acknowledged that it is limited by its charter to evaluating Finra’s exam program only.)

Another of the proposals would direct Finra to disclose the Internal Revenue Service opinion letter concerning how much NASD, Finra’s predecessor, could have paid its members following the 2007 merger. Finra claimed that the $35,000 it paid was the maximum amount possible under IRS rules, but it has never made the opinion letter public.

In the proxy, Finra said that several court decisions upheld its right to keep the letter confidential for competitive reasons.

In a December court hearing, a lawyer for Amerivet, Jonathan Cuneo, founding member of Cuneo Gilbert & LaDuca LLP, cited the IRS letter as the source of figures showing that NASD member firms could have received an additional $35,000 to $76,000.

Ron Reuven, chief executive of Reuven Enterprises Securities Division LLC, agrees with Amerivet that Finra could do more to clear up questions regarding both Mr. Madoff and the IRS letter.

“I would love to find out the answers to those questions, but unfortunately, I have very little faith that they will ever come out,” he said.

A proposal to require that Finra disclose the pay of its 10 most highly compensated employees is unnecessary because it already discloses the information in its annual tax return, the proxy said.

But Mr. Cuneo said that it takes too long for Finra’s tax return to become available, and it isn’t given directly to members.

“We still don’t know the full amount of [former Finra chief executive and current Securities and Exchange Commission Chairman] Mary Schapiro’s compensation in 2009, and we won’t know that until close to the end of 2010,” he said.

Another proposal that would give members a say-on-pay vote for the regulatory group’s five highest paid executives, “would give an inappropriate perception of the membership’s influence on the Finra regulatory program,” according to the proxy.

Finra also argued against a proposal that would make it disclose the investment intermediaries and products that it used for its own investment portfolio. Disclosure would give an impression that it endorsed certain firms or investments, the proxy said.

Amerivet said that more investment transparency is called for, given the large losses that Finra experienced in 2008.

The proposal to open Finra board meetings to the public “could stifle candid deliberations,” Finra said in its proxy. But Amerivet argued that there is no reason that Finra can’t be as transparent as most government agencies.

“We don’t dispute the right to close [a meeting] if they’re talking about enforcement actions or sensitive matters,” Mr. Cuneo said.

Finra also opposes an Amerivet proposal to create an independent inspector general, saying its existing internal audit department and ombudsman’s office already perform oversight roles.

Amerivet argued that those channels lack true independence.

Votes will be counted during Finra’s annual meeting on Aug. 12.

E-mail Dan Jamieson at [email protected].

Related Topics: Financial Industry Regulatory Authority, Industry