With Finra in red, officials saw green

Thirteen current and former executives of the Financial Industry Regulatory Authority Inc. made more than $1 million apiece in 2008, a year in which the regulatory organization had an operating loss of $696 million, according to tax forms that Finra filed last month and the company’s annual report.

The compensation packages, which included salary, bonuses and retirement plan awards, pale next to the payouts that some Wall Street executives and bankers made in boom years — but still raised eyebrows, given Finra’s investor protection charter.

The highest-paid executive was former chief administrative officer Michael D. Jones, who left in the summer of 2008 after more than a decade at Finra with compensation, severance and accumulated benefits valued at $4.43 million. Mr. Jones subsequently joined the Public Broadcasting System as its chief operating officer.

Several of Finra’s 2008 millionaires have left for lower-paying government positions. Securities and Exchange Commission Chairman Mary Schapiro, who received $3.3 million last year as Finra’s chief executive, now earns $162,900 at the government agency.

Earlier this year, she received an additional payout from Finra of about $7.2 million as part of her accumulated-retirement-plan benefits.

Elisse Walter’s 2008 salary was $3.8 million, including $2.4 million of supplemental retirement benefits. She was in charge of Finra’s regulatory policy and programs until July 2008, when she was appointed a commissioner of the SEC.

Internal Revenue Service Commissioner Douglas Shulman pocketed $2.7 million in salary, bonus and retirement benefits from Finra in 2008. He joined the IRS in March of last year after working more than eight years at Finra, leaving as vice chairman after working for many years in its predecessor company’s data division. He is paid $162,900 by the IRS.

Four current Finra executives — including enforcement chief Susan Merrill and member regulation executive Grace Vogel, both of whom formerly worked at the New York Stock Exchange — made more than $1 million last year, and four others made more than $800,000.

Richard Ketchum, who became chief executive of Finra in March following Ms. Schapiro’s departure, was paid $122,500 last year for serving as chairman of the board, according to the tax form. Mr. Ketchum was formerly president of the New York Stock Exchange’s regulatory unit, which merged with NASD in late 2007 to form Finra.

Nancy Condon, a Finra spokeswoman, declined to comment on Mr. Ketchum’s 2009 compensation.

The high number of large 2008 payouts partially reflect accumulated retirement benefits awarded to senior officials, as well as an effort by Finra to increase the professional caliber of its staff following trading scandals that affected exchanges regulated by the group’s predecessor organizations, the NASD and NYSE Regulation.

The pay packages also are well below the $139.5 million, retirement-plan-enhanced farewell compensation that former NYSE Chairman and CEO Richard Grasso was awarded when he resigned under pressure in 2003.

Brings back memories

One of the top Finra awards last year, however, evokes memories of those days. Veteran NASD executive Salvatore Sodano received $3 million in 2008, the last payment from a pay package of more than $20 million he received when he resigned as chairman and chief executive of the American Stock Exchange, a former NASD subsidiary, in 2005. Some of the payment was withheld pending the outcome of an SEC probe involving improper trading at Amex. Mr. Sodano was investigated for failing to supervise the brokers.

Ms. Schapiro’s compensation last year included up to $20,000 annually for club memberships in New York and Washington, $20,000 for personal financial and tax counseling, and a car and driver for use in both cities, according to the tax form.

Finra also generally pays a “gross-up” adjustment to cover employee taxes, the filing said. The gross-up policy commonly applies to staff members’ relocations expenses and is materially insignificant, Ms. Condon said.

Overall, compensation and benefit expenses for Finra’s 2,800 employees jumped 21.4% in 2008 to $541.7 million from the previous year. The increase was driven primarily by annual merit and promotion increases, $30.3 million of severance and benefit costs from a voluntary retirement program, and increased retiree medical and savings plan expenses, the company said in its annual report. About 169 Finra employees took the voluntary buyouts, Ms. Condon said.

As a private non-profit firm, Finra does not file annual proxy documents disclosing executive salaries. Each of its operating units, however, discloses compensation in its annual Internal Revenue Service Form 990 filings for tax-exempt organizations. Data on revenue and expenses in the tax forms differ from operating data in the company’s annual report because the latter uses GAAP accounting.

Finra’s GAAP operating loss last year was dominated by a $568 million decline in its investment portfolio, a 26.5% drop that erased almost all of the company’s positive gains from the previous four years. After Mr. Ketchum arrived, Finra radically repositioned its portfolio, moving from hedge funds and other alternative investments into a more conservative profile.

Although the more conservative investment policy has caused Finra to miss out on the total stock market gains of 2009, the portfolio was up 12% as of late September, according to a Wall Street Journal report. Ms. Condon said the investment portfolio continues to do well, but would not provide specifics.

The regulatory group, which oversees about 4,900 brokerage firms with about 665,000 registered representatives and sells regulatory services to several exchanges and online marketplaces, also disclosed its highest-paid outside contractors. They were led by EDS Corp., which received $64.2 million in 2008 for technology services, and Thomson Prometric, which received $19.7 million for testing services related to securities industry licensing.

Finra, whose executives are frequently pilloried by brokers for running ads that encourage investors to check out their brokers’ credentials, paid advertising firm Doremus & Co. Inc. $5.5 million last year.

The annual pay disclosure regularly attracts jeers from Finra members, particularly those at small brokerage firms who claim they are unfairly represented in the organization’s governance structure and bear a disproportionate burden of regulatory fees.

Standard Investment Chartered Inc. earlier this year filed a suit seeking class-action status against Finra, charging that it did not fairly distribute profits from NASD’s sale of its Nasdaq Stock Market with members and used those profits and projected savings from the merger with NYSE Regulation to pay its executives. Ms. Condon said the group, which is contesting the suit, “completely disagrees” with the characterizations.

In his own words

In a speech on financial regulatory reform and executive compensation in October, Mr. Ketchum said, “More important than public-policy reforms is for executives and their boards to exercise greater discretion in how they structure compensation — and to be able to articulate why it is in the long-term interests of the firm and its customers.”

Asked whether Mr. Ketchum or other executives would elaborate on how the chief executive’s statement applies to Finra’s own constituency, Ms. Condon cited the tax form’s disclosure that the board’s management compensation committee hired Mercer Inc., a compensation consultant, in 2007 to help determine appropriate pay levels for the company’s senior executives.

Mercer measured projected 2008 pay against a mix of public and private financial firms that it believed comparable, according to the tax filing, and the committee’s members unanimously approved proposed levels of executive compensation. The committee includes four directors from outside the securities industry, according to the tax filing.

E-mail Jed Horowitz at [email protected].

Related Topics: Financial Industry Regulatory Authority, Industry, Money Management Institute (MMI), Securities and Exchange Commission