PIABA accuses Finra of conflicts of interest

Public Investors Arbitration Bar Association report slams self-regulator over its picks for board of governors

Nov 15, 2017 @ 11:53 am

By Bruce Kelly

The Public Investors Arbitration Bar Association, a group of lawyers that represents retail investors who sue brokerage firms, in a new report Wednesday morning took aim at perceived conflicts of interests at the board of governors of the Financial Industry Regulatory Authority Inc.

The report claims that many so-called "public governors" on Finra's 24-person board have connections to Wall Street, serve on too many corporate boards to represent the public effectively and face conflicts of interest.

The report highlights the ties to Wall Street of one former and five current public governors, including Eileen Murray, the co-CEO of Bridgewater Associates, a giant hedge fund, and William Heyman, who is also Finra's chairman with a long career in the securities industry and chief investment officer of The Travelers Companies Inc. Mr. Heyman served on the board of Finra and its predecessor NASD from January 2005 until September 2016 and returned to the board this July.

The board of Finra, a self-regulatory organization that oversees 3,800 broker-dealers on behalf of the Securities and Exchange Commission, has 13 public governors, 10 industry governors and one seat for its CEO. According to the PIABA report, Finra's by-laws state that its public governors may have no material business relationship with a broker or dealer or other self-regulatory organization.


Finra's current and recent public governors "reveal significant conflicts and concerns," according to the PIABA report, which was written by the group's current president, Andrew Stoltmann, and Benjamin P. Edwards, associate professor of law, University of Nevada, Las Vegas.

Rather than having a public or customer-oriented bent, Finra's public governors, "often provide additional representation for securities industry constituencies," according to the report.

"It's extraordinarily problematic when you have a self-regulatory organization for the securities industry and its by-laws require it to have public majority representation on its board of governors and, in reality, you don't have a majority public board," Mr. Stoltmann said in an interview. "In reality, there is a de facto industry board. You need true public advocates on that board of governors. Our report makes clear you don't really have that."

The report criticized the selection of public governors with ties to the securities industry. "In many instances Finra's public governors join the board after long careers in the securities industry," according to the report. "Although some academics and former regulators do serve on Finra's board as public governors, the board only infrequently includes persons primarily identified as investor protection advocates. This absence is troubling for an organization that publicly characterizes itself as dedicated to investor protection."


The report proposes a different slate of public governors who are closely associated with investor advocacy. The choices included Phyllis Borzi, the former assistant secretary of Labor and head of the Employee Benefits Security Administration as well as the architect of the DOL's fiduciary rule, and Jordan Thomas, former assistant chief litigation counsel in the division of enforcement at the SEC who was a leader in developing the SEC's whistle-blower program.

Another Finra public governor, Carol Anthony Davidson, is on the board of Legg Mason, an asset manager with a broker-dealer subsidiary, according to the report. Another public governor, Shelly Lazarus, is on the board of the Blackstone Group, a global asset manager. Both Legg Mason and Blackstone rely heavily on brokerage firms to sell their products.

In September, an InvestmentNews special report raised the criticism that many of Finra's public governors have had long careers in the securities industry and serve on the boards of other financial services companies.

Michelle Ong, a Finra spokeswoman, defended the organization's board and public governors. "Each governor, regardless of his or her affiliation or classification, is responsible for serving in an unbiased and objective manner, and voting on matters for the good of the investors, industry and marketplace," Ms. Ong wrote in an email. "Public governors apply their varied expertise in representing the interests of the investing public and sound financial markets."


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