In a move that some say could disenfranchise smaller firms, the Financial Industry Regulatory Authority Inc. plans to revamp its district committees.
The self-regulator filed a proposal with the Securities and Exchange Commission Feb. 25 to carve out three seats for large-firm representatives on the district committees, three spots for small firms and one for midsize firms — the same breakdown Finra has for industry representatives on its board of governors.
Finra also wants to end its own nominating process for district members.
Currently, district committee members — whose primary role is to hear disciplinary cases brought by Finra's enforcement staff — are elected by all member firms in each district and aren't categorized by firm size. Most disciplinary panels are made up of two industry committee members and a Finra hearing officer.
Not surprisingly, some industry participants worry that reconfiguring the committees could diminish the influence of smaller firms in those hearings.
“There are only 180 large firms, so all these district seats will end up being filled by compliance [and branch] managers” from wirehouses, said John Busacca, owner of the Broker Dealer Exchange LLC and one of the founders of the Securities Industry Professional Association, which represents firms and registered representatives.
“These won't be owners of firms, [and] their views on regulation and the cost of regulation is going to be a lot different than [owners of] small firms,” he said.
Committee members — who also advise Finra on regulatory issues — would have to be a branch manager, principal or corporate officer of a broker-dealer, Finra said in its filing.
The proposed changes would be made over a three-year transition period.
Finra bylaws require “appropriate and fair representation” of Finra member firms within districts, the filing said.
Some aren't sure that designating three committee seats for large-firm members will further that goal. said Jed Bandes, president of Mutual Trust Company of America Securities Inc. and a Finra board member. “The larger firms don't really understand the dynamics of [a smaller] independent [contractor] environment.”
Mr. Bandes, who also is a former member of the Finra district committee in Atlanta and said he spoke only for himself, wasn't sure how the changes would work out. But he said that disciplinary hearings he had seen at the district level — under the current setup — “were always conducted very fairly.”
“The whole concept of the district committee is to get people who know what's going on in the industry [to] come to [district] meetings with issues, problems and complaints and have Finra staff address them,” said David Sobel, general counsel at Abel/Noser Corp. and a member of Finra's District No. 10 committee in New York.
“By not having representatives of all the different [types of firms], what you're doing is limiting their voice,” he said.
Mr. Sobel, who also is chairman of the National Association of Independent Broker/Dealers, which speaks out for small firms, said the NAIBD board is set to discuss the change, but hasn't yet heard any negative feedback from members.
FINRA RESPONSE
Finra spokeswoman Nancy Condon said that, on average, district committees are already balanced out by firm size.
Those with misgivings about restructuring the committees did praise Finra for ending the district nominating process. The proposal follows the regulator's announcement last month that it will not nominate a small-firm candidate this year for its board of governors election.
“This is a step in the right direction,” said Alan Davidson, founder of both Zeus Securities Inc. and the Independent Broker-Dealer Association, and a member of Finra's National Adjudicatory Council. “It opens up the field to increased competition.”
Mr. Davidson, who spoke only for himself and his group, in 1992 was the first district challenger to take on a nominated candidate for the important New York district, where seats had largely been held by executives from the large Wall Street firms.
In recent years, more independent candidates from smaller firms — who have had to qualify by submitting signature petitions — have successfully challenged nominated candidates.
Observers said the election losses by some nominated candidates led Finra to abandon the process.
There is a “perception that ... candidates nominated by district nominating committees represent the industry less effectively than more "independent' petition candidates,” Finra acknowledged in its rule filing.
E-mail Dan Jamieson at [email protected].
