B/D Owners Seeking Regulatory Reform Petition Their Way into FINRA Election

B/D Owners Seeking Regulatory Reform Petition Their Way into FINRA Election

Three owners of brokerages are campaigning to be elected to the Financial Industry Regulatory Authority’s board of governors, the group that oversees Wall Street's regulator, with a similar messages: Stop antagonizing smaller firms.

But unlike FINRA's hand-picked candidates, these members needed to petition other firms, in some cases hundreds of other firms, to even appear on the ballot. In FINRA's way of choosing its oversight board, a nominating committee selects a single individual for each open seat; any member that wants to contest that selection, or feels the regulator is not representing the interests of its members, needs to lobby other firms to be included in the vote. For representatives of small firms in particular, that's a challenge.

​“FINRA has done a lot of very good things, however, there still needs to be continual reform and I believe that starts at the top, at the board level,” says Brian Kovack, the president and co-founder of Florida-based Kovack Securities who is campaigning for the open seat allocated for a representative from a mid-sized firm, defined as those with 150 to 500 reps. He believes FINRA needs to become more effective in protecting customers and preserving market integrity “without unnecessarily antagonizing member firms who are just trying to do the right thing.”

Stephen Kohn of Kohn & Associates, who is campaigning for one of the seats reserved for firms with less than 150 reps, has a similar complaint. “As long as we’re ‘members’ of FINRA, we’re subject to a great deal of regulatory oversight that makes it very difficult to conduct business,” he says, noting many times it seems firms are facing a regulator with an attitude that they’re guilty until proven innocent.

Kohn’s campaign is particularly focused in reforming FINRA’s examination process, which he says can be abusive. “Regulators come into our office with impunity. There are no consequences to the way they behave and the way they treat the members. Oftentimes it’s coercive, oftentimes it’s with a lack of respect,” he says.

“There’s nothing simple about being in this business today and the fact that the regulation is so intense, it becomes impossible for a lot of people,” he says, noting that in the small firm category, the industry has lost, on average, two firms a week this year. “The rulebook is 4 inches thick, written on tissue paper in legal mumbo jumbo,” Kohn adds. 

Joe Romano, Kohn’s opponent and president of Chicago-area Romano Wealth Management, is also looking to reform the regulator’s exam process with his bid for the small firm seat. “Susan Axelrod, who heads up examinations, has said they’re moving more toward a risk-based process where they want to get the big things, rather than the little slap-on-the-wrist things. Unfortunately, in reality that just has not translated down to the examiners on the front line. That’s a problem,” Romano says.

Romano is also campaigning on reforming the level of disclosures that FINRA is seeking from brokers. “If in college, I streaked across Wrigley Field, why is that relevant to whether I’m a good broker or not. It’s just gotten to that point of ridiculousness.”

“This is all done in the name of transparency and I’m all for transparency, but it’s got to be transparency of the relevant information. That’s what’s been lost in the process,” he says.  

All three are running as “petition candidates” (Kovack calls himself a “dissident” candidate.) FINRA’s nominating committee, a subset of the current board, usually hand picks one individual for each seat. Unless another member petitions to get on the ballot, it's more like an unopposed appointment. 

Unlike FINRA's selected candidates, petition candidates have to gain signatures from at least 3 percent of FINRA members in their size group. For Kovack, that's six of the 200 firms in the mid-size category. 

But for Kohn and Romano, the climb is much steeper. At the time of the April notice, there were 3,600 small-sized firms (those with less than 150 reps), which meant the two candidates had to successfully solicit signatures from over 100 firms.

“It’s a grind,” Romano says, noting that the tight, six-week timeline didn’t help. To successfully get his name on the ballot, Kohn sent five email blasts and then personally made more than 700 calls to small firm executives.

“I haven’t cold called in more than 30 years,” Kohn says, noting that many firm executives wouldn’t take his call and sent him straight to voicemail. And even now that he’s successfully petitioned to be on the ballot, Kohn says he’s still campaigning with email blasts.

“I have things I need to say to the membership. I’ve been very outspoken for a number of years now after spending many, many years in the shadows for fear of retribution. I’ve finally decided I’m not a little kid anymore…I can stand up to the bullies,” Kohn says.

The board of governors is made up of 11 individuals outside the industry and ten from the membership. That includes three representatives from large size firms, one representative from a mid-sized firm and three representatives from small size firms, as well as seats from the insurance industry and the exchanges. This year the nominating committee selected Merrill Lynch’s John Thiel for the open large firm seat (he is running unopposed) and John Muschalek, vice president at First Southwest Company, for the open mid-sized firm seat. The nominating committee did not select a candidate for the open small firm seat. It's unclear whether that seat would remain open if no petition candidate lobbied member firms to get on the ballot.

A FINRA spokesperson said the organization would not comment on its election process.

Firms started to receive their ballots to elect representatives for the open seats in the mail this week. FINRA is scheduled to conduct its annual meeting on Thursday, July 30, 2015 and will elect the board. Petition candidates hope their message is getting through.

"We need a voice that can rationally and logically let people in the public know what it's like to run a firm and the burdens and constraints that regulation puts on those firms,” Romano says. 

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