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FINRA Seeks Your Vote -be careful

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Aug 4, 2007 8:01 pm d=21   FINRA Board of Governors Nominations: Singer's Acid Test Written: August 4, 2007

On August 3,2007 the new Financial Industry Regulatory Authority (FINRA) announced its seven nominees for its first Board:three from the Small Firm pool, one from the Mid-Size, and three from the Large Firm. Individuals seeking to contest FINRA's slate must file petitions within 45 days (needing 3% of member signatures for each category or 10% if running as part of a multi-category slate).

In reviewing the list of FINRA's official nominees, I sadly see a predisposition to regurgitate familiar faces (and firms) through a system desperately in need of innovation and reform. Despite a vibrant dissident/reform community that won dramatic contested elections during last year's District,NAC, and Board levels, FINRA persists in pretending that such opposition does not exist.

FINRA is not supposed to be a politicized regulatory organization. It is supposed to fairly represent the panorama of the securities industry, and it is supposed to draw upon the wellspring of its members expertise to both root out misconduct and to generate rationale, effective regulation.

In recent years the regulator's misguided, insular policies and bunker mentality have prevented it from becoming meaningfully pre-emptive. Worse, by antagonizing its dissident/reform members, FINRA has only nurtured such opponents and motivated them to better organize and obtain ever-increasing numbers of members.

If FINRA were truly sincere in mending its fences and transforming itself into a partnership with the regulated, it should have engaged in substantive, confidential discussions with the dissident/reform community BEFORE selecting its current class of nominees. By not doing such, FINRA not only delivered an unnecessary slap in the face of hundreds of firms hostile to its past policies, but it has also made it more difficult for folks such as me to support any official nominee. As such, I and others who share my opinions about unfair and biased industry regulation, are given further pause before we trust anyone nominated by a still antagonistic regulator.

Last month I resigned from the Financial Industry Association (FIA). As such, I am now a classic free agent -- beholden to neither FINRA nor its most successful trade-group critic (FIA). I have been asked by both factions to consider supporting their candidates and likely candidates, but have withheld any committment until I better understand how such nominations were obtained and what the nominees stand for.

I would urge all FINRA voting members not to engage in knee-jerk voting for either FINRA's or FIA's nominees. Your future is too important to simply vote a party line. You don't want political hacks sitting on the Board. First and foremost, that man or woman should want to be sitting there, and should want to undertake such service in an effort to better our industry. If the only motivation to run for the Board is to put that title on one's resume and to curry favor with FINRA, you should not cast your vote for such a nominee.

Wall Street stands at the precipice and any further stumbles may be an irreversible fall into the abyss. This is not the time for amateur hour. We need men and women at FINRA's helm -- and individuals who have worked on the Street and understand that their role is not to smile and always say "yes." Similarly, their role is not to always grimace and say "no." Now, more than ever, we need dialog, innovation, and a consensus.

Here are the questions I intend to ask any nominee seeking my support, and I would urge you to put such folks to a similar test:

1. FINRA's August 3, 2007 Election Notice states " As of the close of business on August 2, 2007, FINRA had 4,655 Small Firm voting members, 224 Mid-Size Firm voting members and 193 Large Firm voting members."

QUESTIONS: Do you think that it is fair for 4,655 firms to have no more say in FINRA's affairs than 193 firms (both are limited to three nominees)? If you are elected, will you support a petition to return FINRA to its former one-firm-one-vote status? If not, why do you think the present status is fair?

2. FINRA's policies in processing new member applications and in processing requests for modification of existing membership agreements (notably to acquire additional branches or to add staffing) continue to come under attack as taking too long.

QUESTIONS: Will you support efforts to demand more aggressive timeframes for completion of such applications? What, if any, suggestions do you have to reform that process? How long do you think the approvals should take (barring any unusual circumstances)?

3. FINRA members have increasingly complained about unreasonable regulatory policies/practices during examinations and investigations. Pointedly, members and registered persons complain about arbitrary staff decisions involving the scheduling of on-the-record interviews (he time,duration and place), and in the deadlines and scope of document production. Although such issues are codified when they arise during hearings, the FINRA code is virtually silent on resolving such disputes during investigations/examinations and essentially leaves full discretion to the adversarial Staff.

QUESTIONS: Will you support efforts to codify fair and reasonable policies and procedures to be used during examinations and investigations? Will you support the creation of an independent magistrate (not a Staff member) to rule on such disputes? What ideas do you have to reform this area?

4. As demonstrated in numerous decisions on appeal within FINRA and subsequently to the SEC and federal courts, the Staff's initial demands for settlement of violations often exceeds the fines/suspensions imposed at the hearing level or on appeal. Many respondents complain that the Staff routinely high-balls settlement demands in a tactical attempt to pressure unfair resolutions. In the civil courts there are checks-and-balances to ensure that settlement demands are reasonable, but no such option exists at FINRA.

QUESTIONS: Would you support reforming FINRA's enforcement protocol by requiring the Staff to announce at the beginning of all hearings its final offer of settlement; and implementing a series of rules that would provide incentives for such offers to be fair and reasonable? Would you support a rule that would allow a full set-off for incurred reasonable legal fees up to the amount that a hearing panel imposes a fine below that proposed by the Staff in its final offer (e.g., the Staff asked for $20,000 fine and the panel imposed a $5,000 fine -- the respondent would be given a $15,000 "rebate" to be applied against payment of the fine and all forum fees)? Would you support a rule that would allow a prevailing respondent to seek compensation for all reasonable fees a costs from FINRA in the event that a panel determines that there was no reasonable basis for the filing of charges?

5. Many members complain about the costs of preparing extensive Written Supervisory Procedures (WSPs) and FINRA's dilatory practices in approving such materials -- and then subsequently charging a member firm with failing to maintain adequate WSPS despite the fact that they had been previously approved. For many years there have been calls from the industry to require FINRA to adopt pre-fabricated WSP paragraphs that are typically boilerplate in nature and adequate for many members and many businesslines, and to permit such paragraphs to be included in an effort to streamline the review. There is no suggestion that FINRA adopt a one-size-fits-all WSP as we recognize the need to tailor WSPs to each firm. Nonetheless,it is cynical for FINRA to persist in denying that much of the industry's WSPs cannot be subjected to a pre-approved language process.

QUESTIONS: Will you support a reform to the WSP process? Do you have any suggestions as to how to achieve such a goal?

6. Finally, FINRA seems to have fallen into a mind-set (largely during the Glauber administration at NASD)in which it sought to isolate dissidents/reformers within the NASD community them from meaningful participation with the regulator, and further attempt to balkanize our industry by playing trade groups off against each other.

QUESTIONS: Do you believe that firms should be encouraged to voice their opposition to FINRA proposed rules and existing policies in a courteous and constructive manner? Do you support broadening FINRA's mandate by inviting all industry factions to the table? What specific ideas do you have to heal the wounds within our community?
Aug 5, 2007 4:21 pm

Aug 7, 2007 7:29 am

QUESTIONS: Do you think that it is fair for 4,655 firms to have no more say in FINRA's affairs than 193 firms (both are limited to three nominees)? If you are elected, will you support a petition to return FINRA to its former one-firm-one-vote status? If not, why do you think the present status is fair?

Why wouldn't you weight the "market cap" of large firms to smaller b/d's? Just curious. It's nice to see that larger firms are well represented on the interim board: adership/FINRABoardofGovernors/index.htm

Aug 7, 2007 12:56 pm

That there are 4,655 small firms and fewer larger ones is irrelevant.

The fewer larger firms employ far more registered reps than the 4,655 small firms.

The wishes of a firm the size of Merrill TRUMP the wishes of Acme Broker Dealer and Dry Cleaners--or even 4,655 of them.

There is nothing inherently wrong with having rules--even though the "dissident" set does not like them.

Recent whining about having to have written procedures for supervision is illustrative.  Why in the world should a firm of any size be excused from having such procedures?

Whining that it costs a lot of money to have them is specious--it's called the cost of doing business.  If you don't have enough money to play by the rules the solution is simple--don't play.

Aug 7, 2007 1:03 pm

I tend to agree with DA on the written rules procedures. Did Brookstreet have a compliance department? If so, where in the hell were they for all of these years?

Ditto on Oppenheimer. It's not like those problems in Boston were a big surprise to anyone.

On "representation" the little guys versus the big boys reminds me of small states versus large ones. Each state gets 2 US Senators but the number of House Reps is solely dependent upon population.

Let's keep this a little more professional without the name calling and personal attacks going forward, please.

Aug 7, 2007 2:07 pm

It's a "cost of doing business" until it becomes a "barrier to entry."

"The Financial Industry Regulatory Authority (FINRA), is the largest non-governmental regulator for all securities firms doing business in the United States. All told, FINRA oversees nearly 5,100 brokerage firms, about 173,000 branch offices and more than 665,000 registered securities representatives."

Now, would you like to tell the group why "[t]he wishes of a firm the size of Merrill TRUMP the wishes of ..." and how the math works such that "[t]he fewer larger firms employ far more registered reps than the 4,655 small firms."? After all, if the largest firm, Merrill has less than 20,000 RRs if the top 15 each had 20,000, it would still only equal 300,000 which is obviously less than half the number of RRs.

Further, there is a question of whom they are supposed to represent, the interests of firms or the interests of the RRs.

Aug 7, 2007 3:32 pm

I am agreeing with him that "some" of the little guys kvetch too much for obvious reasons. As you well know, NO ONE manipulates me into agreeing with ANYTHING, Bill.

"Some" of the little guys have NO COMPLIANCE department. They complain about compliance being too costly. If it's too costly, then perhaps they should try another line of work.

People who can't afford liability insurance should not drive cars. They should walk or rely upon cabs/public transportation.

Aug 7, 2007 4:22 pm

We agree on some things like universal health care. We do not agree that everyone has the "right to drive without liability insurance."

The big boys are by no means paragons of virtue but they tend not to hire brokers with rap sheets longer than a football field for good reason. "Some" of the smaller broker-dealers apparently haven't been shown how to use NASD Broker Check.

On customizing written rules how long would/does it take to modify acceptable boilerplate language to placate FINRA inspectors? 10 hours? 20 hours?

For the record, I do not agree with and/or sanction "DevilAdvocate's" personal slams against "known" posters.

Aug 7, 2007 4:45 pm

And of course those big boys would never, ever do anything wrong.  Of course not.  They are paragons of virtue and we would all be better off with a Starbucks and Merrill on every corner and one Walmart taking over our downtown.  Who the hell needs mom and pop.

I don't understand the big picture, I'm just a small franchise owner affiliated with a big broker dealer. It seems small RIAs have become mom and pop, and they are subject to much less regulation and enjoy a much lower fixed cost structure than where I find myself and my large broker dealer after a decade in business.

Maybe these developments favor big business broker dealers, but aren't they fighting for their survival against forces like Fidelity RIA, The Mutual Fund Store, mom and pop RIA, elimination of 12b1 fees, and media that hates commissions and professional advisors, and all others that would cherry pick the profitability out of our diverse marketing mix of profitable and not so profitable accounts - a b/d industry with strong regulation and a unified voice can ensure the survival of full service brokers, insurance reps, and their big and small clients - if the cost of survival is higher entry barriers for the small b/d, so be it.

Maybe I'm way off, I have a pretty full plate with just running my dinky little shop so this is just based on observation and perception.

Aug 7, 2007 6:32 pm

Point well taken and for your information I had a pre-open sidebar chat with a regional director of one of my favorite SEC offices about one such recidivist broker who I would have banned from the biz long ago (jumper type who likes to hose elderly clients).

I firmly support a "banned from the biz for life" sanction on cockroaches. That way smaller broker-dealers won't have to bother pull up their U-4's on Broker Check and won't get schmoozed into hiring them if they fail to check those U-4's to start with.

Perfect solution!

Aug 8, 2007 12:25 pm

Bill, you spelled “businessmen” wrong.

Aug 8, 2007 6:03 pm

We are not each other's enemy.  The bureaucracy is!

rrbd: it is clear you care about the industry, and have identified the real problem.

I have continuously advocated for reps to unite and stop squabbbling about the various platforms and products that the market demands and the home office suits manufacture: it always comes down to the ethics of the individual rep, at least, as professionals, this is what we can control.

The leadership question is interesting. There are a number of souls on this forum who could qualify as leaders. The forum itself seems to be evolving in consciousness, with regard to the big issue we both see.

In a virtual world, even leadership can be anonymous - in a strange twist of irony, some characters here have been moderated to anonymity, a development which once again proves that what is happening here is dynamic and interesting.

In an age of too much information - and too many communication venues - this forum is important. Ideas are powerful, and can take on a life of their own.

Thanks for investing your time here, your contributions, insights, perspectives. There is nothing else to do but push forward. One step at a time.

Aug 9, 2007 4:50 pm

Maybe after Labor Day we can set up a better-policed thread and try to agree on the issues that need to be addressed, seek out ideas to address them, and draft proposals for consideration.  Wow!!! Wouldn't it be nice if we could reach a consensus on this board, of all places, and do something meaningful?

Taking a few weeks off and returning here with a structured thread is a great idea. It will be worth the effort. Enjoy the rest of the summer, the beach, the golf course, or whatever, and bring this leadership topic back into focus after Labor Day.

Aug 9, 2007 5:25 pm

Sounds like a motel room may be a better place to enhance this relationship that you two have.

At least I defended your right to free speech, not that you apparently need or want any one's help, or to generally have rapport with some of your professional colleagues.

Consider taking a little vacation, go get a hot dog on Coney Island, or watch the hemp plants grow on the Sag Canal, check out the children at the Mohawk public pool, or whatever it is you enjoy doing away from here, for a while.

And thanks for your role in defining zero here.