With a little over one month before its maiden Board of Governors election, the new industry self-regulator FINRA faces its boldest challenge yet — not only to its own nominees for the board, but also to its own integrity.
The Financial Industry Association (FIA), a group of 1,400 mostly smaller FINRA member firms, has announced a campaign supporting its own “dissident” candidates for five open seats on FINRA's Board of Governors at the October 26 election. The FIA has been a vocal critic of the election process used by the self-regulator (criticism was primarily aimed at NASD before its merger with NYSE regulation created FINRA), as well as its tactics and procedures when investigating, examining and sanctioning members. In particular, they say regulatory staff routinely bullies the industry membership — and now they think they've found evidence to prove it.
Richard Goble, the president of FIA and founder of North American Clearing (NAC), along with John Busacca, co-founder of FIA and the president of NAC, came across a letter in July from an NASD regional attorney to a FINRA member firm. They say it clearly threatens to name the owner in the complaint for refusing the self-regulator's settlement offers.
“Most of the threats are verbal,” says Busacca, who along with Goble signed affidavits to the SEC swearing they'd experienced similar threats. “Until this, nobody had ever been stupid enough to put it in writing,” he says of the letter sent by NASD regional counsel Helen Barnhill to Spartan Securities in late June.
Spartan owner Micah Eldred was offered a $55,000 fine, or a $35,000 fine plus retention of an independent consultant, in connection with allegations related to anti-money laundering, according to his attorney, Alan Wolper, a lawyer with Sutherland Asbill Brennan. Wolper says he initially fought the charges on merit. But when discussions turned to sanctions, he found FINRA's settlement numbers too rich, so he and his client rejected the offer. The NASD reduced the settlement offer to $20,000 but Spartan rejected that offer too. A letter from Wolper to Barnhill explaining as much received this response from Barnhill: “…Your rejection of the settlement will require additional investigation which we thought could be obviated through the settlement process.” It continued, “Upon such further investigation, and as I reminded you, individuals may be named, or charges may be changed or dropped.”
“That is intimidation and bullying at a minimum,” says Wolper, who says he has no problem with horse-trading sanctions in a settlement offer, but does have a problem with threats to name individuals. So he called Barnhill's boss, Dan Nathan, head of regional enforcement, to hear what he had to say. Nathan fully supported Barnhill's conduct, he says. To Wolper, a former NASD district director and enforcement attorney, that was shocking. “I would never have let my folks threaten people like that,” he says.
Threatening or Posturing?
But the FIA might not have the smoking gun it's looking for. A former SEC attorney who was shown the letter said Barnhill's message did appear to include a “veiled threat,” and he called the language used by Barnhill “sophomoric.” (He also called the exchange between the two attorneys “a classic pissing contest between lawyers.”) But in NASD's defense, he says, what are they supposed to do? They can't just walk away after cutting a settlement offer in half. He concludes that the SEC's Market Regulation department, which oversees the NASD, “might tell the NASD to tone it down a bit, but probably not more than that.”
But Goble and Busacca, who've shared the letter with several of the SEC commissioners, and are including it in an “open file” with the Department of Justice, think it only adds credibility to their long-standing claims of bullying. The FIA filed a formal request with NASD in April 2006 asking the regulator to look into the bullying. At the end of NASD's internal inquiry into the matter, Grant Callery, the chief counsel of NASD, wrote a letter to the firms stating that “while there may have been flaws in the procedures and staff conduct raised by petitioners, there were no instances where the information established a material violation of applicable rules.” Callery wrote that most of the allegations were based on “miscommunications” between staff and complaining firms.
The FIA membership thinks the best way to improve communication with FINRA is to win more seats at the table, and it's hoping the October board election will provide that opportunity. Among other things, the candidates want “education, not sanctions” before fines and suspensions are handed down. But just getting on the ballot will be difficult. Each of the FIA's candidates — one in the small firm category, one in the mid-size and three in the large firm category — will need 10 percent of their designated category's votes by September 17.
Goble, who is the “dissident” candidate in the small firm category, is as realistic about the panel's chances as he is about turning FINRA into a soft and cuddly self-regulator: “It won't be easy.”