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Project on Government Oversight

FINRA's Enforcement Chief to Step Down

Related Content: Financial Oversight, FINRA
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March 18, 2010 | By: Michael Smallberg

The Wall Street Journal reports this morning that Susan Merrill, head of enforcement at the Financial Industry Regulatory Authority (FINRA), will be stepping down from her post, following a period in which FINRA’s lax enforcement of its large member broker-dealers and its failure to catch the Madoff and Stanford Ponzi schemes have raised serious questions about the organization’s regulatory effectiveness.

The Journal doesn’t hide the fact that Merrill’s enforcement track record was less than stellar, noting that “her division has brought fewer cases than its predecessors did,” and that “her departure leaves Finra looking for an enforcement chief who can bolster its reputation and bring more cases.”

Although there was a slight increase in FINRA’s enforcement stats in 2009 in terms of new disciplinary actions filed, firms expelled, fines levied, etc., the organization’s overall stats underwent significant declines under Merrill’s leadership. It was also during this time that FINRA failed to detect the high-profile Madoff and Stanford Ponzi schemes (Madoff’s broker-dealer operation was “by definition within...FINRA’s jurisdiction,” according to securities law scholar John Coffee). And as the Journal points out, in the run-up to the financial meltdown of 2008, FINRA tended to focus on filing cases against its smaller members, rather than supervising the larger brokerage firms whose excessive risk-taking helped to fuel the crisis.

FINRA’s 990 form shows that Merrill pocketed $1.4 million in 2008, a year in which the organization’s top 20 executives were paid nearly $30 million.

In an attempt to describe Merrill’s positive achievements, the Journal notes that she “helped to successfully merge the enforcement departments of the NASD [National Association of Securities Dealers] and NYSE [the regulatory arm of the New York Stock Exchange].” What the article doesn’t mention is that this “successful” merger, which led to FINRA’s creation in 2007, has come under much critical scrutiny, as several former NASD members filed a lawsuit alleging that the organization’s leadership—including current SEC Chairman Mary Schapiro—lied to members about the merger in order to secure their vote. Unfortunately, U.S. District Judge Jed Rakoff recently decided to dismiss the suit, arguing that self-regulatory organizations (SROs) such as FINRA are protected by absolute immunity.

The article also notes that Merrill brought several auction rate securities (ARS) cases against Wall Street firms during her tenure. But as Larry Doyle at Sense on Cents points out, this is a complete joke. Not only is the $4 million fine cited in the article a drop in the ocean compared to the $150 billion in frozen ARS investments, but FINRA also liquidated its own $647 million ARS investment in 2007 as the market was starting to collapse, without giving any warning to investors. But since FINRA is allowed to operate with almost zero transparency, the public still doesn’t have the full story about what Merrill and other executives knew about the collapse of the ARS market, among many other things.

In our letter to Congress last month calling for a critical examination of FINRA and other SROs, we highlighted Merrill’s previous employment at Davis Polk—a top law firm representing some of the largest financial firms in the world—as an example of how FINRA appears to be overly cozy with the industry it is supposed to be regulating.

Now that she’s leaving FINRA, there are no rules prohibiting her from returning to Davis Polk or any other private sector firm. In fact, she would be in good company. Davis Polk’s website boasts that many of its “current and former lawyers have held prominent positions with the relevant law enforcement agencies and financial regulators, including the SEC, DOJ, Treasury, FDIC, OFAC and CFTC.” This list includes Linda Chatman Thomsen, who herself was the former Director of Enforcement at the SEC. (Last year, Thomsen was investigated by the SEC Office of Inspector General (OIG) for “improperly disclos[ing] non-public information to a senior executive of a large investment bank who was a former SEC Senior Official.” That “senior executive” was another former Director of Enforcement, Stephen Cutler, who left the SEC and ended up as General Counsel of JPMorgan, during which time he contacted Thomsen to seek assurances that his new employer would not be sued in the course of acquiring Bear Stearns, according to the OIG.) And another former head of NASD enforcement, Barry Goldsmith, is now a partner at Gibson Dunn, which also represents some of the world’s largest financial firms. Notice a trend here?

As the Senate debates overhauling the financial regulatory system, POGO hopes they will take Merrill’s departure as an opportunity to scrutinize FINRA’s record, and to question whether self-regulators can really be trusted to protect the investing public.

Founded in 1981, the Project On Government Oversight (POGO) is a nonpartisan independent watchdog that champions good government reforms. POGO’s investigations into corruption, misconduct, and conflicts of interest achieve a more effective, accountable, open, and ethical federal government.

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