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Judge's Ruling Helps FINRA Keep Its Records Behind Closed Doors

As described in our latest podcast, POGO sent a letter to Congress last week calling for increased oversight of the Financial Industry Regulatory Authority (FINRA), a self-regulatory organization (SRO) that oversees thousands of securities broker-dealers, and is supposed to be looking out for the interests of the investing public. In our letter, we raised numerous concerns about FINRA’s cozy relationship with the industry it is tasked with regulating, its failure to protect investors from the Madoff Ponzi scheme, its outrageous executive compensation packages, and its lack of transparency, among other things.

One thing we didn’t mention is that current and former FINRA executives—including current SEC Chairman Mary Schapiro—have also been accused of making misleading statements regarding the merger that created the organization. FINRA was formed in 2007 through a consolidation of the National Association of Securities Dealers (NASD) and the regulatory arm of the New York Stock Exchange (NYSE). NASD members were supposed to receive a payment made possible by the cost savings resulting from the merger. But several former NASD members filed a lawsuit alleging that Schapiro and other executives misled members in order to secure their vote, telling them that the IRS had limited the payment amount to $35,000 per firm, when in fact the IRS didn’t issue its final determination until two months after the NASD members voted in favor of the merger. Meanwhile, the merger resulted in Schaprio getting a 57 percent pay raise.

Over the past few years, a number of journalists and news organizations have written to Judge Jed Rakoff, U.S. District Judge for the Southern District of New York, asking him to unseal materials that could potentially shed some light on the suspicious circumstances surrounding FINRA’s creation. Unfortunately, Judge Rakoff decided earlier this week to dismiss the lawsuit, ruling that “SROs and their officers are absolutely immune from private damages suits challenging official conduct performed within the scope of their regulatory functions.” A copy of Judge Rakoff’s ruling is available here.

 The plaintiffs are considering an appeal, but in the meantime, Judge Rakoff’s ruling highlights yet another problem with FINRA—as a commenter at Sense on Cents points out, it’s “interesting that FINRA has the benefit of a quasi governmental entity, i.e. immunity, but not the customary burden of a governmental entity—transparency.” This lack of transparency only adds to the perception that FINRA is more concerned with shielding the large broker-dealers and paying out lavish salaries to its executives than it is with protecting the investing public.

In the past week or two, we’ve received dozens of calls, emails, and faxes in response to our FINRA letter. Some said that we didn’t go far enough in criticizing FINRA’s shortcomings, and that we should be looking into other issues such as FINRA’s forced arbitration process, which generates handsome fees for the organization but often requires member firms to spend precious resources defending themselves against frivolous allegations. Others said that we unfairly criticized FINRA’s failure to regulate some of its larger member firms whose speculative investments fueled the financial crisis, since much of that activity took place outside of FINRA’s official jurisdiction. Some reminded us that the SEC’s track record of regulating the broker-dealers is hardly any better than FINRA’s, and that investors ultimately benefit from having more cops on the beat. Others argued that FINRA does nothing but give investors a false sense of security. And a number of commenters remarked that while there are inherent problems with the self-regulatory model, the perennial lack of funding at the SEC has resulted in an agency that is perpetually overworked and understaffed, and that the SRO model is a flawed but necessary solution.

If any blog readers have other suggestions or tips for our investigation into FINRA, please feel free to leave us a comment below.

By: Michael Smallberg
Investigator, POGO

Michael Smallberg, Investigator Michael Smallberg is an investigator for the Project On Government Oversight. Michael's investigations center on oversight of the financial sector.

Topics: Financial Sector

Related Content: Financial Oversight, FINRA

Authors: Michael Smallberg

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