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Project on Government Oversight

POGO Letter to FINRA Calling for Open Board Meetings

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December 8, 2010 | By: Michael Smallberg

Richard Ketchum
Chairman and Chief Executive Officer
Financial Industry Regulatory Authority
1735 K Street
Washington, DC 20006
 
Dear Mr. Ketchum:
 
The Project On Government Oversight (POGO) is writing to urge you to bring more transparency and accountability to the Financial Industry Regulatory Authority (FINRA). As a first step, we call on you to fulfill the mandate from FINRA’s members to make FINRA Board meetings open to the public.

As an independent watchdog that champions good government reforms, POGO has a keen interest in ensuring that our nation’s financial regulatory watchdogs—including self-regulatory organizations (SROs) such as FINRA, which currently oversees over 4,600 brokerage firms operating in the U.S.[1]—are operating with sufficient transparency and accountability to their members, investors, and taxpayers.

POGO is troubled by the FINRA Board of Governors’ rejection of several reform proposals recently submitted by Amerivet Securities and approved by FINRA’s members. As you know, these proposals called on FINRA to: 1) disclose in each annual report the compensation approved for the most highly paid FINRA employees and the amount paid to compensation consultants; 2) provide an independent study on the ties between FINRA and Bernie Madoff; 3) disclose more information on FINRA’s investment transactions, policies and practices; 4) provide transcripts of FINRA’s Board meetings; 5) give FINRA members a non-binding “say on pay” for the five most highly compensated FINRA employees; 6) employ an independent private-sector inspector general to oversee FINRA’s performance; and 7) disclose FINRA’s correspondence with the IRS concerning the regulatory merger that led to FINRA’s creation.[2]

Among the numerous proposals rejected by FINRA’s Board,[3] we were particularly disappointed to see that it has decided not to post transcripts from its meetings—a proposal that was approved by more than three-fourths of FINRA’s voting members.[4] In fact, this was a relatively modest proposal—in addition to providing transcripts, FINRA’s Board should also make its meetings open to any member of the public who wishes to attend.

The Amerivet proposals come at a critical moment in FINRA’s history, as Congress considers granting additional authority to FINRA or other SRO to assist with the oversight of hedge funds and investment advisers.[5] POGO believes that FINRA’s Board and management need to demonstrate far more transparency and accountability before being given any additional authority to regulate financial markets.

In a notice sent to FINRA’s members on July 12, 2010, the FINRA Board explained that it objects to providing transcripts of its meetings because: 

  • The Board already communicates to FINRA’s members through notices, an Annual Financial Report, and other means
  • The Board does not currently transcribe its meetings
  • Transcribing meetings could stifle candid deliberations among Board members
  • The proposal makes no exceptions to protect against the release of sensitive or proprietary information
  • The Board is not aware of any corporation that transcribes and publishes transcripts of board meetings[6]

Many of the objections raised by FINRA’s Board simply do not hold up to scrutiny. Annual financial reports, notices, and other means of limited communication are no substitute for full transcripts of Board meetings. For instance, in a letter to FINRA’s members on September 28, 2010, describing the results of the Board meeting in which the Amerivet proposals were rejected, the Board provided very little information on what actually happened at the meeting.[7] Based on the limited information provided in this letter, it is hard to know how the Board arrived at its decisions. It would be useful to know, for instance, whether there was any disagreement at the Board meeting between the Governors representing the public’s interest and those representing industry.

The fact that FINRA’s Board does not transcribe its meetings is itself troubling. Many federal advisory committees with far less responsibility post transcripts from their open meetings, in addition to briefing materials, slides, agendas, conflict-of-interest waivers, recusal statements, and more.[8] We see no reason FINRA’s Board could not do the same. In addition, we are confident that a rule could be proposed allowing FINRA to close any portion of a Board meeting that would reveal preliminary deliberations or confidential information. Such provisions are a common feature in the rules governing open meetings at government agencies.[9]

POGO is also concerned by the Board’s wholesale rejection of other proposals approved by FINRA’s members. According to the letter recently sent to FINRA’s members describing the Board’s decision[10]: 

  • The Board is satisfied with a report issued by a special review committee which found no inappropriate connections between FINRA and the Madoff family
  • The Board states that FINRA members should not even have a non-binding say on the compensation paid to FINRA executives
  • The Board has not disclosed IRS correspondence regarding a payment made to member firms when FINRA was created in part because “Board members were thoroughly briefed about the correspondence from counsel”
  • The Board states that FINRA does not need to be overseen by an independent watchdog similar to an inspector general because it is already monitored by two internal offices and overseen by the Securities and Exchange Commission (SEC). 

The Board’s rejection of these proposals is troubling given that: the special review committee that examined the connections between FINRA and Madoff was headed by members of FINRA’s Board[11]; FINRA paid its top ten executives a combined $11.6 million in 2009[12]; recent lawsuits have alleged that former officials misled member firms about the payment limit imposed by the IRS[13]; and countless officials have gone through the revolving door between FINRA and the SEC, raising questions about the SEC’s ability to conduct independent oversight. For instance, SEC Chairman Mary Schapiro is the former CEO of FINRA, and while she has been barred for one year from participating “personally and substantially in any particular matter involving specific parties in which FINRA is a party or represents a party,”[14] she soon will have no such restriction. The fact that Schapiro accepted nearly $9 million in compensation and retirement benefits from FINRA when she left in 2009 is particularly troubling.[15]

It is hardly surprising that FINRA’s members are calling for more transparency and accountability. The member firms pay significant fees in order to keep the organization in operation—in 2009, FINRA collected over $700 million in regulatory fees, user fees, dispute resolution fees, transparency services fees, and contract services fees.[16] In the same year, FINRA’s leadership used the dues collected from its members to pay its top ten executives $11.6 million,[17] to spend over $1 million lobbying Congress and the SEC,[18] and to spend undisclosed amounts on advertisements in The Washington Post and on CNN touting its record.[19] Especially given these recent spending decisions—not to mention the Board’s fiduciary duty to act in the best interest of FINRA’s members—the member firms have every right to request more detailed information on the Board’s decision-making process, and to call for truly independent oversight of the organization. 

The need for greater transparency at FINRA—including open Board meetings—is further heightened by the fact that the SEC has to spend taxpayer dollars to oversee FINRA’s activities. Last month, you wrote that “private funding is a critical advantage of the SRO model. Millions of dollars can be spent on examination, enforcement, surveillance and technology at no cost to the taxpayer” (emphasis added). But you go on to list all the ways in which the SEC supposedly conducts ongoing oversight of FINRA: approving FINRA rulemaking; adding, deleting, or amending FINRA rules; reviewing FINRA disciplinary actions; inspecting FINRA to ensure that it is fulfilling its regulatory responsibilities; and more.[20] The fact that the SEC has to conduct routine oversight of FINRA entitles taxpayers and investors to more information on FINRA’s activities.

Making FINRA’s Board meetings open to the public would give FINRA members, investors, taxpayers, and other stakeholders a much-needed glimpse into FINRA’s affairs. Without more transparency and accountability, and at the very least more open meetings, the idea of giving FINRA or other SRO additional regulatory authority is foolhardy.

Thank you for your leadership on this important matter. If you have any questions, please contact Angela Canterbury or Michael Smallberg at (202) 347-1122.

Sincerely,

Danielle Brian
Executive Director
 
cc:        SEC Chairman Mary Schapiro
            House Committee on Oversight and Government Reform
            House Committee on Financial Services
            Senate Committee on Banking, Housing, and Urban Affairs
            Senate Committee on Homeland Security and Governmental Affairs
            FINRA Board of Governors
            FINRA Members


[1] Financial Industry Regulatory Authority, “FINRA Statistics.”  (Downloaded December 8, 2010)

[2] Letter from Lt. Col. Elton Johnson, Jr., to FINRA Members, “Amerivet Securities, Inc. Proxy Proposals for FINRA 2010 Meeting,” July 29, 2010.

[3] Financial Industry Regulatory Authority, “Update: FINRA Board of Governors Meeting,” September 28, 2010.  (Downloaded December 8, 2010) (hereinafter “Update: FINRA Board of Governors Meeting”)

[4] Votes from FINRA’s 2010 Annual Meeting.  (Downloaded December 8, 2010)

[5] 111th Congress, “Dodd-Frank Wall Street Reform and Consumer Protection Act” (Public Law 111-203), July 21, 2010, Sections 416 and 914. (Downloaded December 8, 2010)

[6] Financial Industry Regulatory Authority, “Election Notice: Notice of Annual Meeting of FINRA Firms and Proxy,” July 12, 2010. (Downloaded December 8, 2010)

[7] “Update: FINRA Board of Governors Meeting”

[8] Food and Drug Administration, Advisory Committees, “Committees & Meeting Materials.”  (Downloaded December 8, 2010); and Securities and Exchange Commission, “SEC Investor Advisory Committee.”  (Downloaded December 8, 2010)

[9] 94th Congress, “Government in the Sunshine Act” (5 U.S.C. § 552b(c)).  (Downloaded December 8, 2010); and Securities and Exchange Commission, “Closed Meetings,” 17 CFR Part 200.402.  (Downloaded December 8, 2010)

[10] “Update: FINRA Board of Governors Meeting”

[11] Financial Industry Regulatory Authority, Report of the 2009 Special Review Committee on FINRA’s Examination Program in Light of the Stanford and Madoff Ponzi Schemes, September 2009.  (Downloaded December 8, 2010)

[12] Jesse Westbrook, “Finra Managers Got $11.6 Million in 2009 Amid Pay Criticism,” Bloomberg, October 1, 2010.  (Downloaded December 8, 2010) (hereinafter “Finra Managers Got $11.6 Million in 2009 Amid Pay Criticism”)

[13] Stephen Labaton, “S.E.C. Choice Is Sued Over a Merger of Regulators,” The New York Times, January 11, 2009.  (Downloaded December 8, 2010)

[14] Letter from Mary L. Schapiro to William Lenox, Ethics Counsel and Designated Agency Ethics Official, Securities and Exchange Commission, January 11, 2009.

[15] Financial Industry Regulatory Authority, Report of the Amerivet Demand Committee of the Financial Industry Regulatory Authority, Inc., September 13, 2010.  (Downloaded December 8, 2010); and Tyler Durden, “Mary Schapiro, Whose Pay Was Benchmarked To CEOs Of Investment Banks And The NYSE, Received A Farewell Payment From FINRA Of $8,985,334.02,” Zero Hedge, October 11, 2010.  (Downloaded December 8, 2010)

[16] Financial Industry Regulatory Authority, FINRA 2009 Annual Financial Report. http://www.finra.org/AboutFINRA/AnnualReports (Downloaded December 8, 2010)

[17] “Finra Managers Got $11.6 Million in 2009 Amid Pay Criticism”

[18] Center for Responsive Politics, “Lobbying Spending Database – Financial Industry Regulatory Authority, 2009.”  (Downloaded December 8, 2010)

[19] Sarah Lynch, “New Finra Ad Campaign Talks Tough on Fraud,” Dow Jones, June 15, 2009.

[20] Letter from Richard Ketchum to Elizabeth Murphy, Secretary, Securities and Exchange Commission, “Commission Study on Enhancing Investment Adviser Examinations Mandated by Section 914 of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (‘Dodd-Frank’),” November 2, 2010.  (Downloaded December 8, 2010)

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