Is obscure Wall Street policeman really protecting investors?
For a regulatory agency dedicated to protecting investors, the Financial Industry Regulatory Authority has some explaining to do.
Thus sayeth a group of lawyers who do battle with FINRA on behalf of investors. FINRA is the private Wall Street regulator policing brokers and their firms. Oversight is provided by the U.S. Securities and Exchange Commission.
The lawyers — members of the Public Investors Arbitration Bar Association — take issue with a handful of people that FINRA has chosen to represent the public on the organization’s board.
They include: Eileen Murray, co- CEOof $160 billion Bridgewater Associates, the world’s largest hedge fund; Shelley Lazarus, a director of Black stone Group, a $385 billion investment management firm; and William Hey man, the chief investment officer of The Travelers lawyers say Mr. Hey man has been on FINRA’s board 14 years even though the organization’ s bylaws limit public directors to three, two-year terms.
“Our primary concern is that an organization dedicated to investor protection should have more persons [who] have spent time as investor advocates on its governing board,” said Benjamin Edwards, a University of Nevada, Las Vegas law professor.
Mr. Edwards and Chicago attorney Andrew Stoltmann, who is president of the lawyers group, told reporters on a conference call Wednesday that six of the 13 so-called FINRA board members who are supposed to represent the public have ties to the investment industry and other conflicts of interest.
FINRA’s board also has 10 governors who represent the industry. The combination of those 10 and the industry-tainted “public” governors “allows the securities industry to exert substantial control over FINRA operations,” Mr. Stoltmann told reporters.
Asked why the regulator would appoint so many industry insiders to its leadership team, Mr. Edwards said: “They may think the most-qualified people are the people who look like themselves.”
FINRA defended what it said is “a robust appointment process.”
Whetherthey represent the industryor the public, directors are “responsiblefor serving in an unbiased andobjective manner, and voting on mattersfor the good of the investors, industryand marketplace,” the agencysaid in an emailed statement.
“Board members need to have an understanding of the issues ... and an ability to apply their knowledge and expertise those issues ,” it added.
Why should investors care about the governance of FINRA, which most of them couldn’t distinguish fromthe alphabet soup of agencies residing in the nation’s capital?
Because any investors who have a problem with a broker or brokerage firm will more likely than not have to turn to FINRA for help.
A 1987 U.S. Supreme Court decision allowed brokerage firms to force investors to sign agreements requiring that any disputes be submitted to arbitration rather than being taken to court.
FINRA oversees those arbitration proceedings, so the policies approved by its board have a lot do with how investor interests are protected through arbitration.
Investors should also be concerned on a broader front.
Last month, Congress overturned a Consumer Financial Protection Bureau rule that made it easier for consumers to file class-action lawsuits against banks and credit card companies. The bureau, created in the wake of the 2008 financial crisis, was intended to protect consumers and investors from the kinds of abuses that contributed to the crisis.
But Republicans like House Financial Services Committee chairman Jeb Hensarling, R-Texas, who thinks CFPB head Richard Cordray epitomizes “capricious, unaccountable bureaucrats,” have other ideas of what constitutes consumer protection. Mr. Cordray announced Wednesday he will resign at the end of the month.
Another group that thinks it knows best when it comes to protecting investors is the financial industry interests balking at the fiduciary rule, which requires advisers to put their clients’ interests ahead of their own.
At a time when consumer protections are being challenged on a broad front, investors have to hold on to any protections they can. Even if it’s only 10 seats on the board of a regulator that few investors even know exists.