The Financial Industry Regulatory Authority’s board is rife with conflicts of interest, with six of the 13 current and immediate past public governors appearing to have conflicts because they’re employed by an industry firm or because of other board memberships, according to a just-released report by the Public Investors Arbitration Bar Association, a trade group for lawyers who represent investors suing their brokers.
Red-flag examples of so-called “public” members of FINRA’s board with conflicts include the co-CEO of the world’s largest hedge fund, a board member of the Blackstone Group, and a former “industry” governor that FINRA simply relabeled as a “public” governor, states the PIABA report, “FINRA Governance Review: Public Governors Should Protect the Public Interest.”
Andrew Stoltmann, PIABA’s president who co-authored the report, said that “FINRA’s Code of Ethics states that FINRA ‘serves as a protector of investors and guardian of market integrity.’ Unfortunately, FINRA’s Board of Directors, called its Board of Governors, has public board members who have very deep ties to the securities industry thereby putting them in a potential conflict of interest situation.”
The report, Stoltmann continued, “shows that many FINRA public governors have material Wall Street ties, serve on too many corporate boards to effectively represent the public, and face other conflicts of interest,” and raises a “major red flag since FINRA’s public governors are supposed to play a vital watchdog role with Wall Street’s self-regulatory organization for brokerage firms, including setting the rules for how many protections ordinary investors receive when doing business with FINRA’s member firms.”
While FINRA characterizes itself as “independent,” its governance structure involves very little transparency and allows the securities industry to exert substantial control over FINRA’s operations.
FINRA’s governing board consist of 13 public governors, 10 industry governors, and one seat for its CEO.
FINRA’s by-laws state that its public governors may have no “material business relationship” with a broker, dealer or other self-regulatory organization.