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FINRA Board Rife With Conflicts: PIABA

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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. 

“However, there is almost no oversight of FINRA by the Securities and Exchange Commission (SEC), no Capitol Hill appointment process, and very little information provided to the investing public,” the report claims.

FINRA issued the following statement in response to the PIABA report: “In March, FINRA issued a Special Notice seeking comment on its engagement programs – including transparency with respect to Board governance. PIABA expressed its views on this issue in a comment letter, which we are considering along with other comment letters received. FINRA’s Board of Governors has a robust appointment process in place to select new Governors who will serve to help further FINRA’s mission.”

Benjamin Edwards, associate professor of law, University of Nevada, William S. Boyd School of Law, who co-authored the report, added that “unlike the process for appointing commissioners to the SEC, or the leading officials of other government agencies, public processes play little role in the appointment of public governors to FINRA’s board of governors. These public governors do not sit before congressional committees to explain their qualifications as public governors. They are also not subject to the same federal ethics disclosure laws.”

He noted that FINRA is also “not now subject to the federal Freedom of Information Act so the public has only a limited ability to keep an eye on the persons appointed to protect their interests.”

After reviewing the current group of public governors, Edwards continued, “our primary concern is that an organization dedicated to investor protection should have more persons that have spent time as investor advocates on its governing board.”

The PIABA report highlights concerns about the following governors:

  • Eileen Murray, a public governor since 2016, is the co-CEO of the world’s largest hedge fund, Bridgewater Associates.  
  • Shelley Lazarus has served as one of FINRA’s public governors since 2013. Lazarus serves on the board of The Blackstone Group, a global alternative asset manager handling $366.6 billion as of Dec. 31, 2016. Blackstone has multiple FINRA member subsidiaries, including Blackstone Advisory Partners L.P. Lazarus was an executive at Ogilvy & Mather from 1995 through 2012. She now serves as chairman emeritus of Ogilvy. In 2015, Ogilvy created FINRA’s BrokerCheck advertising campaign.
  • William H. Heyman, currently the chairman of FINRA and called a public governor even though he is the chief investment officer of The Travelers Cos. and previously served in the NASD (the predecessor to FINRA) as an “industry governor.” He has served for the last 14 years on the Board of Governors even though FINRA’s bylaws expressly limit public governors to two three-year terms.
  • Carol Anthony Davidson has been a public governor since 2013, even though he joined the board of Legg Mason Inc., in 2014. Legg Mason is a global asset management firm and has a FINRA member subsidiary, Legg Mason Investor Services LLC. Davidson’s 14,906 shares give him a more than $500,000 stake in Legg Mason. Davidson serves on at least five corporate boards and six different FINRA Board Committees.
  • Joshua S. Levine serves as a “public governor” while working as a managing director affiliated with Kita Capital Management LLC. Levine’s LinkedIn profile makes clear that he co-founded Kita Capital Management LLC and that it provides “capital, operations and advice to technology-driven organizations.” Although his current FINRA profile indicates that he has served as a managing director for Kita without interruption since 2005, past FINRA annual reports characterized him as “retired.” The PIABA report notes that inconsistent disclosures raise questions about the quality of FINRA’s disclosures and governance.

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