SEC names co-directors of enforcement

A group of plaintiffs’ lawyers is criticizing the governance of the Financial Industry Regulatory Authority (FINRA), the U.S. securities industry’s self-regulatory organization, pointing out in a new report that several of FINRA’s public governors have strong ties to the industry.

The Public Investors Arbitration Bar Association (PIABA) — a non-profit association of lawyers who represent plaintiffs in securities litigation and arbitration proceedings —argues in its report that six of FINRA’s 13 current and immediate past public governors “appear to have conflicts of interest either in terms of industry ties through direct employment or because of other board memberships.”

For example, the report notes that the list of public governors includes a top executive at one of the world’s largest hedge funds, a Blackstone Group director and a former “industry” governor who has been recast as a “public” governor.

“Unfortunately, FINRA’s 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,” says Andrew Stoltmann, the PIABA’s president and co-author of the report. “This report 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.”

FINRA should address conflicts of interest with its current roster of “public governors,” limit overlapping and excessive participation on other boards and consider nominating public governors with a demonstrated interest in investor protection issues, the PIABA report says.

“After reviewing the current group of public governors, 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,” says Benjamin Edwards, associate professor of law at the University of Nevada, Las Vegas, the report’s other co-author. “FINRA should also more closely police conflicts of interest on its governing board. If it does not, the odds of Congressional intervention into its governance will increase.”

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