First Shot Fired In PIABA’s War On The Securities Industry

From Ulmer’s Broker-Dealer Law Corner Blog
By Alan M. Wolper

A week or so ago, I highlighted in a post the acceptance speech of PIABA’s incoming president, Andrew Stoltmann, in which he announced his intent to wage “war” on the securities industry. Bluster aside, Andrew has been true to his word.  His opening volley is an attack on the public governors who sit on FINRA’s Board, alleging that some of them have ties to the industry that raise significant conflicts of interest, compromising their ability to serve as public governors.  Indeed, PIABA has published a flashy report – co-authored by a real professor! – that analyzes the data and concludes that FINRA is not meeting its goal of investor protection.

The thing is, I don’t know if PIABA is right about this; frankly, I don’t really care if it’s right. I don’t care if the public members of the FINRA Board do, in fact, have ties to the securities industry.  And that’s because I have had an issue with the composition of FINRA’s Board for a very long time.  Remember, it was not that long ago that FINRA – which, after all, is a “self regulatory organization” – was run by – wait for it – actual members of the securities industry.  Indeed, up until 1996, NASD’s Board was principally and overwhelmingly comprised of people associated with broker-dealers.  While there might have been the occasional public member, there was no requirement that there be any, and they played a minor role.

In 1995, however, Senator Rudman and his Congressional Committee issued their Reportscrutinizing NASD’s work, and suggested, among other things, some wholesale changes to the Board.  Then, shortly after that, the SEC issued its infamous 21a Report of NASD, concluding that the regulator had some serious issues, issues that derived from overly cozy relationships between NASD staff and the industry committee members (but only in New York, at the District 10 District Business Conduct Committee, and in DC, at the Market Surveillance Committee). In its effort to appease the SEC and avoid the imposition of any real sanctions, NASD basically capitulated and voluntarily agreed to adopt the Rudman Report’s recommendations regarding the composition of its Board, which included ensuring at least an equal number of public members.

Here’s what occurred to me at the time, and what still bothers me: how can NASD/FINRA truly consider itself to be a self-regulatory organization if the people that run it are not from the very industry it regulates? Many FINRA rules have reasonableness standards.  But, we are not talking reasonableness in the general sense of the word; we are talking what is reasonable for a broker-dealer to do.  Only someone with industry experience is truly capable of making this judgment effectively.  Maybe public governors could have some role in an oversight capacity, to ensure that FINRA is doing its job correctly.  But, to allow public governors to be able to dictate the standards to which FINRA holds its member firms, to decide the direction that FINRA takes its strategic initiatives, well, that is not self-regulation.

The other point to make is that PIABA is nothing if not predictable. Given its druthers, PIABA would remove anyone from FINRA who actually knows anything about the securities industry.  Remember, PIABA is the reason that there is no longer a requirement that there be an industry member on arbitration panels.  It argued to FINRA that somehow, having someone on the panel who knows something about securities created an unlevel playing field, tilted in favor of the respondents.  Naturally, FINRA folded in the face of this pressure (notwithstanding the fact that likely not a single member firm agreed with the argument), concerned that if it did not, Congress would find additional reasons to question the validity of pre-dispute agreements that compel customers to arbitrate their disputes, rather than going to court, which would end FINRA’s virtual monopoly on securities disputes.  So, now I have the pleasure of arguing cases – regardless of their complexity – to panelists who may not know a stock from a bond.

And that is exactly how PIABA wants it. PIABA doesn’t care about the law; it cares about the ability of its members to make panelists feel badly for claimants.  That’s why most arbitrations end up being fights about “fairness,” not about the application of actual statutes or regulations; in PIABA’s world, it is always unfair that a customer incurs a loss, no matter that investments inherently have risks, no matter how robust the risk disclosures may be, no matter the documents that claimant may have signed.

If PIABA is able to remove from the FINRA Board any public member who has the slightest degree of association with the securities industry, imagine the customer-friendly rules that PIABA lobbyists could work towards. Things are bad enough now for broker-dealers: too many rules, too much money to comply, too much Enforcement actions.  The last thing they need is a bunch of Board members who come to the table with the view that any investor who loses money has, necessarily, been the victim of broker misconduct.