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September 2010 Board Update

September 28, 2010

Dear Executive Representative:

As you know from my August 13 email, the FINRA Board of Governors committed to review at its September meeting the non-binding proxy proposals that had been approved by a majority of firms. Today, I want to report to you on our discussions on these matters and outline the actions the Board has agreed to take. 

After careful consideration, the Board instructed FINRA staff to take steps on the following proposals:

  • Executive Compensation: FINRA will disclose compensation details for its 10 most highly compensated employees each year. Compensation for 2009 will be reported in the audited annual financial report, scheduled for release later this week. Beginning in 2011, a separate report on executive compensation will be posted on FINRA's website. FINRA will continue to report the direct and indirect compensation of a broader list of highly compensated officers on an annual basis in its Form 990.
  • Investment Manager Disclosure: Beginning with the release of its audited 2009 annual financial report, FINRA will publish the names of the money management firms that it hires to manage its portfolio. FINRA will continue its practice of posting its annual financial report on our website each year.
  • Regulatory Proposal Notification: The Board carefully analyzed the proxy proposal with respect to having transcripts of all Board meetings made public and determined that such an action would significantly affect the candor of board discussions. However, the Board recognized the desire by firms for more transparency after Board meetings. To that end, FINRA will communicate to firms and publish on its website rulemaking items discussed and decisions the Board has reached on new rules. The first such notification is included below and available on our website.

The Board's instructions to FINRA staff took into full consideration both the proposals' specific recommendations and their underlying call for greater transparency. The Board's determination with regard to the proxy proposals also reflects its responsibility to ensure the integrity of its processes and deliberations, carry out its fiduciary obligations, and shield FINRA from undue external influence so that we can carry out our important mission of protecting investors.

With that in mind, and understanding that I don't speak for every Board member, let me set out the reasons why action was not taken on the other four proposals:

Regarding the "say on pay" proposal, the Board believed that it raised serious problems for FINRA because of its potential to create the perception that regulated entities had the power to improperly intimidate regulatory staff. In fact, FINRA's Management Compensation Committee is composed entirely of public board members for this reason—so that industry governors cannot make recommendations regarding compensation of regulatory staff.

On the proposal to have an independent study of current and/or former FINRA officer and director involvement with the Madoff Family, the Board believes this issue was fully addressed by its Special Review Committee last year, which concluded that no staff relationships with the Madoff family influenced FINRA's regulatory efforts.

Regarding the proposal to disclose IRS correspondence about the $35,000 NASD member payment, the Board decided that it would not be in the interests of the organization to release the letter, since the information sought is under seal by a federal court. It is important to note that all Board members were thoroughly briefed about the correspondence from counsel before reaching this determination.

The fourth proposal, which requested the creation and employment of an independent, private-sector inspector general, was rejected by the Board due to the fact that FINRA already has its regulatory operations independently reviewed by a number of entities. FINRA is subject to comprehensive, regular oversight by various divisions of the SEC. Additionally, within FINRA there already exist two offices, Internal Audit and the Office of the Ombudsman, which provide the types of review contemplated in the proposal.

Please know that I am committed to enhancing FINRA's transparency with firms. To that end, I will continue to update you on key FINRA initiatives and other regulatory matters after each Board of Governors' meeting and sooner if events warrant.


Richard Ketchum Signature

Richard G. Ketchum
Chairman and CEO

Rulemaking Items Discussed at the September 2010 Meeting

  • Arbitration. The Board approved amendments to FINRA's arbitration rules specifying that investors making a claim against any broker-dealer firm will have the option of only selecting a panel of all-public arbitrators. These proposed changes extend a pilot program introduced two years ago with 14 firms. If the rule is approved by the SEC, the net effect will be that any investor, regardless of the firm or the type of case, will have the freedom to choose all public, rather than industry, arbitrators. We expect to make the rule filing with the SEC next month. Read the news release.
  • Disclosure. The Board approved the filing of a concept release on a possible new rule that would require firms, at or prior to commencing a business relationship with a retail customer, to provide a written statement that describes the types of accounts and services it provides. Firms would also be required to disclose the conflicts associated with such services. We expect to publish the concept release next month.
  • Statutory Disqualifications. The Board approved filing with the SEC a new rule that would provide that FINRA will reject a new member application if a statutory disqualification exists for either the applicant or one of its associated persons. In addition, the Board approved amendments to FINRA's rules on eligibility proceedings that would restrict certain members' or a new member applicant's ability to seek association with a disqualified person. We plan to make these rule filings with the SEC next month.