FINRA’s Executives Prosper While Investors Suffer

FINRA’s mandatory arbitration system does little to help individual investors.

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I can fully understand why FINRA’s chief executive Richard Ketchum reported in the organization’s most recent annual report that 2012 was “a solid year.” I assume he meant it was a bonanza for him and his fellow regulators at the industry-sponsored agency that makes a pretext of self-regulating its members.

Daniel Solin
Daniel Solin
Ketchum earned a staggering $2,629,705 in total compensation, and his colleagues were also handsomely rewarded. Todd Diganci, the CFO of FINRA, earned $1,246,523. Robert Colby, FINRA’s chief legal officer, joined the organization in June and earned $559,615, including a $300,000 bonus. Let’s put these salaries in perspective.

The President of the United States earns $400,000. The Chief Justice of the United States earns $227,000.

You might wonder why Ketchum earns more than five times the President’s salary or why the chief legal officer of FINRA earns more than twice the salary of the Chief Justice of the United States. The answer is simple: It’s a great investment for the securities industry.

For the entire year in 2012, FINRA levied fines of only approximately $69 million and obtained restitution of a paltry $34 million. These numbers are a round-up on the petty cash report of major brokerage firms. Tepid enforcement of this sort is not cheap.

FINRA’s real value to the securities industry is the mandatory arbitration system it runs to protect its members from having to pay meaningful awards to hapless investors whose savings have been plundered by the misconduct of their brokers. Every investor who does business with a FINRA broker is required to submit to this process, which was accurately described by William Galvin, the Secretary of the Commonwealth of Massachusetts, as "an industry sponsored damage-containment and control program masquerading as juridical proceeding."

Galvin’s views were recently supported by The North American Securities Administrators Association (NASAA), which sent a letter to the Chairman of the SEC stating: "It has been our longstanding position that the 'take it or leave it' approach represented by these mandatory clauses is harmful to investors."

Don’t confuse FINRA mandatory arbitration with arbitration by impartial administrators like the American Arbitration Association. Arbitration administered by these agencies can offer savings in time and cost to the participants. In contrast, FINRA-administered arbitration falls into an entirely different category. It’s the securities industry sitting in judgment of itself, with predictable results. It’s not surprising that an independent study by researchers at Pace Law School and the University of Cincinnati found that participants in FINRA mandatory arbitration proceedings came away from their experience with “a strong negative perception of the bias of the arbitrators.”

The entire concept of “self-regulation” of the securities industry is flawed. The process is dysfunctional and twisted. FINRA is a captive to the firms it is supposed to regulate. While its “regulators” decide on their next cruise destination, investors (as usual) are left holding the bag. Their savings are depleted by an industry run amok. Efforts to recover from the brokers who did them in are effectively thwarted.

It’s an appalling, indefensible system.

Dan Solin is the director of investor advocacy for the BAM Alliance and a wealth adviser with Buckingham Asset Management. He is a New York Times best-selling author of the Smartest series of books. His latest book, 7 Steps to Save Your Financial Life Now, was published on Dec. 31, 2012.

The views of the author are his alone and may not represent the views of his affiliated firms. Any data, information and content on this blog is for information purposes only and should not be construed as an offer of advisory services.