The Financial Industry Regulatory Authority wants to give the industry it helps regulate a bigger role in its oversight, proposing the first major shakeup in decades to the Wall Street watchdog’s governing board.
The move would shift the board’s makeup to a majority of representatives from firms versus non-industry members. The public-member majority structure has been in place since 1996, when the Securities and Exchange Commission required Finra’s predecessor to implement reforms to prevent potential conflicts of interest and address enforcement issues.
Finra said in a proposal filed with the SEC earlier this week the factors in play 30 years ago “are significantly different from the environment Finra faces today.”
“The changes preserve important safeguards for Finra’s regulatory mission and consensus-driven approach to governance,” the regulator said in a statement.
Finra’s board oversees the activities of the self-regulatory organization, which can bar or suspend bad actors and levy financial penalties. The regulator also tracks stock and option trades, with its surveillance teams sending tips and referrals to the SEC about potential insider trading and stock manipulation schemes.
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The proposal, which calls for a minimum of seven industry governors and at least five from the public, would bring Finra’s board makeup in line with other market self-regulators, like the National Futures Association, which helps oversee the derivatives industry. The proposal also calls for shrinking the number of governors to a maximum of 20 instead of 25.
Former SEC Commissioner Hester Peirce in a 2015 academic paper argued Finra’s current structure means it’s not accountable to industry or the public. “An organization run by a board that is dominated by people who are not in the industry is not an SRO; it is a regulator with industry representation,” Peirce wrote, referencing a self-regulatory organization.
But the proposal is also likely to stoke questions about Finra’s independence.
“A regulator that’s not just ideologically captured but actually structurally captured by the entities its regulates, you really have to question not just willingness but also its ability to do its job,” said Tyler Gellasch, chief executive officer of the Healthy Markets Association.
The SEC will take public comment on the proposal for 21 days.
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