Selecting the Public's Representatives in the Financial Regulatory Process

Financial regulations issued and enforced by the Financial Industry Regulatory Authority (FINRA) affect the public by setting the level of investor protection available.  If things go awry, FINRA regulation also governs the rights the public has in industry-controlled arbitration. 

Structurally, FINRA is a quasi-governmental organization that allows the industry to regulate itself under supervision from the SEC.  While the industry elects a substantial number of FINRA's board members, its bylaws also call for the majority of the board to be "public" governors. The board's nominating committee, which includes industry-elected members, selects the "public" representatives.  

This picking process has resulted in some surprising choices for public representatives.  I took a close look at the current board and discovered some interesting things.  According to one version of FINRA's annual report, Robert W. Scully served as one of the "public" board members as of June 15, 2016.  In May 2016 he was elected to serve on the board of UBS--a major financial services firm.  It struck me as odd that a public representative would concurrently serve on a financial service's firm's board.  Interestingly, the contents of FINRA's previously issued annual report recently changed to omit Mr. Scully's name.  His name was also scrubbed from FINRA's website.  I am not aware of any information about when Mr. Scully actually stopped serving as a public representative on FINRA's board or when any discussions about joining the UBS board began.  It may be that he promptly resigned as soon as he began to discuss joining UBS's board.

 Susan Antilla at The Street reached out to FINRA for comment about the industry connections of FINRA's public board members.  In her evaluation, the reality is that a majority of FINRA's board appears to have very close industry connections:

But by my count, only eight represent the public -- the result, in part, of the wide berth Finra allows for recent retirees from the finance industry to fill pubic seats. So if you're wondering why things don't always turn out so well for Mom and Pop when they entrust money to a broker, you might ponder the balance of power on Finra's board.

Is there a better way to pick public representatives?  I give my idea after the jump.

The difficulty with the current process is that it may be particularly vulnerable to industry capture.  If the nominating committee has five members, with three public members and two industry members, a single public member that votes with the industry members to select future board members can result in a radically different board.  Of course, picking public representatives is a difficult task.  We want people with sufficient sophistication to be effective but without the sort of entangling ties that might make them too tame.

I suggest we shift the appointment power for public representatives outside FINRA and to public processes.  Perhaps public entities such as the Consumer Financial Protection Bureau, SEC, Department of Labor, and Treasury should nominate candidates.  It's hard to say who would emerge from this process, but it seems like these agencies have a strong interest in FINRA's performance and would be able to select reasonably competent candidates that might not be as likely to be torn in different directions.

Consider Randal Quarles as an example of a public representative that might possibly feel pulled in different directions.  Both versions of FINRA's 2015 annual report identify him as a public representative.  The U.S. Chamber of Commerce also identifies him as one of its board members.   The U.S. Chamber describes itself as "representing the interests of more than 3 million businesses of all sizes, sectors, and regions."  While the business and public interests often align, concurrent board service raises questions about how to balance these interests if they conflict.