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Monday, August 29, 2016

The Missing Million Dollar Man

Financial self-regulatory organizations play an important role in investor protection.  Like other institutions, they also have governance scandals.  When Richard Grasso served as the head of the New York Stock Exchange from 1995 to 2003, he somehow managed to secure a eye-popping $140 million in special retirement compensation even though the NYSE was, at that time, a non-profit.  Observers speculated that Grasso may have secured such a large payday for himself in part because of his influence over selecting his own compensation committee:  

Many of the directors of the NYSE (including members of the Compensation Committee) were subject to regulation by Mr. Grasso himself, as chairman and CEO of the NYSE. During the periods relevant to the litigation, Mr. Grasso was authorized to appoint the members of the Compensation Committee (subject to board approval) and to select one of the members as the chairperson of the committee (the selection of the committee chairperson did not require board approval). 

Given this history of governance problems at financial self-regulatory organizations, the SEC should vigilantly monitor this area.  Unfortunately, that isn't what has happened.  In 2012, the Government Accountability Office released a report finding that the SEC had “conducted limited or no oversight of . . . FINRA’s . . . governance and executive compensation.”  FINRA itself does not disclose much information about the backgrounds of its public governors.  In many instances it simply lists them as "retired."  

In my last post, I shared how Robert W. Scully, one of FINRA's public governors, recently disappeared from FINRA's website and annual report.  This former public governor now serves as a director on UBS's board (a large financial institution with brokerage businesses regulated by FINRA).  Because the case of FINRA's mysterious disappearing public governor piqued my interest, I reached out to Sarah Haan, my favorite corporate election expert and figured a few more things out.

 She helped me piece together that while Scully officially joined the UBS board on May 10, 2016, cause of concern may have arisen much earlier.  For example, he was on the management's publicly announced "agenda" for the board on April 5, 2016.  This raises questions about when he actually began discussions with UBS and when or whether he began to recuse himself from FINRA's board.   Interestingly, a position as a UBS Director comes with significant compensation and offers "a average pay of $1.2 million per director . . . the highest pay of any company in the the Stoxx Europe 50."  With this looming potential payday, disclosure and conflict management seem critical.  

While this makes for a fascinating investigation, there is a bigger point here.  Mr. Scully has a long history as an industry leader.  He formerly served as a managing director at Lehman Brothers and the co-president of Morgan Stanley's asset management division.  While he undoubtedly knows the industry well, it seems likely that the current selection process may favor persons with his background because the industry prefers to see familiar faces on the "public" side of the table.  Is this the best way for public representatives to be selected?


Posted by Benjamin P. Edwards on August 29, 2016 at 11:01 AM | Permalink


Thanks, Ben. Always nice to see some good business-law-related blogging at Prawfs...shame it's so rare...

Posted by: BDG | Aug 30, 2016 10:03:56 AM

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