As loyal readers are undoubtedly already aware, I used to work for NASD, and Michael more recently came to Ulmer from FINRA.  That hardly means we win every FINRA Enforcement case we are engaged to defend.  To suggest that because we came through the “revolving door,” FINRA does whatever we suggest is, frankly, absurd.  I only wish it was true!  – Alan 


This week, FINRA named the CEO of Janney Montgomery Scott to its Board of Governors. Last week, FINRA hired the CCO of Charles Schwab to head its Member Regulation department. A few weeks ago, the former head of Member Regulation joined Merrill Lynch as its Chief Supervisory Officer. And the ill-informed, politically-motivated, and unsubstantiated cries of the supposed perils of the revolving door have followed.

In an article about the new Board member, one critic of the revolving door, who hails from investor advocacy group Public Citizen, was quoted as saying: “The revolving door means the cops on the beat and the perps can be confused in the blur.” This statement is ridiculous. First, there is no confusion over who works for who. Those who work in the securities industry know when they receive a call or letter from FINRA, and those who work for FINRA know who works in the industry, with or without the aid of CRD records.

Second, to refer to FINRA as “cops” and the industry as “perps” is ignorant, offensive, and wrong. While there may be a few bad apples in the securities industry – as there are in any bunch, industry, or profession – the overwhelming majority of FAs try to do right by their customers. It is hard to succeed in the securities industry or any other service business for that matter without referrals from satisfied customers. I’ll also add that I was surprised to see someone from a group that touts itself as a champion of democracy and citizen’s interests ascribing malicious intent to an entire group of people.

Third, FINRA is a self-regulatory organization authorized by federal law, and registered with the SEC. The Securities Exchange Act of 1934, as amended by the Maloney Act, requires that FINRA’s rules “assure a fair representation of its members in the selection of its directors and administration of its affairs.”[1] FINRA’s Board consists of 24 persons – ten seats for industry members, thirteen seats for public members, and one seat for its CEO. Therefore, it should come as no surprise that the CEO of a FINRA member was appointed to FINRA’s Board. In fact, he took the seat previously occupied by the former head of another firm.

The President of the Public Investors Arbitration Bar Association (PIABA) was recently quoted in an article saying: “If you want true stringent regulations, a compelling argument can be made that these people shouldn’t come from the securities industry.” Setting aside the issue of whether stringent regulations and enforcement, as opposed to principles-based standards and reasonable enforcement, do not make sense in many cases, a more compelling case can be made that those running, and working at, FINRA should come from the industry.

The securities industry is a complex one. To successfully work at a firm, represent a firm in many legal matters, or regulate a firm, you need to have more than just a basic understanding of how stocks and bonds work. You cannot properly regulate that which you do not understand. That is precisely why FINRA hires executives and managers with securities industry experience. FINRA is not alone in this regard. Most companies prefer to hire executives and managers with relevant experience, and to keep their executives and employees with that experience from working at competitors, through non-competition and non-solicitation agreements. I can’t really imagine a company hiring only people who have no relevant experience, but I suppose the conversation would go something like this: “I know that we are a healthcare company, and that you have twenty years of experience and proven success in the healthcare industry, but we really are looking for someone who knows nothing about the healthcare industry to run the company.” That’s absurd. People with relevant experience bring their knowledge and experience to the table, and companies pay for, and benefit from, that knowledge and experience. Indeed, it makes perfect sense that FINRA would hire the CCO of a reputable firm to run its examinations program. She presumably is familiar with securities rules and regulations, and the policies, procedures, and systems that firms implement to comply with those rules and regulations.

Another problem with the arguments made by critics of the so-called revolving door is the reality of living and working in this country. Once you gain experience in an industry or field, you are free to use that experience to leverage a better paying or otherwise more desirable job. Simply because you worked as a securities regulator does not mean that you are confined to working in the securities industry only as a regulator for the rest of your life. And conversely, because you worked at or for a firm does not mean that you cannot work for a securities regulator. FINRA presumably has internal rules that govern conflicts of interests, such as prohibitions on working on a matter involving a friend, family member, former employer, or former client. FINRA Rule 9141 prohibits its former officers from appearing on behalf of a client in a FINRA disciplinary proceeding for a year after leaving the company.

My final problem with the critics is that they assume the worst in people. In other words, they assume that people who have worked at or for a firm, or who may do so at a later date, can’t function appropriately as regulators because of some hidden agenda or inherent bias. Critics cite no empirical or statistical data to support their proposition. There are, however, many lawyers and compliance consultants who have track records of success working both at FINRA and on behalf of firms.

The revolving door is much ado about nothing.

[1] 15 U.S.C. § 78-o-3(b)(4).