A Love Triangle Only Wall Street Could Love

Happy Wednesday, and welcome back to Dry Powder.
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Happy Wednesday, and welcome back to Dry Powder.

In today’s note, I take a look at the paradoxical motivations of FINRA—Wall Street’s de facto arbitration system—through the lens of a peculiar case, one that I first covered years ago for Bloomberg, which pitted a trio of arbiters against one of the world’s biggest banks. Newsworthy developments have caused me to return to the case, but the saga is also fascinating in and of itself.

As always, you can shoot me your feedback (or tips) by replying directly to this email. My inbox is always open.

Bill

A Love Triangle Only Wall Street Could Love

Revisiting an endless scorched-earth FINRA saga that could only take place in the culture’s most bizarrely regulated industry. Merrill, Wells Fargo, Greenberg Taurig, Lowenstein Sandler: this has ‘em all.

WILLIAM D. COHAN

The Financial Industry Regulatory Authority, or FINRA as it is known, is one of Wall Street’s most obscure, yet powerful, institutions. It bills itself as the financial service industry’s self-regulatory organization, separate from state regulators or the kahunas in D.C., like the Securities and Exchange Commission and the Federal Reserve. It’s also a bizarrely profitable enterprise. In 2021, FINRA had revenue of $1.4 billion, nearly 80 percent of which, or $1.1 billion, came from fees for the regulatory services that it provided to the very Wall Street firms that it was regulating. FINRA had nearly $220 million of net income in 2021, around half of which came from realized and unrealized investment gains on its multi-billion dollar portfolio of stocks and bonds. So, you know, not to put too fine a point on it, but FINRA has a bit of a built-in conflict of interest.

Nevertheless, FINRA is perhaps best known for attempting to regulate the hundreds of thousands of Wall Street brokers, who invest the savings of some 145 million Americans in the stock and bond markets. FINRA operates an online database of brokers that contains information about where brokers have worked, what required tests they have taken and passed (Series 7, Series 63, etc.) and whether they have misbehaved. Less well known is that FINRA also largely operates the justice system on Wall Street—a bureaucracy of arbitration that people who have brokerage accounts, or people who work on Wall Street, have no choice but to employ if they have a monetary dispute with the banks...

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