A La Vista executive, whose investment advisory company paid $5.8 million in a conflict-of-interest settlement last spring, is now a board member of a nongovernmental agency that helps regulate the U.S. investment industry.
Jim Nagengast, chief executive and president of Securities America Inc., said he campaigned for election to the board of the Financial Industry Regulatory Authority, commonly known as FINRA, in part by criticizing the agency’s practice of “rule-making by enforcement.”
Financial advisers sometimes discover that they have violated a rule only when they are disciplined by FINRA, Nagengast said. To be fair, new or revised rules should be proposed, reviewed thoroughly and then enacted so advisers know them in advance, he said.
“The industry as a whole wants to abide by the rules and wants to protect investors,” Nagengast said. “It’s in everybody’s best interest that we’re protecting investors.”
But Barbara Roper of Pueblo, Colorado, director of investor protection for the Consumer Federation of America, said advisers should be penalized for violations that may not be specifically spelled out in regulations but that are clearly against FINRA’s principles for protecting investors.
“You can’t place your interests ahead of the customer’s,” said Roper, who also is a member of FINRA’s investor issues group. “It’s not that complicated a policy.”
Nagengast said his reasons for seeking a seat on FINRA’s board of governors, representing the industry’s large broker-dealers, did not include the settlement that Securities America paid last spring, but rather his desire to provide a voice for middle-American investors and their financial advisers. He declined to comment on the settlement.
Securities America agreed to the settlement with the Securities and Exchange Commission, the government agency that regulates the investment industry and oversees FINRA. The SEC and FINRA operate separately, although both enforce rules of conduct for financial advisers.
The Securities America settlement last April was one of dozens targeting firms across the country in recent years in which the SEC alleged that financial advisers unfairly enriched themselves by putting clients’ money in investments with unnecessary fees, a practice the SEC said was “widespread.”
Richard DeFusco, a finance professor at the University of Nebraska-Lincoln, said the SEC alleged a serious breach of Securities America’s financial advisers’ duties to their clients, but said he doesn’t know that the firm has a generally bad reputation.
Securities America was not alone in being disciplined by the SEC for not disclosing conflicts of interest over the excess investment fees, DeFusco noted. Since the large firms elected Nagengast to the FINRA board, DeFusco said, “they obviously feel that this is the guy they want to see represent them.”
In fact, the Financial Services Institute, which represents independent financial advisers and financial services firms, endorsed Nagengast for the FINRA seat, saying he would be “a tremendous representative for our industry.”
Dale Brown, the institute’s president and CEO, said in a statement before the election that Nagengast “will represent our industry and the investors we serve well. Jim has been a highly visible leader in our industry, at FSI and in his community, providing insights and expertise on the future of the financial advice space, and through his extensive charitable work. Jim’s vision, integrity and experience will help FINRA in all aspects of its critical work.”
Nagengast earned a bachelor’s degree magna cum laude at Harvard University in 1987 and a master’s degree in business from Columbia University in 1992, joining Securities America two years later. He has been chairman of Heartland Family Services in Omaha.
Securities America has grown into one of the 10 largest independent broker-dealers in the country, with 2,571 registered advisers. Its Omaha office had 379 employees in 2011 and has 682 today, with revenue doubling to $800 million a year in that time.
Construction is due to start soon on a 65,000-square-foot addition on its headquarters near Interstate 80 and Giles Road, where it moved in 2008 from near 72nd Street and West Center Road.
FINRA is a not-for-profit organization authorized by Congress to oversee the broker-dealer industry, including enforcement actions, certifying financial advisers and arbitrating disputes between advisers and their clients. It was formed in 2007 by combining the National Association of Securities Dealers and the regulation, enforcement and arbitration operations of the New York Stock Exchange.
Nagengast became one of its 24 governors when he won an election in June with a seldom-used petition campaign, defeating the candidate nominated by the FINRA board’s nominating committee. The FINRA board does not have authority over the SEC.
He and two other FINRA governors represent the 174 largest U.S. brokerage firms, with 500 or more financial advisers each. The voting result was a “convincing margin,” Nagengast said in an interview. “I think in politics you would say it’s a mandate.” FINRA directors are paid $90,000 a year for up to two three-year terms.
He said his criticism of “rule-making by enforcement” is one of four “pillars” of his campaign for the seat, along with seeking greater transparency and more diversity in the financial industry and his experience running a broker-dealer firm from the Midwest.
Roper, the consumer advocate, said she doesn’t know Nagengast or the details of Securities America’s settlement or his election to the FINRA board. She said she supports FINRA’s objectives, believes there are many good people in the financial industry and respects many of FINRA’s board members and staff.
She said being disciplined by the SEC or FINRA would not disqualify someone from being on the FINRA board.
But she said that when investment advisers say they don’t want rule-making by enforcement, “what they’re saying is, ‘I want to be able to get away with anything that isn’t very concretely and particularly spelled out in the rules.’ And that is a recipe for disaster for investors.
“There is simply no way to write a detailed rule for every circumstance that might arise,” she said, so the SEC and FINRA use enforcement actions to correct brokers’ conduct so that they follow the basic principle of putting their clients’ best interests first.
In response, Nagengast said, “Providing financial guidance is not a zero-sum game, with financial advisers on one side and retail investors on the other.
“Rule-making by enforcement is a good example of this, as a practice that harms retail investors by potentially driving up costs, while impairing the ability of financial advisers to deliver high-quality, consistent guidance,” he said. “In fact, it’s hard to think of any industry where a lack of consistent, up-front transparency on rules would benefit the end consumer.”
In the FINRA election, which industry publications called an upset, Nagengast defeated Shelley O’Connor, co-head of Morgan Stanley’s wealth management operation in New York City. Asked for reaction, Morgan Stanley declined.
It was the first time a person used a petition to win election to represent large firms on the board, although small-firm candidates have used petitions successfully. Nagengast succeeded Stephen Cutler, who resigned from the board and from JPMorgan Chase & Co. to join a law firm. Cutler had two and a half years left on his three-year term.
Besides its CEO, the FINRA board has three large-company members, one medium-sized company member, three small-company members, 13 “public” members who aren’t affiliated with broker-dealers and three others representing insurance and investment companies.
“I really felt that with my background, I felt I had a unique perspective to represent the Main Street and stand up for the little guy,” he said. “I wanted to make sure that this board was not dominated by a Wall Street viewpoint.”
Nagengast, originally from Bloomfield, Nebraska, was an unsuccessful candidate for University of Nebraska regent in 2006.
Securities America, which was founded in Omaha in 1984, has more than 600,000 clients, the company says, with $86 billion in client assets under its supervision. It’s owned by Miami-based Ladenburg Thalmann Financial Corp.
In the April settlement, Securities America did not admit or deny allegations by the SEC that between 2012 and 2016 some of its financial advisers, who are independent contractors, put client money into investments that carried unnecessary fees and didn’t disclose that they would profit from those fees.
The same investments were available without those fees and would have earned clients more money, the SEC said. Securities America was censured and paid “disgorgement” of the excess fees totaling $4,473.025.50 plus $580,423.14 in interest and a $775,000 civil penalty.
Because such practices are so common, in February — after the Securities America case was underway — the SEC offered to reach settlements without civil penalties for individual financial advisers and broker-dealers that self-reported violations. That offer expired June 12.
Nagengast’s second meeting as a FINRA governor is Wednesday and Thursday in New York City. He said he plans to raise the rule-making issue during his term on the board, as well advocate for his other campaign pledges.
“If you campaign on something,” he said, “you ought to keep your word, try to get that accomplished.”