SEC to FINRA: Toughen up standards, penalty fines are too low

FINRA, the Financial Industry Regulation Authority, came under fire recently to toughen its sanctions and enforcement actions against financial firms and Wall Street executives. The Wall Street journal recently reported that during a 5 year period through 2013, FINRA trailed the SEC in the number of fines issued against financial firms and individuals. The report found that compared to the SEC, which imposed fines of $1million or more 259 times through 2013, FINRA issued only 55, an average of less than once per month. The analysis also showed that the SEC’s largest penalties reached upwards of $300 million, while FINRA’s fines amounted to just $12 million. Following the report, SEC commissioners urged FINRA employees to update and strengthen the standards used to determine financial punishments against Wall Street wrongdoers. Penalties must have a significant impact and send a strong enough message, the commissioners said, to hold perpetrators responsible and discourage unlawful actions.

While the SEC oversees FINRA and holds a broader jurisdiction over the financial industry, FINRA regulates over 4,000 brokerage firms and over 600,000 individual brokers. The report found that the $74.5 million the agency collected in penalty fines made up just 2% of the SEC’s $3.4 billion total last year. While FINRA uses money collected from fines to finance capital expenditures, the SEC uses the money to for government costs. Both agencies also use a portion of the funds to pay restitution fees to harmed investors. And while the SEC usually handles larger cases involving big firms, FINRA’s cases tend to target individual brokers, as well as operational breakdowns and control issues. FINRA officials said these types of penalties are generally lower than the major fraud-based cases and explain contrasts with the SEC’s fines. The agency was clear to point out that its action on Wall Street helped to expose over 650 instances of suspected insider trading and other fraud, banning 429 brokers and suspending 670.

In response to the WSJ report, FINRA agreed to review its penalty process and examine sanctions against repeat offenders and large firms, ensuring that its policies send a clear, firm message throughout the industry. Financial organizations should stay cognizant of future SEC and FINRA policy changes, as well as up to date on and up to date on major cases that involve heavy fines and penalties.

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About the Author

Jennifer Sharkey is a Senior Vice President at William Gallagher Associates and Leader of the firm’s ExecutiveRisk Practice. She is responsible for the strategic and tactical leadership of this practice by providing consulting, marketing and negotiation expertise on Directors’ & Officers’ Liability, General Partnership Liability, Private Equity/VCAP, Fiduciary Liability, Fidelity, Kidnap/Ransom & Extortion, Employment Practices Liability and Professional Errors & Omissions Liability.

617.204.6706 | jsharkey@wgains.com | Connect with Jennifer on LinkedIn
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