Mark Taylor
Senior Editorial Manager
The US brokerage industry’s self-regulatory body is under pressure to explain why its enforcement caseload has plummeted, with senior political figures pushing for a more aggressive approach.
Investigations by the Financial Industry Regulatory Authority (FINRA) have dropped to “the lowest levels in the agency’s history”, according to a recent Bloomberg report, despite its promises to do more to clean up markets.
FINRA issued 426 enforcement actions last year, and its caseload has nearly halved since its peak in 2015.
Total fines were also half at $88.4m, compared to their 2016 peak of $173.8m.
FINRA’s mission is “to protect investors and promote market integrity”, but US Senator Elizabeth Warren told the agency’s president, Robert Cook, “financial crimes cannot be prevented if you take the cop off the beat”.
What is FINRA being asked to explain?
In a letter, Warren wrote to Cook to say she believes “that the decline in enforcement is part of a deliberate deregulatory effort”.
A February study by a former Securities and Exchange Commission lawyer revealed the drop in FINRA’s enforcement actions and noted that the body appeared to be focusing on “low hanging fruit”.
Warren also accused FINRA of not being entirely transparent about its enforcement activity, noting that only 10 press releases concerning cases were published from 426 actions.
“It is unclear how this represents an improvement in investor protections,” Warren wrote.
A FINRA spokesperson has said “any suggestion that we have let up on our regulatory focus is just dead wrong” and claimed that the decline is due to “reduce[ing] the number of bad actors.”
But Warren claims that there’s “no evidence to that effect”.
Warren, a senior senator, has led efforts in Congress to protect investors and enhance transparency at FINRA.
She wants to know why the cases were opened, and how many triggered enforcement actions, fines, expulsions and broker suspensions.
The agency said it would respond in writing to Warren’s points, and has a deadline of September 13.
Is FINRA due for a shake-up?
The self-regulatory body was founded in 2007 to regulate member brokerage firms and exchange markets and is the largest independent supervisor for securities firms.
Its board comprises industry and public members, and as part of its powers it is mandated by the US Securities and Exchange Commission (SEC) to sanction registered members and firms that breach securities laws, and FINRA’s own rules.
Cook, a white-collar lawyer partner and US Securities and Exchange Commission official took charge of FINRA in 2016.
He introduced changes to how FINRA interacted with brokers, and industry experts believe the reduction in cases is down to the increased quality of enforcement.
“There are definitely firms whose business models are so disparate and margins are so tight that it is cheaper for them to pay periodic multimillion-dollar fines than to devote the resources necessary to meet their compliance obligations,” said Brad Bennett, former enforcement chief at the agency, now managing partner at Vernon’s Gate Partners.
“For those firms, increased enforcement is obviously a bad thing,” Bennett said.
Failure to enforce ‘restricted' labels on high-risk brokers
Separate criticism of the agency has also bubbled up in regard to FINRA’s attempts to give high-risk broker-dealers a public ‘restricted’ label.
Researchers from SLCG Economic Consulting, which specialises in securities litigation and arbitration, found that FINRA has not categorised any firms since the rule entered force in June 2023.
SLCG identified 13 firms it believes should be restricted, based on the number of brokers with adjudicated client complaints, regulatory events, or ties to brokers from formerly expelled firms.
“Evaluating firms for a restricted firm designation is a multi-step, annual process based on key metrics, member firm remediations, and FINRA’s ongoing risk monitoring,” a spokesperson for the agency said.
FINRA barred 3,640 individuals and expelled 130 firms from its membership between 2014 and 2023, according to figures.
High-risk firms and associated individuals who had been the subject of multiple disciplinary actions were behind many of the numbers, FINRA said by way of explaining the decline in enforcement actions.
“Other high-risk firms withdrew from our membership following considerable regulatory attention,” a spokesperson said. During that period, the regulator’s enforcement actions resulted in $377.9m ordered to be returned to harmed investors, they said.
“Sad to see this happen to my beloved FINRA,” added Bennet. He said he believed enforcement results “are a direct reflection of the efficacy of FINRA’s examination, surveillance, and fraud detection functions”.
“When you turn your examination function into a help desk, dismantle the key parts of your fraud detection operation that identify problem brokers, and double down on surveillance patterns that are incapable of identifying significant violations, the Enforcement results will be exactly what we are currently seeing from FINRA,” he said.
CUBE comment
The future of FINRA is in doubt given the anger directed at the agency for the drop in enforcement activity it has registered in recent years.
In response to barbs from senators, the likely outcomes are either an uptick in cases opened in response to the criticism, or a total overhaul of the agency and a new set of directives.
For firms, the uncertainty will almost certainly lead to greater levels of oversight and supervision in the short term, as the agency seeks to respond to the government’s probing.
The regulatory landscape could move fast. To anticipate and react to emerging trends proactively, look to technology-powered solutions like CUBE.
Find out how CUBE can help today.