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Finra Weighs Tougher Stance

6/19/2014

Wall Street Journal

The Financial Industry Regulatory Authority, a Wall Street watchdog overseen by the Securities and Exchange Commission, is considering tougher penalties for misconduct after criticism from an SEC official that its sanctions are too lenient.

In the five years since the financial crisis, Finra, which is funded by the industry, didn’t discipline any Wall Street executives. It imposed fines of $1 million or more 55 times through 2013, compared with 259 times for the SEC, according to a Wall Street Journal analysis. The SEC oversees a wider number of firms and range of conduct.

Susan Axelrod, Finra’s executive vice president of regulatory operations, said in an interview the watchdog would review its guidelines to make sure penalties are “meaningful and will have an impact.”

She rejected any suggestion its punishments have been insufficient, adding that Finra, as “the cop on the beat from Wall Street to Main Street,” should not be judged just on its biggest fines. “We’re going to bring the action against the individual broker in Des Moines, Iowa, that other regulators are not going to bring. That’s a key part of our mission.”

Finra announced its review this week after seeing the Journal analysis, which included a study of cases obtained through open-records requests and available through public filings.

The move also followed a speech last month by Kara Stein, one of five commissioners who run the SEC, in which she told Finra employees that she was concerned Finra’s enforcement actions were “too often financially insignificant for the wrongdoers.”

“I would encourage you to examine your sanctions and update them,” she said. Ms. Stein didn’t respond to a request for comment, and a spokeswoman for the SEC declined to comment.

Financial regulators across the board have been criticized by lawmakers following the financial crisis for not doing enough to hold the people running Wall Street firms accountable for perceived wrongdoing. The SEC itself has come under scrutiny, leading to Chairman Mary Jo White vowing to get tougher on enforcement.

Finra regulates more than 4,100 brokerage firms and 600,000-plus individual brokers. The SEC, the top U.S. securities regulator, has about five times as many enforcement officials.

The SEC’s fines against financial firms in that five-year period reached as high as $300 million, whereas Finra’s highest was $12 million, the analysis shows. The $74.5 million in penalties imposed by Finra on brokerage firms and brokers last year was 2% of the SEC’s $3.4 billion tally for its financial year, according to the analysis.

Finra uses fines for capital expenditures, a spokeswoman said, while SEC fines generally go to the government’s coffers. The total sanctions for both regulators also include restitution paid to harmed investors.

Critics said Finra’s penalties are out of whack with the industry it regulates. The fines are “so small compared to the kind of behavior they’re trying to discourage that you scratch your head and say, ‘Really?’ ” said Philip Aidikoff, a Beverley Hills, Calif., lawyer who represents investors in arbitration claims against brokerage firms.

In the review of its sanctions, Finra will look particularly at repeat offenders and at the biggest firms. “We want to move the ball forward in terms of really bad actors,” said Ms. Axelrod.

“These sanctions can’t be the cost of doing business; they have to send the right message to the industry,” she said.

A Finra spokeswoman said 63% of its fines in actions against brokerage firms were for $500,000 or more. For cases involving fines of $1 million or more, the average fine was more than $2 million, the spokeswoman said.

The SEC will inevitably have higher sanctions than Finra, Ms. Axelrod said. Where the two watchdogs’ areas overlap, the SEC tends to take the most serious, fraud-based cases. A lot of Finra’s cases against the big firms, in contrast, involve operational breakdowns or control issues, in which penalties are generally lower, she said.

Finra and the SEC work closely together, “using our resources to address the myriad of conduct that’s occurring, not all jumping on a single case,” said Ms. Axelrod. Last year, Finra referred 660 instances of suspected insider trading or other fraud to the SEC and was thanked publicly for its help in at least 30 cases filed by the SEC, she said.

Finra spearheads efforts to deal with bad brokers, last year barring 429 and suspending 670, Ms. Axelrod said. Action against individuals “is one of the things that other regulators really count on Finra to do,” she said.

According to the Journal’s analysis, Finra took action against individuals in one-quarter of its 259 enforcement actions involving fines of $1 million or more in the five years through 2013.

In February, Finra disciplined an executive at Brown Brothers Harriman & Co., a relatively small Wall Street firm, as well as fining the firm itself $8 million for alleged anti-money-laundering failures. A spokesman for Brown Brothers declined further comment beyond the firm’s statement at the time, which said it had taken steps to address the issues identified by Finra. Brown Brothers neither admitted nor denied wrongdoing.

Ms. Axelrod said that in every case against a firm, Finra looks to see if there are also grounds for taking action against individuals. “Where we can, we will tie in the conduct to an individual supervisor or up the line even further. It does become more difficult the higher someone is up the chain,” she said.

Finra hasn’t set a deadline for completing its sanctions review, which it announced on Monday at a Thomson Reuters event. The work could take more than a year, officials said.

“The most important thing is getting this right,” said Ms. Axelrod. “Our enforcement cases are the most visible things we do and the way we send messages to the industry.”


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