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FINRA's Fines

The Wall Street Journal reports that the Financial Industry Regulatory Authority is reviewing its penalty guidelines to make sure they are appropriately severe. This review follows a speech by Securities and Exchange Commission member Kara Stein, in which she opined that FINRA penalties are "too often financially insignificant for the wrongdoers" and urged FINRA to make penalties high enough to be "impactful, and provide strong motivation for compliance." It is good that someone at the SEC is paying attention to FINRA, but a blanket suggestion to raise penalties may serve only to exacerbate problems that arise from FINRA's inadequate accountability structure.

Although often characterized as a self-regulator, FINRA describes itself as an independent regulator. Indeed, it is largely independent of the industry and of the government--a regulator with governmental powers, but no matching accountability. More than half of its directors are public interest directors; only 10 of the 23 outside directors represent industry. The public interest directors are not directly accountable to anyone, so it is not clear whose interests they represent. While the SEC oversees FINRA and reviews some of its decisions, FINRA's enforcement settlements typically do not get reviewed. Regulated entities sign on to these settlements, but they have little leverage with a regulator whose favor they need to retain. FINRA has a built-in incentive to push for higher fines since it spends them on capital expenditures and regulatory projects. Particularly if it is trying to make a public relations case that it is a tough regulator, FINRA might not employ the careful case-by-case assessment of facts that justice requires.

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Rafael Mangual
Project Manager,
Legal Policy

Manhattan Institute


Published by the Manhattan Institute

The Manhattan Insitute's Center for Legal Policy.