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FINRA's Profits Should Come With a Price

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Last Friday, the Financial Industry Regulatory Authority (FINRA), the frontline regulator of securities firms, reported a $10.5 million profit for 2012. As the profit suggests, FINRA is not a typical regulatory agency. It is quasi-private, which means it can do things like bank its profits and pay its CEO $2.25 million. It's good that FINRA is not losing millions, as it did in 2008 when it lost nearly $700 million largely because of losses on its risky investment portfolio. Nevertheless, FINRA's profits and losses remind us that it should not enjoy the same liberties that a government regulator does.

FINRA is subject to some degree of oversight by the Securities and Exchange Commission, but it is still a powerful regulator that, in many ways, looks a lot like an arm of the government. FINRA membership is legally required for most broker-dealers. FINRA exercises a lot of power over member firms and employees. In 2012, for example, it kicked 30 firms and hundreds of individuals out of the securities industry and imposed approximately $69 million in fines. It can use those fines for capital expenditures and regulatory projects, which gives it an unseemly incentive to impose large fines.

The exercise of government-like power by a non-governmental body raises concerns. FINRA needs to be reminded that it is not on equal footing with government regulators, who are politically accountable for their decisions. Unfortunately, the Securities and Exchange Commission does not always keep FINRA in check. Last month, for example, the commission gave FINRA greater authority to publish its disciplinary proceedings, including complaints that have not yet been adjudicated. More transparency sounds good, but potentially career-ending allegations by a regulator that is not part of the government should be tested before they become public. Instead, even complaints that have been withdrawn or dismissed will be posted. Any regulator should be careful in publicizing mere allegations of wrongdoing, but quasi-private regulators that exercise governmental powers should be even more constrained.

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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.