Investment News reported last week that the Financial Industry Regulatory Authority’s (FINRA) operating revenue decreased while its income from fines nearly doubled in 2016. FINRA made up for a 6% decrease in operating revenue with $173.6 million in income from fines, up from $93.8 million in 2015. FINRA’s members are understandably concerned by these increasing fines.
For those unfamiliar with securities regulation, FINRA was formed in 2007 in a merger between the regulatory branches of the National Association of Securities Dealers and the New York Stock Exchange, and it regulates broker-dealers in the United States. Generally, FINRA investigations and prosecutions settle before they reach final evidentiary hearings. In recent years, however, the fines resulting from investigations and enforcement actions have increased, partly as a response to the 2008 financial crisis and the resulting political demands to increase regulation on Wall Street. FINRA’s answer to congressional and public criticism has been to hire more enforcement personnel and other employees. More employees require more economic resources. In 2007, FINRA employed 3,000 workers. Now the company employs more than 3,500 (a 17% increase), despite that over this same period membership in FINRA dropped from 5,000 firms to 3,800 (a 24% decrease). Fines and member fees, not taxes, fund these expansions.
We have experienced FINRA’s efforts to collect increased fines during our negotiations with FINRA enforcement on behalf of our securities clients. We have recently noted that, even before serving a Wells Letter or commencing an enforcement action, FINRA enforcement lawyers are insisting on fines that are at the high end of FINRA’s published guidelines. At the same time, however, we have experienced FINRA enforcement’s willingness to listen to opposing views, and to reduce its demands in negotiations. However, we encourage FINRA members to remain cautious when FINRA begins an investigation. If the investigation is going to end in a settlement, the amount of the fine is likely to be higher than the member might expect.