Washington INsider

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Mark Schoeff Jr. looks at what's really happening on Capitol Hill - and the upshot for advisers.

Finra's fine money whets appetites of investor advocates, experts, industry representatives

Suggestions for uses range from establishing funds for harmed investors, those whose arbitration awards go unpaid or giving it to the Treasury Department

Oct 23, 2017 @ 1:47 pm

By Mark Schoeff Jr.

The $176.3 million in total fines Finra levied last year has mouths watering like a succulent burger coming off the grill. Investor advocates, members of Congress, scholars and industry representatives all want to take a bite.

In the last couple of months, Finra has been pressed regarding what it does with fine proceeds. The industry-funded broker-dealer regulator's opacity in this area was highlighted in September in an in-depth InvestmentNews analysis of the Financial Industry Regulatory Authority Inc.

Then it was brought up by lawmakers at a Finra oversight hearing conducting by a House Financial Services subcommittee. The topic also was raised earlier this month in an event at the Heritage Foundation featuring Finra president and chief executive Robert W. Cook.

Not only is there an expanding chorus calling on Finra to better explain how it allocates its fine money, there also is a growing wish list of what it should do with its take.

In the House Financial Services subcommittee hearing, Rep. Brad Sherman, D-Calif., suggested that a chunk of the Finra fine money be returned to investors harmed by broker violations of Finra rules.

Another idea is for Finra to use the fine proceeds to ameliorate one of its most vexing problems — unpaid arbitration awards. A study by the Public Investors Arbitration Bar Association showed that investors who won arbitration cases ended up being stiffed to the tune of $62 million in 2013, a quarter of the awards that year.

The fine largess looks inviting to the new PIABA president, Andrew Stoltmann.

"They could use $60 million of it to wipe out the unpaid arbitration problem," Mr. Stoltmann said.

Another group that might want to tap the fine pool for unpaid arbitration is the Financial Services Institute.

At the Heritage Foundation event, David Bellaire, FSI executive vice president and general counsel, asked Mr. Cook whether Finra had considered using fine money to pay arbitration awards when brokers go bankrupt. Mr. Cook didn't directly answer that portion of Mr. Bellaire's multiple-part question.

The host of the event, Heritage scholar David Burton, suggested that Finra consider establishing an "investor reimbursement fund" or giving some of the fine proceeds to the Treasury Department.

In his appearance at Heritage, Mr. Cook reiterated what Finra says about fine revenue in its annual report. The organization uses the money, which fluctuates from year-to-year, to finance capital projects and regulatory programs.

I have my own suggestion, which stays within those parameters. In its recent report on capital markets regulation, Treasury recommended that Finra, the Securities and Exchange Commission and other regulators "centralize reporting of individuals and firms that have been subject to adjudicated disciplinary proceedings or criminal convictions."

Why not use some of Finra's fine money to finance the integration and upgrade of Finra's BrokerCheck and the SEC's Investment Adviser Registration Depository?

As it continues its Finra 360 self-examination, it's not clear whether the regulator will change the way it allocates fine proceeds. But it is hearing the rumblings about the pool of money.

"We are not going after fines to achieve a revenue goal," Mr. Cook said at the Heritage event. "We recognize there is a perception issue. We're working with the board to think through what is the right approach to fines going forward."

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