Finra sheds more light on how it determines fine amounts

A footnote in regulator's settlement letter to Fifth Third outlines factors affecting the size of the fine

May 15, 2018 @ 4:47 pm

By Mark Schoeff Jr.

Finra has begun to shed more light on how it determines the fines it levies on firms that violate its rules.

In a case last week involving Fifth Third Securities Inc., the Financial Industry Regulatory Authority Inc., the broker-dealer self-regulator, outlined the factors that went into socking the firm with a $4 million fine over the sale of variable annuities.

"In determining the fine in this matter, Finra considered, among other factors, the firm's recidivism, the harm to customers from the firm's violations, the breadth and extended duration of the violations, and the firm's failure to comply with a prior regulatory action," according to a footnote on page 7 of the settlement letter.

The explanation is part of Finra's effort to draw back the curtain on its enforcement actions.

"We are focused on providing more transparency into the basis for our outcomes," Finra spokeswoman Michelle Ong wrote in an email.

The fine narrative was foreshadowed in a February speech by Susan Schroeder, Finra executive vice president for enforcement. She promised more detail about the mitigating and aggravating circumstances that can influence a fine.

"We need to walk the line and make sure we characterize [aggravating] aspects of the case in a way that respondents can agree is fair, but still communicates with the industry why a sanction is larger or smaller," Ms. Schroeder said.

Emily Gordy, a partner at McGuireWoods, said the footnote in the Fifth Third settlement letter was the first notation explaining a fine amount that she has seen. In the past, it was necessary to read between the lines to figure out the reasoning behind a fine.

"Now, they're putting it in the order and being specific about it," said Ms. Gordy, a former Finra senior vice president in enforcement. "When it's in print, it takes the guesswork out of it."

Brian Rubin, a partner at Eversheds Sutherland, said that Finra normally articulates the mitigating factors that might have reduced a fine, such as a firm's cooperation in an investigation or the fact that it self-reported. But the Fifth Third settlement delved into the reasons for a bigger penalty.

"Here, it's taking into account aggravating circumstances," said Mr. Rubin, a former deputy chief counsel in Finra enforcement. "It's helpful for firms to know what issues get Finra's goat. It does fit with Finra becoming more transparent."

But outlining the areas Finra considered in setting a fine still leaves some mystery over how it got to the exact number, said Daniel Nathan, a partner at Orrick.

"It states the obvious factors without going into the calculus used to apply these factors and reach the resulting fine," said Mr. Nathan, a former Finra vice president for regional enforcement.

Nonetheless, the fact that Finra is putting more of its cards on the table when it comes to fines gives its member firms a way to evaluate Finra enforcement.

"It's a good policy step because it holds the regulator accountable, too," Ms. Gordy said. "They can't just pick a number out of a hat."


What do you think?

View comments

Recommended for you

B-D Data Center

Use InvestmentNews' B-D Data Center to find exclusive information and intelligence about the independent broker-dealer industry.

Rank Broker-dealers by

Featured video


How are broker-dealers helping 401(k) advisers adapt to a changing market?

Bryan Hodgens, co-head of LPL Financial's Retirement Partners group, says the industry is getting much better at connecting advisers to wealth management opportunities and helping scale their businesses.

Latest news & opinion

IBD report: Another impressive year

Despite a stock market decline, revenue is up. And the streak isn't expected to end anytime soon.

IBDs with the most CFPs

How many of the more than 83,000 certified financial planners are employed by the big independent broker-dealers?

Richard Thaler wants to use 401(k)s to boost Social Security payments

The Nobel laureate wants to simplify drawing down retirement assets, which he thinks is 'way harder' than saving the money.

InvestmentNews announces 2019 Innovation Awards winners

Sheryl Garrett is this year's InvestmentNews Icon.

Morgan Stanley rides wealth management train to solid first quarter

Chairman and CEO James Gorman expresses excitement about expanding into workplace plans with purchase of Solium.


Hi! Glad you're here and we hope you like all the great work we do here at InvestmentNews. But what we do is expensive and is funded in part by our sponsors. So won't you show our sponsors a little love by whitelisting It'll help us continue to serve you.

Yes, show me how to whitelist

Ad blocker detected. Please whitelist us or give premium a try.


Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print