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


Financial advisers highlight solutions to increase diversity and inclusion

These Excellence in Diversity & Inclusion award winners suggest short-term changes to help foster D&I in the financial advice profession.

Latest news & opinion

Social Security and the fear of missing out

How to lower expectations when clients think they're owed a bigger Social Security benefit.

7 things advisers should do today to boost diversity and inclusion

Creating diversity and inclusion within financial advice firms is challenging, but these InvestmentNews Excellence in Diversity & Inclusion award winners have suggestions that firms can put into practice today

The midterm elections: What's at stake for financial advisers

A shift in control of the House could change the course of important issues, including the SEC advice rule, tax reform and retirement policies.

What to tell your clients after they've won the lottery

The current combined Mega Millions and Powerball jackpots are more than $850 million. What should you tell your clients if they have a winning ticket?

2019 Medicare premiums announced

Slight increase in Part B premium to $135.50 per month is in line with expectations.


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