InvestmentNews Editorials

Transparency, credibility, fairness: Finra's decision to explain rationale for penalties is a welcome one

Agency strikes a balance between punishment and deterrence

May 19, 2018 @ 6:00 am

The object​ of all justice systems should be, in the words of Gilbert and Sullivan: "To let the punishment fit the crime."

Systems of justice are more likely to achieve the dual objectives of punishment and deterrence when all can see that the severity of the punishment is appropriate to the seriousness of the violation — and when people understand the factors that went into determining that punishment.

Finra's decision to provide more explanation of the rationale for penalties levied on firms and individuals for violations of its rules and federal securities laws is therefore welcome.

The move was foreshadowed in February in a speech by Susan Schroeder, Finra's executive vice president for enforcement, and has now been demonstrated in a footnote in a settlement letter imposing a $4 million fine to Fifth Third Securities Inc. over the sale of variable annuities.

The footnote outlined the agency's reasons for the severity of the fine: the harm to customers caused by the firm's violations, the breadth and extended duration of the violations, and the firm's recidivism and its failure to comply with prior regulatory action.

Inspires confidence

It is apparent from the footnote that the punishment fits the violations and gives confidence that the aggravating aspects of the case have been weighed, the level of the penalty has been carefully considered and the penalty is fair.

This transparency adds credibility to Finra's enforcement actions and to the fairness of the penalties imposed. It will allow all in the industry to observe whether the penalties Finra imposes are consistent across cases and across time. In doing so, it also imposes discipline upon Finra to ensure that its penalties are consistent.

Finra's object all sublime, it shall achieve in time — to let the punishment fit the crime. (With apologies to Gilbert and Sullivan.)


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