Study shows softening of Finra enforcement last year

Law firm Eversheds Sutherland says fines, restitution, cases decreased; Finra touts the quality of its cases

Finra enforcement softened last year, according to a report by a law firm.

In its annual study of disciplinary actions undertaken by the Financial Industry Regulatory Authority Inc., the law firm Eversheds Sutherland found the broker-dealer self-regulator imposed fewer fines, obtained less restitution for customers and pursued fewer cases in 2019 compared to 2018.

Reviewing Finra’s monthly disciplinary reports, press releases and online databases, Eversheds found that fines reported by Finra dropped to $44 million last year from $61 million in 2018. The number of cases with “supersized fines” – those of $1 million or more – declined from 13 totaling $47 million in 2018 to nine totaling $27.9 million in 2019.

Restitution also maintained a downward trajectory last year, according to the report. Finra ordered approximately $24 million returned to harmed investors in 2019, down from $26 million in 2018.

The total monetary sanctions ordered by Finra – fines, restitution and disgorgement combined – was $70 million in 2019, down from $124 million in 2018. That total has declined steadily in recent years, from a high of $193 million in 2015.

The decrease in enforcement activity could signal a new approach from Finra on disciplining its approximately 3,600 brokerage firm and 630,000 registered representative members, said Brian Rubin, a partner at Eversheds Sutherland and co-author of the report.

“I don’t know. It could be a kinder and gentler Finra – at least temporarily,” said Mr. Rubin, who wrote the report with counsel Adam Pollet.

Another factor that may contribute to the decline in enforcement is the bull market, which had been running strong until coronavirus worries sent it tumbling, Mr. Rubin said. Investors tend not to bring complaints against brokers when their accounts are accumulating wealth.

Finra downplayed the Eversheds report, saying that it focused on the amount of fines – which have fluctuated between $42 million and $174 million from 2010 through 2018 – rather than the substance of disciplinary actions.

“We measure our success by the quality of cases, our ability to return money to harmed investors and our effectiveness in ridding the industry of bad actors who defraud the investing public – not by total fines, which are inherently volatile year to year, as Sutherland’s data show,” Finra spokeswoman Michelle Ong said in a statement.

Finra will release its own enforcement statistics later this month and also will publish them in its annual report over the summer.