FINRA is saying there should be no limit on fines for violations like excessive trading and recommending tailored penalties for individual advisors and small and larger firms amid an overhaul of its recommended sanctions for various types of financial malfeasance.
But some observers note that mere guidelines, rather than strictly enforced rules, can only go so far.
FINRA announced on Sept. 29 the first large overhaul of its sanctions guidelines in at least five years.
Michael Edmiston, president of the Public Investor Advocate Bar Association, said the common complaint about FINRA's recommended penalties is that "with the amount of money these firms are making, these sanctions can be little more than rounding errors, if even that."
Still, as a self-regulating body with no criminal-enforcement authority, FINRA can do only so much. The worst weapon at its disposal remains the threat of disbarment from the industry.
"There's no FINRA jail, no FINRA hard labor," Edmiston said. "Of course, we'd like to see these sanctions be as aggressive as possible to deter investor abuses. But we recognize the restrictions that FINRA operates under."
Among other changes, the latest revisions eliminate the maximum recommended penalty of $310,000 for nine types of violations, giving adjudicators no suggested upper limit for fines in such cases. FINRA says the change was made in part to reflect recent fines handed down in the industry. FINRA last year, for instance, ordered the financial trading firm Robinhood Markets, whose app is popular among retail investors, to pay $70 million for supervisory failures and harm to millions of customers.
Brad Bennett, former chief of enforcement at FINRA, said that case shows FINRA was already willing to ignore its own maximum limits in particularly egregious instances. The recent revisions merely bring the guidelines into line with actual practice.
"This provides total transparency, he said. "There is now no top end for some of these infractions."
Aside from excessive trading, the violations that no longer have maximum penalties include: supervisory failures, illicit sales of unregistered securities, misrepresentations or omissions of material facts, and the charging of overly high commissions.
FINRA defines small firms as those with between 1 and 150 representatives, mid-size firms as having 151 to 499 representatives and large firms as having 500 or more representatives. By the end of 2021, FINRA had 3,048 small firms, 185 mid-size firms and 161 large firms as registered members.
"Regardless of whether the sanctions are within or outside of the recommended range, adjudicators must identify the basis for the sanctions imposed, ensuring that bad actors are sanctioned appropriately," FINRA said in a statement.
FINRA also set the recommended minimum penalty for most violations by small firms at $5,000. And it adds anti-money-laundering guidelines for both firms and individual advisors. One of these, aimed at companies that fail to monitor and report suspect transactions, recommends a fine of at least $50,000 for medium-sized and large firms and sets no upper limit.
FINRA separately lists various remedial measures adjudicators can consider imposing. These include ordering firms to cease engaging in a particular line of business, requiring them to retain consultants to monitor their compliance with regulatory obligations and mandating that they subject certain employees to heightened supervision.
Bennett said some of these measures will no doubt prove just as useful as higher penalties in FINRA's work to police the industry.
"Of course, the thing that makes the real difference is the ability to work cases up quickly and the desire to do it," he said. "These guidelines are a step in the right direction but not the be-all, end-all of enforcement."
