Financial Planning (March 8, 2022) - Is FINRA showing its teeth? Look closely.
Last year, the Financial Industry Regulatory Authority, the self regulator of the brokerage industry, levied significantly more fines on wayward brokerages that misled or cheated investors. The watchdog also nearly doubled the amount of money it ordered sketchy broker-dealers and advisors to repay cheated customers.
Still, the two sets of figures for 2021 tell different stories, according to fresh data compiled by law firm Evershed Sutherlands.
Michael Edmiston, a lawyer and president of the Public Investors Advocate Bar Association, whose lawyers represent investors in claims and lawsuits against financial firms, said that he was “heartened by the increase in fines and regulatory activity” detailed in the analysis. But he added that he was “still disappointed that it’s still at a low level compared to what FINRA was doing in 2016.”
Wall Street’s self-regulator has long drawn criticism for not doing more to root out and discipline recidivist brokers who pile up securities-law violations and complaints from investors. Cheated customers often struggle to collect their awards. The watchdog oversaw more than 3,400 securities firms employing roughly 617,500 advisors in 2020, according to ts most recent public data.
Last year, FINRA launched a new initiative to weed out “high-risk firms” that cheat investors. But data and industry experts say the push will focus on small and mid-sized brokerages, giving larger ones a pass. Edmiston said he “would like to see the size of fines increase such that it dissuades actors from profiting from their bad behavior.”
FINRA hasn’t yet released its annual report or updated its public statistics website for 2021. For its yearly analysis of disciplinary actions by the watchdog, Eversheds compiled data from the self regulator’s monthly disciplinary reports, disciplinary actions online database and press releases.
For more on FINRA’s scrutiny of “high risk firms,” read our coverage here and here.
A fine situation
The watchdog reported levying $91 million in fines on member firms in 2021, a 60% increase on the prior year’s level. That represents the highest total in fines since 2016, when FINRA ordered $174 million in fines.
Sounds like a lot — but the boost came from a single, record-setting fine against Robinhood Financial, the online brokerage that regulators accused of misleading millions of investors. Minus that $57 million fine, levied for inappropriately letting thousands of Robinhood clients trade sophisticated options and “negligently” giving customers false information as far back as 2016, among other things, FINRA’s fines last year totaled $34 million, a plunge of more than 40% compared with 2020.
Either way, FINRA’s fines appeared to get bigger. Or is it smaller? The watchdog assessed eight fines of at least $1 million each, totaling $71 million. That’s fewer than in 2020, when it assessed 10 such “supersized” fines totaling $39 million. Likewise, FINRA assessed one “mega” fine of $5 million or more last year — on Robinhood. By contrast, 2020 saw two cases with “mega” fines totaling $22 million.
Compensating duped investors
When it came to getting brokerages to repay the customers they swindled, the story is different. Last year, FINRA ordered restitution of roughly $49 million, nearly double the $25 million it commanded in 2020. Like the fines it levied last year, the increased restitution total was driven in large part by a single, $12.6 million case — with Robinhood. But unlike fines, customer-payback totals were still up significantly, not counting the big Robinhood one — more than 45%.
What Eversheds called “supersized” restitution orders of at least $1 million helped propel this growth. There were 10 such orders totaling nearly $42 million last year.