Fines to flourish as FINRA draws on reserves to tackle budget shortfall?

Publication April 2019

The Financial Industry Regulatory (FINRA) projects that it will draw US$185.8 million on its reserves in 2019 to compensate for a projected, similarly-sized budget shortfall. FINRA anticipates that it will face an expected near 4% rise in technology and compensation-related operating costs, and lower “user fees” (which include registration and testing fees).

Read the entirety of FINRA’s 2019 Annual Budget Summary.

FINRA, a not-for-profit self-regulatory organization, oversees brokerage firms and brokers with the mission of promoting market integrity and protecting investors in the U.S. securities market. While restitution and remediation of investor harm remains its professed highest priority, FINRA, like other self-regulatory organizations, also discourages misconduct by imposing fines on its members when violations arise. Per FINRA policy, FINRA does not target or budget for fines within its operating budget, and fine monies must be allocated to specific capital and strategic initiatives. Nonetheless, these initiatives are broad (ie. leveraging technology and data in a secure manner).

One approved purpose is the replenishing of reserves. This may understandably leave industry members wondering how meaningful or effective the restrictions on uses of fines are, as FINRA prepares to make a substantial draw.

FINRA maintains complex public guidance related to fines and their amount(s), but generally, these fines are ranges and ordinarily fluctuate based upon individual circumstances, and on a case-by-case basis. See FINRA fines policy. In that regard, FINRA maintains significant discretion. The ranges provided in FINRA’s guidance can fluctuate more than seventy-seven fold, in some instances. Where guidelines profess fines of “US$1,000 to US$77,000” or “US$5,000 to US$155,000” FINRA maintains the power to levy substantially heftier fines, even within its own publicized ranges.

FINRA can also boost the likelihood of the imposition of fines through self-reporting initiatives. On January 28, 2019, FINRA announced a self-reporting initiative aimed at recommendations for 529 college savings plans. See FINRA Regulatory Notice 19-04. “Under the 529 Plan Share Class Initiative (529 Initiative), broker-dealers are encouraged to review their supervisory systems and procedures governing 529 plan share-class recommendations, self-report supervisory violations and provide FINRA with a plan to remediate harmed customers.” Id. FINRA notes that “[i]n response, FINRA’s Department of Enforcement will recommend that FINRA accept a settlement that includes restitution for the impact on affected customers and a censure, but no fine.” Id.

This pronouncement is hardly a safeguard and will likely lead to the imposition of additional or larger fines, albeit more indirectly. For those members who fail to self-report by FINRA’s deadline of April 1, FINRA could decide to impose a fine during its next exam for violations dating back five years. This timeframe goes beyond the scope of a typical periodic exam. FINRA may also find a member to have violated other regulations and impose fines for other violations found as a result of, or stemming from, a firm’s self-reporting.

FINRA chief executive Robert Cook has emphasized to industry professionals that "[f]ines are not collected for budget purposes” and that FINRA has “extra cash in the till, so to speak.” See“Robert Cook says FINRA doesn’t levy fines to balance budget,” Investment News, March 25, 2019.

For perspective, FINRA levied a record-high US$173.8 million in fines, in 2016. It remains to be seen whether FINRA will acknowledge these gaps in how fines may be used, and whether 2019 will be a banner year for replenishing the “cash in the till.”


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