FINRA Enforcement recently released some information on how and when one of its investigations turns into an actual enforcement action against one of its broker dealers or registered representatives. Jessica Hopper, Head of FINRA Enforcement, explained the enforcement process.
FINRA starts investigations based on information received from various sources, including their own examinations of the firms, customer complaints, and referrals from other regulators. Once all the facts in an investigation are gathered, the FINRA Enforcement attorney makes a recommendation for the disposition of the matter – no action, formal action, or informal action. This recommendation is reviewed by at least two senior Enforcement managers (and presumably proceeds with the recommendation only if the two managers agree).
After that, all proposed disciplinary actions must be approved by FINRA’s Office of Disciplinary Affairs. Additionally, certain categories of cases (which are not identified) require further review by the Office of the Counsel to the Head of Enforcement, a unit comprised of attorneys who review proposed formal actions.
In the course of a formal action, FINRA can order fines, suspensions, bars, and restitution to victims. In 2019, FINRA ordered $27.9 million in restitution as a result of enforcement actions. However, there are no details available to the public on how much ordered restitution has been paid to victims either for 2019 or any preceding year.
Ms. Hopper states that “only a small percentage of FINRA examinations become FINRA enforcement actions…” Reviewing the process by which an investigation turns into an action, it is easy to see why.
FINRA is not alone in dealing with the challenge of bad actors in the financial professional industry. It only has authority over one slice of the financial industry – broker dealers. An important part of FINRA’s effort is and should be coordinating closely with other federal and state regulators to ensure the entities that can take action do. A persistent challenge for regulators is making sure that the regulatory framework does not create opportunities for bad actors to move from one area to another to avoid detection or to “start over” after they have been caught.
