FINRA Goes Quiet as Its Caseload Plunges

“I felt that examiners came in with the idea that they were going to find violations, and it was just a question of how many,” Mark Cresap, a money manager in the Philadelphia area, said in an interview. His firm, Cresap Inc., manages about $1 billion in assets.

Examiners would spend months at a time at his firm, Cresap said. FINRA, he said, was devoting too much time scrutinizing small, well-intentioned companies and not enough time looking at firms trying to skirt the rules.

Broker Joe Romano, president of Romano Brothers & Co., said FINRA’s oversight often fixated on minor violations rather than major fraud.

Perceived overregulation has even driven one firm to challenge the constitutionality of parts of FINRA. That case is making its way through the appeals process.

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New Chief

In 2016, Robert Cook, a former white-collar law partner and SEC official, took the helm of FINRA. The year before, FINRA had a record high of 1,147 enforcement actions, based on the number of settlements and complaints filed by the regulator.

FINRA’s internal statistics on disciplinary actions show a higher count, though a similar decline over the years.

In one of his first major actions, Cook launched FINRA360, described as a “comprehensive self-evaluation and organizational improvement initiative.” FINRA needed to modernize, streamline and engage more with brokers, he said.

One of Romano’s messages — echoed by other brokers — was that FINRA had to cut down on the number of enforcement cases and increase their quality. That feedback quickly made its way into FINRA policy.

At an industry conference in New York in February 2018, Susan Schroeder, Cook’s then-head of enforcement, announced her priorities. She said they were driven by FINRA360.

“Enforcement action, while a powerful tool in FINRA’s toolbox, is not the right tool in all cases,” Schroeder said in her speech. “In fact, we must be thoughtful and intentional in order to use our finite enforcement resources in the matters where they are most needed.”

In 2018, FINRA brought 557 enforcement actions, nearly half the 2015 mark. Company expulsions and broker suspensions decreased. FINRA combined two enforcement divisions into one, explaining that it would lead to a “more effective and efficient” unit.

‘Precipitous Drop’

The changes in approach led to a “precipitous” drop in enforcement, said Justin Chretien, a senior official in FINRA’s enforcement division from 2011 to 2021. The department was streamlined, and there was more transparency for brokers under investigation, he said, but productivity declined.

Schroeder said in an email that she gave the speech to explain FINRA’s approach to enforcement. For enforcement to be effective, “it has to be predictable, transparent and risk-based,” she said.

Finra360 didn’t lead to a reduction in the number of enforcement actions, FINRA’s Pellecchia said. Rather, it focused on making enforcement more efficient and consistent, he said.

Tim Scheve, a FINRA board member and former CEO of Janney Montgomery Scott, said it didn’t feel like there was less enforcement. “FINRA continues to be an aggressive regulator,” he said.

LPL Settlement

In LPL’s case, the lack of a press release was notable not only because of the fine’s amount but also due to the size of the company, which includes affiliated brokers that don’t usually do business under the firm’s banner. The alleged lapses were also extensive.

According to FINRA, LPL failed to track hundreds of thousands trades its brokers made on behalf of clients — and neglected to check whether those investments were appropriate for them. For 2 million other transactions, LPL didn’t collect required data on investors, like their ages and investment needs, FINRA said.

LPL’s $6.1 million payment to settle the probe amounted to about two days of the firm’s profit in 2023. An LPL representative didn’t respond to emailed requests for comment. The company didn’t admit to or deny the allegations. Neither did Goldman Sachs nor Barclays.

There’s value in shining a light on such cases, said U.S. Representative Katie Porter, a California Democrat and law professor. When you don’t, “you are losing the deterrent effect,” she said.

(Pictured: FINRA sign in lobby at Brookfield Place in New York. Credit: FINRA)