The Financial Industry Regulatory Authority is at a crossroads.

Changes are afoot, managerially speaking, with the recent announcement that Chairman and CEO Richard Ketchum will retire this year from the self-regulatory organization, which oversees 4,000 brokerage firms and 643,000 registered representatives. The change in leadership comes amid important questions about what the future holds and how FINRA can remain both effective and relevant.

That forward-looking debate manifested itself in an exchange between Sen. Tom Cotton (R-Ark.) and Hester Peirce, a Republican nominee for the Securities and Exchange Commission, as she was questioned by members of the Senate Banking Committee.

Cotton described FINRA as “in a neither fish, nor fowl mode” because it seems to have evolved beyond the traditional role of a self-regulatory organization with SEC oversight. He asked: “Do you think it needs to go in one direction or another, basically folded into the Commission or reconceived as a true SRO, perhaps in competition with other SROs as well?”

Either would be worthwhile of consideration, or “we could go the route of trying to reform FINRA and put in more accountability mechanisms to make sure the SEC is performing proper oversight,” Peirce said.

It isn’t the first time Peirce has tackled the topic. In a working paper for the conservative Mercatus Center at George Washington University, she chided FINRA for a “lack of accountability.”

“Despite having regulatory powers similar to those of the SEC, FINRA is not subject to the same mechanisms that hold other federal regulators accountable to Congress, the president, and the public,” she wrote.

“FINRA has grown beyond what it was supposed to be and, maybe rather than doing an overhaul or pulling it into the SEC, the best thing would be to draw the lines around it more clearly so everyone knows what the roles are.”
Scott BarnardScott Barnard of the law firm Akin Gumpartner, Akin Gump

“FINRA has actively sought opportunities to expand its regulatory authority,” Pierce added. “It argued that it should become the regulatory body for investment advisers and has gradually expanded its role as a regulator of securities markets. Additionally, Congress recently gave FINRA responsibility for registering and overseeing crowdfunding portals, the intermediaries through which companies will be able to raise small amounts of equity funding. As FINRA expands its regulatory reach beyond its oversight of broker-dealers, it may look even less like a self-regulatory organization and more like a government regulatory agency.”

Among the reforms Peirce suggested: enhancing FINRA’s public disclosure and procedural obligations; folding it into the SEC, so regulatory functions would be subject to the procedural and disclosure requirements that apply to other government agencies; or remaking FINRA into “a true self-regulatory organization—a regulator that is actually run by the industry it regulates—and allowing the emergence of competing self-regulatory organizations.”

It isn’t just conservatives turning their gaze to the agency. Sen. Elizabeth Warren (D-Mass.) has recently blasted the SRO for, in her view, not doing enough to protect investors.

At a Senate Banking Committee hearing in March, she noted a study by professors at the University of Chicago and the University of Minnesota that found nearly one-in-13 brokers overseen by FINRA has been guilty of misconduct. Also, even after advisers are fired, nearly half worked again in the industry within a year. Warren also criticized FINRA for allowing millions of dollars in arbitration settlements to go unpaid.

Beyond these critics, other forces are in motion that raise questions about FINRA’s future. The SEC has announced plans to increase its pool of investment advisers from 530 to 630, moving broker-dealer examiners over to its investment adviser exam staff.

Also in play: In response to the SEC’s extremely low examination rate for investment advisers, just 10 percent a year, there are competing proposals to either expand FINRA’s powers or create an entirely new SRO that focuses on that business. Added to the mix is SEC Chairman Mary Jo White’s “broken windows” enforcement strategy of going after low-level offenses, many of them the sorts of issues that are already in FINRA’s wheelhouse.

Meanwhile, FINRA has apparently stepped up its enforcement efforts. A recent study by law firm Sutherland Asbill & Brennan found that in 2015 FINRA’s overall sanctions “increased dramatically.” The amount of restitution ordered by FINRA tripled in 2015 while fines declined from 2014’s total.  The number of cases also increased for the first time since 2012.


The following are key data points from the law firm Sutherland Asbill & Brennan’s study of the disciplinary actions reported by the Financial Industry Regulatory Authority in 2015.
The overall sanctions imposed by FINRA increased significantly in 2015 due to $96 million of restitution it reported. This restitution amount was a new record for FINRA and an increase of 200 percent from the $32 million ordered in 2014.
The overall sanctions imposed by FINRA, including fines and restitution, increased from $166 million in 2014 to $190 million in 2015, an increase of 14 percent. While restitution increased in 2015, fines decreased. FINRA imposed fines of approximately $94 million in 2015, a decrease of 30 percent from the $134 million in fines the regulator reported in 2014. Despite this decrease, it was still the second-largest amount of fines imposed by FINRA since the financial crisis. Fines have increased by 236 percent since FINRA assessed fines of $28 million in 2008.
While fines decreased and restitution jumped significantly in 2015, the number of cases reported by FINRA increased slightly last year. FINRA reported filing 1,462 disciplinary actions in 2015, an increase of nearly 5 percent from the 1,397 cases FINRA reported in 2014. This was the first year since 2012 that the number of cases filed by FINRA increased. The number of cases filed by FINRA has grown from 1,073 in 2008 to 1,462 in 2015, an increase of 36 percent.
Just as the number of cases filed and the overall monetary sanctions reported increased in 2015, so did the number of firms expelled and the number of individuals barred and suspended. The number of firms expelled by FINRA jumped from 18 in 2014 to 25 in 2015, an increase of 39 percent. This was the first time there was a rise in the number of firms expelled since 2012. The number of individuals suspended increased from 705 in 2014 to 737 in 2015, an increase of 5 percent. The number of individuals barred increased slightly from 481 in 2014 to 492 in 2015, a 2 percent increase. That number has now increased for three years in a row and the number of suspensions has increased every year since 2007.
Source: Sutherland Asbill & Brennan

Those statistics and the trends they reveal should probably come as no surprise. FINRA certainly feels the pressure to keep up with the SEC’s very aggressive enforcement program, empowered by a budget that has doubled since the financial crisis. If FINRA’s enforcement program were to drop off or not keep up with the SEC, some would argue that it was losing relevance. If the SEC keeps bringing more and more cases on the broker-dealer front, it runs the risk of becoming less relevant and, essentially, reduced to oversight and surveillance, as important as that may be.

There are also discussions in Washington about FINRA taking on the role of an SRO for investment adviser regulation or, in the alternative, creating a new entity modeled after its oversight of broker-dealers. If somebody else gets into that space they will be biting into FINRA’s territory. 


Marketplace shifts are also shaping FINRA’s future. The number of broker-dealers has dropped almost every year for 15 straight years, while the number of investment advisers has risen by a double digit percentage in that same time frame, explains Hardy Callcott, a partner with law firm Sidley Austin.

“It is a long-term trend that FINRA should be concerned about,” he says. “It is part of the reason why it wanted to be the SRO for investment advisers. They see the migration. As the number of broker-dealers declines and FINRA’s size and expense base increases, that means greater cost that the broker-dealer population has to bear. That’s not a long-term sustainable trend.”

In the short term, however, FINRA is as important as ever to the SEC, as the latter agency looks to maintain effective oversight of broker-dealers with its attention shift to investment advisers, Callcott says. And if there is to be a second national securities association, “the SECs perspective is that they don’t want to have a competitor to FINRA; they are happy working with one entity.”

The problem, as Scott Barnard of the law firm Akin Gump sees it, is that the SEC and FINRA all too frequently duplicate efforts. FINRA’s enforcement is not as efficient as the SEC, and to some extent that is because it does not have the same resources the SEC has, Barnard says. “They try to do what they can, but there is overlap and a duplication of effort that could be handled better. Each is trying to one up the other a little bit, and you are dealing with two masters.”

Folding FINRA into the SEC may not be a worthy alternative, Barnard says, because it would “only create more turf battles and confusion about roles.”

“It might make more sense to better define what FINRA’s role is,” he says. “With any government agency, it is always going to grab more power if it can. FINRA has grown beyond what it was supposed to be and, maybe rather than doing an overhaul or pulling it into the SEC, the best thing would be to draw the lines around it more clearly so everyone knows what the roles are.”

Sandra Dawn Grannum, a partner at law firm Drinker Biddle & Reath, serves on a 13-member Arbitration Task Force that FINRA formed to consider possible enhancements to its arbitration forum to improve the transparency, impartiality, and efficiency.

She sees FINRA as an agency that does its best to keep pace with market changes. “It really has evolved into something different and bigger, but I don’t necessarily think that is a bad thing,” she says. “It fills a gap in the system because it acts like another regulator, but is mostly funded by the industry.” It has, through its board of governors, representatives of both the industry and investing public.

Critics, like Sen. Warren, may not grasp how seriously FINRA takes its mission. “They are actively involved in regulating the industry, with the added benefit of being mostly paid for by the industry.”