FINRA, the Financial Industry Regulatory Authority, describes itself as “the largest non-governmental regulator for all securities firms doing business in the United States.” It’s basically a private agency set up by the financial industry to regulate itself, doing things like monitoring brokerage firms’ capital positions and checking up on sales practices. Firms that violate FINRA’s rules of conduct are charged fines or expelled.
According to its web site, the organisation oversees nearly 5,000 brokerage firms, about 172,000 branch offices and 663,000 registered securities representatives. One of those brokers was Stanford Group Company, the Houston-based wealth mangement unit of Sir Allen Stanford’s financial empire, now under investigation by the US Securities and Exchange Commission for allegedly executing a “massive fraud“.
The FT’s Jeremy Lemer has dug out Finra’s latest report on Stanford Group, with data current as of yesterday. The broker report contains, in addition to some basic information on the company, a disclosure section that lists “regulatory or disciplinary events on the firm’s record” – i.e. a log of questionable activity.
For Stanford Group those disclosures include:
- A $30,000 fine for Stanford Group for failing to disclose in research reports that it had received compensation for investment services from a subject company, failing to provide price charts in research reports, or valuation methods used to determine its price target and associated risks. Also, failing to disclose it was a market-maker in the firm’s securities at the time the research was published.
- A $10,000 fine for failing to report customer transactions in municipal securities within 15 minutes of execution.
- A $20,000 fine for holding customer funds without maintaining required minimum capital reserves.
The standout event, however, is this one, which resulted in a $10,000 fine.
Those certificates of deposits, we now know, are at the centre of the SEC’s fraud allegation against Stanford International Bank.
Interestingly, Stanford was able to pay the fines on all of these “regulatory events” without having to admit or deny any of the findings. It paid the fines, and presumably, that was that. The company was allowed to conduct business as normal — more or less.
And so, inevitably, questions will arise as to FINRA’s efficacy. Indeed, they already have.
Recall, for instance, Harry Markopolos — whistleblower on another fraud: Bernard Madoff’s $50bn Ponzi scheme. In his testimony to Congress, Markopolos’s harshest words were reserved for Finra, not the SEC.
“I never thought the SEC was corrupt … FINRA is definitely in bed with the industry.”
Judging by the Stanford case, there’s a good argument to be made here that FINRA’s fines are doing little to dissuade or expose fraudsters. However, even fines, we note, have dwindled in recent years. The Wall Street Journal made the chart below last month, showing a steady decline in amounts assessed by FINRA, fines charged, individuals barred and firms expelled, over the past three years. It’s also worth noting that FINRA during this time, was headed by Mary Schapiro — now head of the SEC.
The Stanford series – FT Alphaville
Obama’s pick to head SEC has record of being regulator with light touch – WSJ
Two lessons of the Stanford affair – John Gapper’s blog, FT.com