It recently has been reported that enforcement actions and fines by the Financial Industry Regulatory Authority (FINRA) increased sharply in 2011, rising to $68 million from $45 million in 2010. While certainly a positive development, in our opinion, investors should gain little comfort in learning this information. While the increase in FINRA fines reflects regulators’ attempt to curtail abuses against investors, many of the fines often are too little and too late. We believe that the timing involved in FINRA fines does little to deter stockbroker negligence and investment fraud.
All too often FINRA (and other securities regulators) do not even begin to investigate investment fraud, let alone issue fines, until long after the investment fraud has taken place and investors have been fleeced. Moreover, by the time many of the fines are imposed, some of the brokerage firms are out of business and many of the individual brokers do not even have the money to pay the fines. As such, many of the fines do not get paid. Finally, the fines often are substantially less than the financial damage that investors have suffered and much, if not all, of the fine money is not used to pay investors for their investment losses.
While we are pleased that FINRA has been issuing fines in increasing amounts, we believe that regulators should make a greater effort to monitor stockbrokers’ and brokerage firms’ conduct and stop improper sales practices before investors lose their money. Such monitoring should include increased scrutiny on sales of complex structured investments, leveraged exchange-traded funds (ETFs), and risky and illiquid Reg D private placements. Until FINRA and other securities regulators become more proactive in stopping investment fraud before investors are damaged, after-the-fact fines offer little more than publicity material for securities regulators.
