Sifma presses for consistency in brokerage fines

The Securities Industry and Financial Markets Association (Sifma) has raised concerns about what it says is an inconsistent approach by regulators when imposing penalties against broker-dealers found to have violated industry rules.

The Financial Industry Regulatory Authority (Finra) in March asked for feedback on enhancing its programs for engagement with its members and other stakeholders, with particular focus on the self-regulatory organization’s (SRO) advisory and ad hoc committees and rulemaking process. The move is part of the so-called Finra360 initiative, under which the SRO is conducting a comprehensive review of its operations and programs.

As part of its response in a May 8 letter, Sifma points out areas of the Finra enforcement and exam programs it would like to see changed.

‘Our members experience Finra’s enforcement functions through multiple departments, including the department of enforcement and the department of market regulation’s legal section,’ writes Sifma president and CEO Kenneth Bentsen. ‘In their experience, these separate departments are not fully co-ordinated and have different mandates and approaches.’

Bentsen argues that it would be more efficient and effective to house the SRO’s enforcement functions in one department. In addition, he recommends the following changes to a centralized enforcement unit, arguing that most of them are already in place but ‘infrequently or inconsistently exercised’ among the different enforcement teams:

• Give credit to firms that co-operate and remediate violations in a timely manner, and publicize when credit is given
• Consider whether formal action is necessary for system glitches when there is no customer harm
• Use Finra Rule 8210 in accordance with internal guidelines. The rule gives Finra staffers authority to inspect and copy the books, records and accounts of member firms relating to investigations, complaints and exams
• Remove ‘barriers to access and freely provide transcripts when requested’.

Although recognizing ‘Finra’s efforts to impose sanctions consistently and fairly by adopting and publishing sanction guidelines’, Bentsen expresses concern that ‘Finra adjudicators are not following the guidelines, resulting in inconsistent and unfair sanctions.’

He also argues that adjudicators are either not providing or not adequately describing their rationale for a particular sanction, either during settlement negotiations or in their final decision. This rationale would include their reasons for a fine that falls outside the ranges listed in the penalty guidelines, and their reasons for accepting or rejecting any aggravating or mitigating factors.

‘Certainly, we recognize that imposing fines is an important oversight mechanism to deter future violations, but we also believe it is imperative for Finra to comply with its published sanction guidelines and to explain the rationale behind sanctions,’ Bentsen says. He urges Finra to take the following steps:

• When imposing a fine, clearly explain the rationale behind the fine, including any aggravating and mitigating factors
• Create a board-approved advisory committee to benchmark and review the appropriateness of fines that are imposed.

EXAMS
Sifma notes efforts made by Finra to take a more risk-based approach to conducting its exams – steps SRO officials have often discussed in recent years. ‘We understand that several firms have observed notable changes to Finra’s examination program because of this enhanced approach,’ Bentsen writes. But he proposes the following changes to further improve the program:

• Beef up examiners’ knowledge of Finra’s rules and firms’ businesses
• Adhere to the reasonableness standard by ‘correcting examiners’ common misconception that perfection is required of a reasonably designed supervisory system’ and impress on examiners that a reasonably designed supervisory system is not a one-size-fits-all item
• Provide an avenue for firms to ask substantive questions while an exam is in progress
• Enhance co-ordination among exam officials to avoid duplicative requests
• Allow flexibility in reporting data, rather than mandating specific and complex requirements that are not required to be maintained by regulation
• Incorporate the information Finra receives from firms that complete the voluntary risk control assessment into decisions about whether to examine the firm and how to scope such exams
• Reinforce with examiners at all levels the importance of providing members with maximum transparency into the specific rule and compliance concern on which an information request is founded
• Issue recommendations, rather than exceptions, in instances where the SRO is unable to substantiate a finding by reference to clear language in a rule or related guidance.