Finra says fewer bad actors explains reduced, quieter, enforcement: Does that include insider trading by Big 4 partners?
If insider trading happens and no one prosecutes or publicizes it, can we pretend it never happened?
On August 28, U.S. Senator Elizabeth Warren, Democrat of Massachusetts, wrote to Finra — the Financial Industry Regulatory Authority — seeking an "explanation" for a concerning June 2024 Bloomberg report by Austin Weinstein.
“…the number of enforcement actions brought by the brokerage industry’s self-funded regulator [the Financial Industry Regulatory Authority (Finra)] slid to the lowest level in its history” and that Finra’s “[t]otal fines … are down by about half since a peak in 2016.”
Source: Bloomberg
Weinstein's story [Gift link] opens with an anecdote that highlights an even more insidious issue: there's a growing lack of transparency for the enforcement actions Finra does pursue.
Two days after Christmas, a prominent Wall Street regulator updated a database with news of interest to the industry: A $1.4 trillion brokerage had been slapped with one of the year’s biggest fines for allegedly losing track of almost a million trades.
But there was no press release when the Financial Industry Regulatory Authority hit LPL Financial Holdings Inc. with the $6 million penalty. Nor did Finra seek attention for its multimillion-dollar sanctions of Goldman Sachs Group Inc. and Barclays Plc months earlier.
Warren's press release and letter note Finra has appeared to limit transparency about its enforcement actions. According to Bloomberg, “[i]n multiple instances in recent years, employees drafted press releases to promote cases, only for managers to spike their publication". For example, publication of press releases promoting cases has often been eliminated by Finra leaders. Last year, Finra issued releases for “just 10 of 426 enforcement actions, compared with 63 in 2015,” and details on cases are reportedly difficult to find in Finra’s database.
Professor Roy Shapira, law faculty at Reichman University in Israel is the author of "Law and Reputation", published by Cambridge University Press in 2020. Shapira writes extensively on the impact of public enforcement on corporate reputation. According to Shapira, public enforcement actions may provide more information to the public than private settlements, but the information that regulators release is typically not reputation relevant. That’s because it does not help market players distinguish between good and bad actors because the information rarely provides new facts or credible interpretations. When there’s wrongdoing on a large scale and by visible companies, the media usually covers it long before regulators act on it.
That is not necessarily true with the lesser known securities firms and brokers regulated by Finra, but this case can certainly be made about the enforcement actions against firms Bloomberg and Sen. Warren say Finra did not promote: Goldman Sachs and Barclays.
But why decline to publicize these cases at all? A Finra spokesman told Bloomberg that "issuing too many of them would dilute the impact of enforcement actions it wants to emphasize."
Such as?
Shapira writes that large publicly-traded companies — I would emphasize banks and public accounting firms are in the trust and reputation business — are incentivized to trade-off higher fines for the ability to prevent unfavorable information about them from getting to the market.
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