SEC Commissioner Stein Tells FINRA To Toughen Up

“Speak softly but carry a big stick.”

Real leaders and financial cops very much appreciate that principle. Those playing politics and crony capitalism circa 2014 find it to be anathema.

Why is it that bad practices on Wall Street (e.g high frequency trading, abusive sales practices, market manipulation) are too often tolerated in Washington while costing ordinary Americans untold sums? Very simply, when the punishments do not fit the crimes the practices will perpetuate. The penalties become little more than a cost of doing business. Those ‘writing the tickets’ are little more than meter maids.

Those engaged in regulatory oversight might not appreciate these assertions but these realities are part and parcel of the self-regulatory model on Wall Street. To think otherwise is simply to be willfully blind. SEC commissioner Kara Stein recently told the folks at FINRA to take off their blinders. 

Let’s navigate and review Stein’s comments from a talk she delivered to FINRA’s Division of Market Regulation:

Lastly, I want to speak with you about enforcement.  Your enforcement process is crucial to your ability to enforce your rules and protect the markets.  And your general principles are in the right direction. Your sanctions should be designed to deter misconduct and improve business standards. And recidivists should be treated more harshly.

But, I fear the results, after months or years of hard work by you, are too often financially insignificant for the wrongdoers.  Your enforcement cases must be impactful, and provide strong motivation for compliance.

I would encourage you to examine your sanctions and update them.

Let’s ponder Steins remarks. “Financially insignificant for the wrongdoers.” Sounds synonymous with ‘cost of doing business.’

As in the fact that FINRA’s sanctions represent approximately one tenth of one per cent of Wall Street’s bottom line. (From page 3 of FINRA’s 2012 Annual Report: “Overall in 2012, FINRA brought 1,541 disciplinary actions against associated persons and firms, levied fines totaling more than $69 million and ordered restitution of $34 million to harmed investors.”)