Finra’s enforcements are down, but its new adverts are up #NewsMarket

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Two weeks ago, Elizabeth Warren extended her long-running beef with the Financial Industry Regulatory Authority, Wall Street’s self-regulatory body mostly just known as Finra.

In a letter pointedly cc’ing the SEC’s Gary Gensler, the senator asked why — per a Bloomberg article — the number of fines levied against brokers and dealers last year fell to the lowest level in the regulator’s history, noting that . . . 

• There were 426 enforcement actions in 2023, the lowest since Finra’s inception in 2007 (before that it was known as the National Association of Security Dealers, or NASD).

• Similarly, the value of fines imposed by Finra for brokers or dealers that break the rules has declined from $173.8 million in 2016 to $88.4 million in 2023.

“It is unclear how this represents an improvement in investor protections,” Warren said, unsurprisingly expressing doubts over Finra’s own claim that this was because of its success in reducing the number of “bad actors”.

There is no evidence to that effect: the SEC’s enforcement numbers stayed relatively steady even as FINRA’s fell, and an ex-FINRA senior counsel expressed his skepticism that there are fewer bad actors today, saying: “to the contrary, with the growth of so many more financial platforms . . . there is far more opportunity for abuse that is harder to detect.”

Finra has until Friday to reply to Warren’s list of questions and requests.

A good thing then that the self-regulating body was busy improving investor protections just last week in the form of a new advertising campaign — Get Your Head in the Trade — urging “new investors to take key steps before trading”.

Both ads centre on Meghan, a millennial-looking lady with a nice apartment, a dog and money in the stock market. In the first ad, Meghan Gets a Stock Alert, a push-notification informs her that shares in meat-based tofu company Meafu (absurd!) are down 10 per cent.

Channelling Pixar’s Inside-Out Plato’s theory of the soul, the camera zooms in on and then inside of Meghan’s cranium where we’re introduced to four anthropomorphisms of her dominant states of mind: the Dreamer (“we’re gonna be rich!”), the Impulsive (“get optioning those options”), the Nervous (“euuuugh”) and the Rational (“let’s dig a little first”). Needless to say, Rational Meghan appears to have the final word on Meafu. Finra’s second ad, Meghan Checks an AI Pick, feels somewhat derivative.

Both ads link to a new web page, FINRA.org/tradesmart, designed to equip investors with “knowledge, skills and tools” via quizzes and questionnaires. In the name of public service, some screenshots:

. . . None of which will have been in vain if it helps even one retail trader pause for thought etc etc.

But some critics oddly appear to think Finra should maybe be doing more than making high-production-value, sparsely-watched ads. Former Amex and NASD lawyer and author of the now-retired BrokeAndBroker.com Bill Singer called the ads “garbage that passes for modern day Wall Street regulation” on LinkedIn:

Instead of doing the hard job of regulating, FINRA issues idiotic warnings and offers meaningless advice. A waste of money and resources — all sanctioned by a useless Board of Governors.

Responding to which, Finra told us:

From an investor’s perspective, it’s far better to prevent harm from happening than to punish it after the harm has been done. Consistent with our mission to protect investors and ensure market integrity, we are encouraging new investors to make informed decisions and providing knowledge and resources to help them to invest successfully and help protect themselves.

Extremely important to note: The campaign is in addition to FINRA’s regulatory program including market surveillance, firm examination, risk monitoring and enforcement. I urge you to consider the full breadth of our self-regulatory role, described concisely here.

It also stressed that the ad campaign was entirely funded by the roughly $70mn levied against Robinhood in 2021, which remains the largest penalty ever ordered by the regulator. We really hope they didn’t blow all of it on this. The second ad has racked up 59k views (anything AI is hot these days, even stuff that mocks it) but the first is still stuck in the mid-hundreds.

We’ll do another post on Finra’s reply to Warren once it’s out. Until then, remember to GYHITT.