The Blog Of The Securities Industry Professional Association

FINRA needs to get out of FRAUD business


Recently we discussed in ‘Broker Beware” the new NAC guidelines that call for a lifetime bar for unsuitability and for cases involving fraud.  While we think this can lead to an influx of trial lawyers attacking small firms with over blown claims of unsuitability in order to get them to settle quickly, we believe that in the case of fraud, the NAC panel got it right.  Or did they? FINRA remains a self regulatory nonprofit association that answers to the U.S. Securities and Exchange Commission.   Should FINRA be allowed to accuse people and companies of fraud or should that be left to the government?   The basic definition of fraud is: wrongful or criminal deception intended to result in financial or personal gain.   

We have no doubt that FINRA has uncovered numerous frauds that were being committed at various levels in the securities industry.  The question we have is should FINRA be making claims of fraud and then going to an industry hearing or should all claims of fraud automatically be sent to the SEC to handle?  In the real world when you commit fraud you usually are charged by a district attorney and are afforded a day in court to plead innocence or guilt.  How is it that a self regulatory organization can make a claim of fraud and go to a hearing with two industry panelists and an SRO hearing officer?  I live in a neighborhood governed by a Home Owners Association (HOA).  We can be fined for not cutting our lawn, trimming our trees or pressure cleaning our driveway.  We can contest these fines with a little HOA committee made up of volunteers and try to get them revoked or reduced.  It’s bizarre to think that if I was engaged in a fraudulent check kiting scandal involving my HOA dues account that instead of being turned over to authorities for fraud, that the HOA could bring me up on ‘Fraud “ charges and then I could go to a hearing with a couple of my neighbors.  This is essentially what has been and what continues to occur.

We believe that if the SRO finds reason to believe a real and significant fraud is occurring, the SEC should be brought in immediately and then they should decide if the FBI or other law enforcement should be brought in. When real fraud is committed people need to go to jail not be suspended from association with an SRO.  Despite claims to the contrary, FINRA is not a government authority and cannot charge people or companies with fraud.  We understand that committing fraud is ‘against member rules” but you should first be afforded the right to have your case heard in court.  FINRA should be required to turn any and all fraud charges (as well as suspicion of theft, murder and domestic abuse) over to the SEC for processing and if in fact the criminal act is pinned on the company or individual than of course, a lifetime bar is in order.  But as it currently stands, a non government SRO is making Government criminal accusations and then deciding on a punishment that should be in the hands of juries not industry insiders. In addition, they are permanently marking a person’s record with an accusation of fraud in which it may or may not have occurred.

Post Metadata

May 18th, 2015




  1. jbusacca

    Court Says Regulator Exceeded Its Power

    By DIANA B. HENRIQUES OCT. 6, 2011

    Continue reading the main storyShare This Page





    Continue reading the main story

    A federal appeals court in Manhattan ruled on Wednesday that Finra, an important regulator of Wall Street for more than 70 years, does not have the right to take its members to court to enforce its disciplinary actions.

    The surprise decision curbs the powers of Financial Industry Regulatory Authority, formerly the National Association of Securities Dealers, at a time when it has been under pressure to impose greater accountability on its licensed brokers and brokerage firms.

    The ruling came after a 14-year fight waged by Fiero Brothers, a tiny penny-stock brokerage firm, and its owner, John J. Fiero. In December 2000, after legal disputes that lasted several years, Finra accused Mr. Fiero and his firm of violating federal fraud statutes — specifically, engaging in a manipulative activity known as naked short-selling. Besides expelling the firm, the regulator imposed a $1 million fine.

    The firm was shuttered and its owner was barred from the market — but both refused to pay the fine and, ultimately, Finra wound up in federal court trying to collect the money.

    But Finra had no right to do that, according to a three-judge panel of the United States Court of Appeals for the Second Circuit, which encompasses Wall Street.

    In an opinion written by Judge Ralph K. Winter Jr., the panel unexpectedly overturned a lower court and ruled that neither the nation’s foundational securities laws, adopted in 1934, nor a “housekeeping” rule adopted by Finra in 1990 gave it the right to pursue its monetary sanctions in court.

    “The principal issue is whether the Financial Industry Regulatory Authority Inc. has the authority to bring court actions to collect disciplinary fines,” Judge Winter wrote. “We hold that it does not and reverse.”

    T. Grant Callery, Finra’s general counsel, said the organization would “continue to review the ruling and weigh our options.” But he insisted the decision would not affect the self-regulatory group’s “ability to enforce Finra rules and securities laws, to discipline firms or protect investors.”

    But some securities law experts predicted that the ruling could have both practical and psychological effects.

    “The decision neuters Finra,” said John C. Coffee Jr., a securities law professor at Columbia who has been a consultant both to regulatory agencies and to private defendants appearing before them. “It has been trying to show that it has teeth and could hold its members more accountable — now, those teeth have been surgically removed.”

    Martin H. Kaplan, a lawyer for Mr. Fiero and his firm, agreed that the ruling “changes the regulatory landscape in a profound way.” He said the decision vindicated those who had complained for years that Finra was exceeding its statutory power and abusing the rule-making process.

    “Not only did the court find that Finra/N.A.S.D. never had authority to enforce fines using the courts, but it also highlighted Finra/N.A.S.D.’s failure to follow rule-making procedures and its frustration of Congressional intent,” Mr. Kaplan said.