REUTERS SUMMIT-Wall Street watchdog to review sanction guidelines

Reuters - UK Focus

(For other news from the Reuters Global Wealth Management Summit (LSE: SUMM.L - news) , click on comment from SEC commissioner and lawyers; adds background)

By Suzanne Barlyn

June 16 (Reuters) - The head of Wall Street's industry-funded watchdog, Richard Ketchum, said on Monday that the group will review its guidelines for imposing fines on the brokers and companies it oversees, in his first public response to criticism that the regulator's penalties were too small to correct errant behavior.

Ketchum, chief executive of the Financial Industry Regulatory Authority, speaking at the Reuters Global Wealth Management Summit in New York (Frankfurt: HX6.F - news) , said the review will hone in on sanctions for repeat offenders and look into whether there should be a separate category for the largest brokerage firms.

Kara Stein, a commissioner of the U.S. Securities and Exchange Commission who last month said the results of FINRA enforcement cases "are too often financially insignificant for the wrongdoers," on Monday praised the steps FINRA is taking.

"I'm pleased to learn that FINRA is reviewing its penalties and sanctions to ensure the most effective enforcement and deterrence program for both investors and the marketplace," she said in an email to Reuters.

Stein, in her remarks to FINRA's division of market regulation last month, had suggested that FINRA review its guidelines.

FINRA's oversight of Wall Street has come under scrutiny in recent months, including the supervision of problem brokers and the vetting of arbitrators who hear brokerage industry cases. The regulator oversees nearly 634,000 brokers and more than 4,140 securities firms.

Under Ketchum, the regulator has been responding. In April, for example, FINRA imposed mandatory background checks for brokers every five years after it came to light that some 1,600 failed to include criminal charges and other problematic issues that should have been in their files.

The regulator also launched a program for expediting disciplinary cases involving high-risk brokers.


FINRA uses a broad set of sanction guidelines, developed in 1993, to determine fines and other penalties in enforcement cases. The guidelines, which cover 10 areas of potential misconduct, recommend a range of monetary penalties and lay out other factors to consider in the imposition of fines, such as a firm's history and size.

FINRA has not reviewed the guidelines in at least five years, Ketchum said.

"The basic purpose is to discourage bad behavior," Ketchum said, adding that the guidelines are designed to be fair.

Daniel Nathan, a lawyer for Morrison & Forrester in Washington and a former FINRA regional enforcement director, said updating the guidelines would give the disciplinary process "greater predictability" by making them more consistent with FINRA's current enforcement policy and decisions imposed by hearing officers.

"It is high time that the guidelines be brought into the modern age," Nathan said.


FINRA imposed a total of $65 million in fines in 2013, compared with $69 million the previous year.

Brian Rubin, a lawyer at Sutherland Asbill & Brennan LLP in Washington who defends brokerages in FINRA enforcement cases, said the decrease is largely due to the winding down of financial crisis enforcement cases.

On Monday, FINRA fined Bank of America Corp's Merrill Lynch unit $8 million and ordered it to repay $24.4 million to settle allegations it overcharged thousands of charities and retirement accounts by failing to waive mutual fund sales charges. [ID: nL2N0OX0LW] Merrill neither admitted nor denied the charges.

An $8 million fine against Brown Brothers Harriman in February had set a record for anti money-laundering violations, FINRA said at the time.

"They suggest that where FINRA thinks it makes sense, they will assess large fines," Rubin said.

Nonetheless, fines in the thousands of dollars are far more common, according to a review of FINRA's disciplinary database.

They include, for example, a $37,500 fine against a brokerage for reporting violations. A firm that held customers' checks for too long and also violated industry rules about keeping enough capital on hand received a $7,500 fine, according to FINRA records. (Reporting by Suzanne Barlyn; Additional reporting by Sarah N. Lynch; Editing by Paritosh Bansal and Leslie Adler)