FINRA allows “Bad Actors” in the Securities Industry to exist because a large percentage of its revenue is derived from fines imposed on “Bad Actors” that should be kicked out of the industry.

by jetty42

FINRA is a non-government organization that has been authorized by the US Securities and Exchange Commission (SEC) to regulate Firms and individuals in the US Financial Services Industry.

In FINRAs own words “FINRA is dedicated to investor protection and market integrity through effective and efficient regulation of broker-dealers.”

In order to fulfill its mission FINRA has the authority to both impose fines and revoke the licenses of Brokers and Firms that do not adhere to its rules. These Brokers and Firms are known as “Bad Actors” within the industry.

For example, there are rules that prevent Brokers from selling worthless Penny Stocks to 90 year Widows.

When a “Bad Actor” breaks a serious rule, like the Penny Stock rule, FINRA is incentivized to Fine the “Bad Actor”and has no incentive to revoke the licenses of the “Bad Actor.”

  • “Bad Actors” with licenses generate Revenue for FINRA.
  • “Bad Actors” whose licenses have been revoked are not “repeat offenders” and are therefore not repeat payers of Monetary fines to FINRA.
  • In 2016 FINRA had revenue of $1.06 billion.
  • The $1.06 billion in included revenue of $173.8 million from fines. The revenue from fines was up 85% from 2015.

Very simply, if FINRA revokes the licenses of “Bad Actors”, (those brokers and firms that harm the public), then FINRA’s revenue will go down.

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Interestingly most of these firms have individuals (non-professional) Investors as their primary clients. You don’t see any firms on this list that primarily have Institutions (professional investors) like Mutual funds and Pension Funds as their clients. Professional Investors generally have the expertise and resources to independent of FINRA, determine who the \”Bad Actors\” are and avoid doing business with them.

Further Reading:

Worst Firms List

Who’s Watching the Watchdog?


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