Does FINRA Accurately Seed Enforcement Issues?


Law360, New York (May 17, 2011) -- Earlier this spring, with much anticipation, American sports fans waited for the announcement of the NCAA men’s basketball tournament seeds on Selection Sunday. Many wondered whether Duke would again be ranked No. 1 in its region (as it usually should be). And once the teams were ranked and March Madness play began, many hoped to see a Cinderella team slay a seemingly unbeatable Goliath (to mix fairy tales and Bible stories).

Similarly, every spring, officials from the Financial Industry Regulatory Authority (and its predecessor, NASD) announce regulatory priorities in their annual Examination Priorities Letters. Much like basketball fans (and “participants” in office pools across the country), broker-dealers and registered representatives focus on what types of subjects and cases FINRA intends to emphasize and pursue. Many also wonder whether these exam priorities will lead to enforcement cases.

With the February 2011 release of FINRA’s 2011 Regulatory and Examination Priorities Letter, we thought it would be interesting to see whether FINRA’s stated examination priorities actually lead to enforcement actions in those areas. Since it usually takes two to three years for FINRA to investigate an issue before deciding whether it has sufficient grounds to bring a disciplinary action, this article compares the 2007 and 2008 Examination Priorities Letters with the disciplinary cases brought by FINRA in 2009 and 2010, as set forth in FINRA’s Regulatory Notices.

Based on this analysis, it appears that FINRA’s rankings are good — although not perfect — predictions for the future. (FINRA, of course, would probably like to emphasize that past performance does not guarantee future results.)

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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