FINRA Grades Itself With An “F,” Too

A Special Review Committee of the Financial Industry Regulatory Authority, Inc. (“FINRA”) Board of Governors today issued a report that is destined, like the OIG review of the Securities and Exchange Commission, to be characterized as “scathing.”  

One portion of the text that jumped out at us because of the similarities to the SEC’s failure to discover Madoff’s Ponzi Scheme relates to the alleged fraud of R. Allen Stanford: 
 
“Between 2003 and 2005, the National Association of Securities Dealers—FINRA’s predecessor entity—received credible information from at least five different sources claiming that the Stanford CDs were a potential fraud. The most striking was a July 2005 five-page referral letter from the SEC’s Fort Worth office that explained in detail why the purported investment strategy of the offshore bank could not have produced the consistently high returns being paid by the CDs. The letter stated that the CD program was a 'possible fraudulent scheme' and that the returns were ‘too good to be true.’ According to this letter, ‘as of October 2004, [the Stanford firm’s] customers held approximately $1.5 billion of CDs.’ Despite the existence of this ‘red flag’ and others described in the body of this report, FINRA did not launch an investigation of whether the Stanford CD program was a fraud until January 2008.”
 
The FINRA report makes it clear that FINRA must institute a number of internal reforms to better safeguard investors and the broader financial system. In fact, FINRA today announced the creation of a new Office of Fraud Detection and Market Intelligence, which hopefully will provide rapid response to fraud by a staff with expertise in fraud detection and investigation.
 
Standing alone, however, FINRA’s reforms will be insufficient to meaningfully limit financial fraud. Indeed, the report itself points to the urgent need for financial regulatory reform that ensures comprehensive oversight, reduces jurisdictional confusion, streamlines enforcement and improves coordination and communication among all regulators. We’re still waiting for that….