CSG Law Alert: What is FINRA’s Threshold for Deciding Whether a Matter Should Be Referred to Enforcement?
The Commodity Futures Trading Commission (CFTC) recently announced that, going forward, the CFTC’s operating divisions would refer only “material” violations to the CFTC’s Division of Enforcement. What are “material” violations? The CFTC listed as examples matters that involve:
- harm to clients, counterparties, or other industry participants;
- harm to market integrity; or
- significant financial losses.1
Notably, the CFTC specifically addressed violations involving “supervision or non-compliance issues.” To determine the materiality of a supervision violation, the CFTC said it would consider the following criteria:
- especially egregious or prolonged systematic deficiencies of the supervisory system;
- knowing and willful misconduct by management; or
- lack of substantial progress towards completion of a remediation plan for an unreasonably lengthy period of time (such as several years).
The CFTC stated, explicitly, that supervision issues that failed to rise to this level of materiality would not be referred to Enforcement but instead would be addressed by the operating divisions “directly with the registrant.”
The CFTC’s notice is surprisingly transparent for a regulator, but it makes common sense. Indeed, why wouldn’t a regulator want the persons and entities it regulates to understand the rules of the road to encourage compliance and deter violations before they occur? As the CFTC itself explained, such guidance provides registrants with “fair notice and greater transparency.”
All of which begs the question: Why hasn’t FINRA—a self-proclaimed “self-regulatory” organization—issued similar guidance? The short answer is that it has . . . sort of.
In 2017, Robert Cook, FINRA’s CEO, announced an initiative, “FINRA360.” FINRA’s website described FINRA360 as a “self-evaluation” designed to ensure that FINRA is “operating as the most effective self-regulatory organization (SRO) it can be.”2 In April 2018, FINRA published a progress report, the “FINRA360 Progress Report,” which summarized the changes made in the first year of the initiative including changes made to FINRA’s Enforcement Department. Among the changes highlighted in the Report, FINRA touted that Enforcement had “[c]learly communicated to the industry and the public FINRA’s approach to pursuing and resolving enforcement cases.”3 As evidence of this communication, the Report cited to a February 2018 speech given by Susan Schroeder, then Head of FINRA’s Enforcement Department.
In her speech, the text of which can be found here, Ms. Schroeder explained that she wanted to provide greater insight into the principles that guide FINRA’s enforcement decisions and, ultimately, answer the following fundamental question: When is an enforcement action appropriate?
In answering that question, Ms. Schroeder stated that FINRA would pursue enforcement action when the misconduct:
- resulted in financial harm;
- significantly impacted market integrity; or
- created a significant risk of financial harm or impact to market integrity.
In evaluating this third category—i.e., whether there is “significant risk”—Ms. Schroeder stated that FINRA would consider, among other factors, whether (1) the firm employed a number of brokers with “sales practice disciplinary histories,” (2) the misconduct was intentional or reckless, or (3) the firm had a history of similar misconduct.
Like the CFTC’s recent announcement, Ms. Schroeder’s speech is a laudable example of transparency by a regulator. As Ms. Schroeder herself stated: “If firms don’t know what to expect from their regulator, they don’t know how to shape their behavior in order to comply with the rules.” Absent such transparency, Ms. Schroeder warned, regulators risk being accused of “rulemaking by enforcement.”
Though it has been more than seven years since Ms. Schroeder’s speech, it remains the most recent, comprehensive description of FINRA’s enforcement philosophy. Unfortunately, even a cursory review of FINRA’s Monthly Disciplinary Reports suggests that the tenets of Ms. Schroeder’s speech are not always followed, particularly when it comes to those so-called “supervision and non-compliance” cases, and it is not hard to find FINRA settlements that seem to cross the line into “rulemaking by enforcement.” All of which suggests that a refresh of Ms. Schroeder’s speech is long overdue.
Coincidentally, Robert Cook just announced a new initiative, “FINRA Forward.” FINRA Forward is FINRA’s first major “self-evaluation” initiative since FINRA360 and, like FINRA360, its stated goal is to improve FINRA’s efficiency and effectiveness.4 Perhaps FINRA Forward, like FINRA360, is an opportunity for FINRA to transparently outline to the industry and the public FINRA’s approach to pursuing and resolving enforcement cases.
1 CFTC Letter No. 25-13 (April 17, 2025). The CFTC Letter follows recent guidance from CFTC’s Department of Enforcement discussing credit for self-reporting.
2 https://www.finra.org/about/finra-360
3 https://www.finra.org/about/finra-360/progress-report
4 https://www.finra.org/media-center/newsreleases/2025/finra-announces-new-finra-forward-initiatives