The Self-Regulation of Investment Bankers
Andrew F. Tuch
Washington University in Saint Louis - School of Law
September 10, 2014
George Washington Law Review, Forthcoming
Washington University in St. Louis Legal Studies Research Paper No. 14-04-04
An under-appreciated feature of the regulation of investment bankers is that they must register with, and comply with rules promulgated by, the Financial Industry Regulatory Authority (FINRA). The self-regulatory body for broker-dealers, FINRA was formed on the principle that self-regulation is more effective than direct government regulation in governing the ethics of broker-dealers. Investment bankers generally fall within the definition of broker in federal securities laws because of the functions they perform and their compensation structure. Investment bankers must therefore comply with FINRA rules, including the requirement to “observe high standards of commercial honor and just and equitable principles of trade.”
This paper examines the extent to which FINRA enforces it rules against investment bankers. Based on a hand-collected data set of every disciplinary matter by FINRA from January 2008 to June 2013, this study finds weak FINRA enforcement activity against investment bankers. Applying optimal deterrence theory, the paper argues that the self-regulation of investment bankers offers no credible deterrence against misconduct. Moreover, since the costs of self-regulation likely exceed its benefits (measured in terms of deterrent force), the paper concludes that the self-regulation of investment bankers should be considered a failure. The paper further argues that other deterrence mechanisms likely under-deter misconduct by investment bankers – a preliminary conclusion that underscores the gravity of the failure of self-regulation. The paper suggests various proposals for reform.
Number of Pages in PDF File: 116
Keywords: Investment banking, investment bankers, FINRA, self-regulation, professional responsibilities, ethics, enforcement, conflicts of interest, fraud
JEL Classification: K22, G24, G21, G34working papers series
Date posted: May 5, 2014 ; Last revised: September 11, 2014
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