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, G34

working papers series

Download This Paper

Date posted: May 5, 2014 ; Last revised: September 11, 2014

Suggested Citation

Tuch, Andrew F., The Self-Regulation of Investment Bankers (September 10, 2014). George Washington Law Review, Forthcoming; Washington University in St. Louis Legal Studies Research Paper No. 14-04-04. Available at SSRN: http://ssrn.com/abstract=2432601 or http://dx.doi.org/10.2139/ssrn.2432601

Contact Information

Andrew F. Tuch (Contact Author)
Washington University in Saint Louis - School of Law ( email )
Campus Box 1120
Saint Louis, MO 63130
United States
Feedback to SSRN

Paper statistics
Abstract Views: 898
Downloads: 209
Download Rank: 88,223

© 2015 Social Science Electronic Publishing, Inc. All Rights Reserved.  FAQ   Terms of Use   Privacy Policy   Copyright   Contact Us
This page was processed by apollo6 in 0.406 seconds