Financial Industry Regulatory Authority Research Articles

Education and Financial Knowledge in Health-Related Financial Decisions.

The high cost of health care in the United States creates complex decisions where suboptimal choices may negatively affect an individual's physical and financial health. The challenge for patients is that the complex nature of health-related financial decisions requires specialized knowledge to avoid these suboptimal choices. While the benefits of improved health literacy are well documented, the connection between health care and household finances may mean that there is a role for education and financial knowledge in improving outcomes. This study uses data from the Financial Industry Regulatory Authority's Financial Capability Survey in a binomial logistic regression to examine the role of education and financial knowledge in health-related financial decisions. The results show that both higher levels of education and financial knowledge are related to a higher likelihood of obtaining health insurance coverage and a lower likelihood of having medical debt and engaging in cost avoidance. Income disparities remain, however, especially for those in the middle-income brackets. These results raise the possibility that increases in general education and financial knowledge may improve health outcomes, but those facing the most complex health care decisions may need more specialized knowledge. This implies that given the connection between health care and personal finances, increasing objective and subjective knowledge may lead to better outcomes for patients' financial and physical health.

Risk preference, payday loans and other alternative financial services

PurposeThe purpose of this paper is to examine how individual risk preference influences the borrowing of payday loans – a prevalent type of cash loan in the USA with exorbitantly high-interest rates. Additionally, this paper tests how risk preference determines other alternative financial services (AFS), including pawn shops, rent-to-own purchases, title loans, etc.Design/methodology/approachThe author applies Probit and Tobit regressions to test the relationship between individual risk preference and payday borrowing, based on the state-by-state survey data from National Financial Capability Study (NFCS) sponsored by Financial Industry Regulatory Authority (FINRA) Investor Education Foundation.FindingsIndividuals with higher risk tolerance are more likely to borrow payday loans and other AFS, after controlling for financial situation, financial literacy, overconfidence and demographic features.Originality/valueThis paper is the first to study risk preference as an explanation to the high cost and widely used payday loan services in the United States of America. This study provides evidence that these cash loans are determined by inherent human characteristics. The finding provides new insight for the policymakers and regulators in the consumer debt market.

The Effects of Financial Literacy of Low-Income Females on Their Long-Term Financial Behaviors

Much of modern education has focused on developing individuals’ skills to be productive parts of society. The developed skills can become enablers of financial stability, independence and economic security. Yet, on a relative basis, considerably less effort is expended on building the financial skills for individuals to preserve their wealth and assets. As a result, for certain consumer segments, lack of financial education can become a source of hardship. In this study, we use data from the U.S. Financial Industry Regulatory Authority’s (FINRA) 2021 National Financial Capability Study. The correlation between financial literacy and long-term financial behaviors is empirically examined and further dissected by gender and income, to identify population segments who may be vulnerable due to lack of adequate financial education. Significant patterns of financial literacy scores are identified, highlighting the need to enhance financial education offerings to vulnerable consumer segments.

MP66-09 ASSESSING FINANCIAL LITERACY AND WELLBEING OF UROLOGY RESIDENTS

You have accessJournal of UrologyCME1 Apr 2023MP66-09 ASSESSING FINANCIAL LITERACY AND WELLBEING OF UROLOGY RESIDENTS Katherine Sinchek, Kyle Dymanus, Morgan Salkowski, Christopher Coogan, and Alexander Chow Katherine SinchekKatherine Sinchek More articles by this author , Kyle DymanusKyle Dymanus More articles by this author , Morgan SalkowskiMorgan Salkowski More articles by this author , Christopher CooganChristopher Coogan More articles by this author , and Alexander ChowAlexander Chow More articles by this author View All Author Informationhttps://doi.org/10.1097/JU.0000000000003329.09AboutPDF ToolsAdd to favoritesDownload CitationsTrack CitationsPermissionsReprints ShareFacebookLinked InTwitterEmail Abstract INTRODUCTION AND OBJECTIVE: Physicians accrue significant debt throughout their medical education yet report less experience with and instruction in personal finance management than their age-matched peers. Our study aims to evaluate financial status, literacy, and attitudes in urology residents across the United States. METHODS: A web-based survey was sent to 146 ACGME-accredited urology residency programs in the United States. Respondents were asked to answer 50 questions covering personal debt, financial status, and willingness to participate in formal education on personal finance during residency. The survey included a validated questionnaire authored by the Financial Industry Regulatory Authority (FINRA) to provide objective data regarding financial literacy. RESULTS: 99 total responses were received from urology residents located in 23 states. Financial and debt status are reported in Table 1. 88 respondents answered the financial literacy portion of the survey, with an average correct score of 53% (+/-22.5%). Residents that reported their knowledge of personal finance and investing as high (7%) or above average (26%) were more likely to have higher scores than those reporting their knowledge as limited (38%) or having no knowledge (11%) (p=0.01). Lower debt level (<$100,000) was associated with a higher literacy score (p=0.01). Residents cited lack of time (75%), lack of resources (51%), and challenging subject matter (47%) as reasons for their limited financial knowledge. CONCLUSIONS: Responses indicate a high debt burden yet limited literacy in personal finance based on quantitative measures provided by the FINRA assessment. Although most residents reported confidence in ability to meet monthly costs of living, a survey of savings versus debt depicts residents in a precarious position. Formal education in personal finance was also assessed, highlighting a disparity in resident interest and what programs currently offer. While most residents reported having access to personal finance educational programming at their programs, almost all respondents indicated they did not feel it was adequate for their needs. These results suggest that the addition of a formal course on personal finances would be well-received and lead to improved financial wellbeing in this group. Source of Funding: None © 2023 by American Urological Association Education and Research, Inc.FiguresReferencesRelatedDetails Volume 209Issue Supplement 4April 2023Page: e935 Advertisement Copyright & Permissions© 2023 by American Urological Association Education and Research, Inc.MetricsAuthor Information Katherine Sinchek More articles by this author Kyle Dymanus More articles by this author Morgan Salkowski More articles by this author Christopher Coogan More articles by this author Alexander Chow More articles by this author Expand All Advertisement PDF downloadLoading ...

Badges of Misconduct: Consumer Rules to Avoid Abusive Financial Advisers

ABSTRACT The financial advisory industry in the USA lacks professional standardization/regulation. There are few guideposts to assess adviser quality, and risks to consumer welfare abound. Some 91% of investment advisers operate on conflicted sales commission licences, although many market themselves as fiduciaries. Using an adviser misconduct scoring framework we report specific misconduct ratings for each of the 625,980 Financial Industry Regulatory Authority (FINRA) advisers, finding elevated misconduct for Certified Financial Planner (CFP®) professionals and commission/fiduciary licensees. For Chartered Financial Analyst (CFA®) professionals, we found the opposite. We propose a unique scoring system to aid consumers in flagging problematic advisers. We also offer simple regulatory policy recommendations, which could enable stronger consumer protection at minimal cost or bureaucratic burden.

Ten Reasons for Serving as a FINRA Arbitrator

Over the course of my career, I have heard many critical, even prejudicial, comments about arbitrators who adjudicate cases for the Financial Industry Regulatory Authority, best known as FINRA. Yet I continue to be proud to serve as a FINRA arbitrator.

The Relationship Between Ethics and Firm Turnover Among Investment Brokers

Unethical brokers wreak havoc on the personal and financial lives of their clients. However, in order to have confidence that a broker is ethical, clients must be able to identify warning signs. The occupational and demographic history of brokers may hold clues to a broker’s ethics. For example, brokers who move from firm to firm may be doing so to avoid legal trouble. However, moving from firm to firm may also simply reflect ambition. Thus, research is needed to determine if turnover is a legitimate warning sign for unethical behavior. Study 1 used an archival sample from the Financial Industry Regulatory Authority organization (i.e., FINRA; www.finra.org) to replicate and extend previous findings that frequent turnover is a warning sign for unethical behavior. We found that having been banned from trading or having high amount disclosures was associated with more turnover and less time spent at each firm. Study 2 surveyed 235 full time workers in the financial sector. Although we found no evidence that firm turnover was associated with legal concerns, we did find a negative relationship between time spent at their longest appointment and legal concerns. This association remained even when controlling for personality, workplace culture, greed, and ambition. These findings contribute to a greater understanding of how demographic variables may be useful for flagging unethical brokers.

Individual vs. group decision-making: Evidence from a natural experiment in arbitration proceedings

The importance of understanding the systematic differences between group and individual decisions has been well recognized in the literature. However, the vast majority of empirical evidence on this issue is derived from laboratory experiments, and hence does not reflect professional incentives and career concerns, both of which may play a crucial role. To fill this gap, I exploit a unique regulatory change that exogenously decreased the number of presiding arbitrators from three to one for a specific class of cases in the Financial Industry Regulatory Authority arbitration and an original data set of arbitration awards. The findings indicate that panels of three arbitrators render more extreme “all or nothing” awards compared to sole arbitrators. An arbitrator fixed effects model confirms that this tendency is also present within arbitrators, thus ruling out that the effect is driven by differential selection of arbitrators into panels. Rather, evidence suggests that groups provide individual arbitrators with a “shield of anonymity” which mitigates their concerns about adverse reputational effects of extreme decisions.

Preparing for market disruption: circuit breakers and discretionary trading halts

Purpose This article provides a resource for traders and other market participants by providing an overview of certain automatic circuit breaker mechanisms and discretionary powers that the U.S. Securities and Exchange Commission (SEC), Financial Industry Regulatory Authority (FINRA) and the U.S. president, as applicable, can exercise to pause or stop the trading of individual securities or trading activities across exchanges during extreme market volatility, each of which can cause interruptions to trading activity. Design/methodology/approach This article surveys automatic and discretionary mechanisms to halt trading activity under extreme market conditions. In particular, the article examines automatic cross-market circuit breakers, limit up-limit down pauses, the alternative uptick rule, as well as discretionary authority to stop short selling of particular securities and to stop trading across exchanges. Findings The article concludes that market participants must be cognizant not only of automatic cross-market circuit breakers, but also several other forms of potential market disruptions that may occur due to increased market volatility during the COVID-19 pandemic and beyond. Originality/value By exploring various mechanisms that respond to market disruption, this article provides a valuable resource for traders and other market participants looking to identify and respond to potential interruptions to their trading activity.

Investment Banks’ Research Activities in the Post-Reform Era: Are Analysts’ Conflicts of Interest Still Alive?

In this paper, we identify a channel where affiliated banks maintain a positive gap between the implied return (computed from target price) of the corporate client stock and that of the client’s peer. This behavior is triggered after the business deal disclosure when investment banks, including those sanctioned in the Global Research Settlement Act, are most likely to exploit such conflicts. The client’s high institutional ownership and target prices issued in isolation exacerbate the implied return gap. We show that the subsequent sanctions incurred for the violation of Financial Industry Regulatory Authority’s rules effectively discourage the affiliated investment banks to favor their corporate clients via the client-peer channel.

Nothing but the Facts: The U.S. Treasury Market During the COVID-19 Crisis

In this report, the Committee on Capital Markets Regulation (the “Committee”) describes the turmoil in the U.S. Treasury market during March 2020, with a focus on the unexpected rise in Treasury yields, the illiquidity in the Treasury market and the subsequent intervention by the Federal Reserve to stabilize the market. We then describe the market structure for trading U.S. Treasuries as well as trade reporting requirements and public information regarding the owners of Treasuries. We find that policymakers and the public lack the transaction data to comprehensively determine the source of selling in March 2020 that drove the volatility in the U.S. Treasury market.Policymakers have sought to identify the source of the selling pressure in the Treasury market in March 2020 because holders of U.S. Treasuries, including large financial institutions and foreign investors, rely on the assumption that Treasuries are cash-like instruments.1 For U.S. Treasuries to continue to function as a global safe haven asset, Treasuries must retain their value and trade efficiently during market crises. Identifying the source of the selling pressure in March 2020 would enable policymakers to determine whether changes to regulation or market structure are necessary to allow the Treasury market to better accommodate such selling in the future. In-deed, understanding the potential sources of fragility in the Treasury market remains important, as periodic bouts of volatility persist—most recently in February 2021.2In Part I of our report, we summarize the volatility in the U.S. Treasury market in March 2020 and the Federal Reserve’s role in stabilizing the market. In Part II, we provide a comprehensive overview of the market structure for trading U.S. Treasuries (so-called “cash Treasury” markets), including the respective role of broker-dealers, proprietary trading firms, institutional inves-tors and trading venues. Part II then describes the trade information for U.S. Treasuries available to regulators from the Financial Industry Regulatory Authority’s Trade Reporting and Compliance Engine (“FINRA’s TRACE database”). Finally, in Part III we evaluate public disclosures of ownership information and trade data for U.S. Treasuries, including data provided by the Federal Reserve and U.S. Treasury Department regarding institutional investors, foreign investors and foreign official investors (such as central banks and sovereign wealth funds). We also review public disclosures regarding the U.S. Treasury holdings of hedge funds and mutual funds.We conclude that policymakers and the public lack the trade and ownership information necessary to comprehensively determine the source of selling in the Treasury market in March 2020. We therefore recommend that policymakers exercise caution before reaching conclusions or enacting regulations related to the March 2020 spike in Treasury yields. An appropriate first step for policymakers would be to consider whether expanded reporting obligations for participants in the U.S. Treasury market are warranted. In addition, policymakers should continue to study activity in the U.S. Treasury market to determine whether other reforms could enhance its efficiency, resiliency and transparency.

Self-regulation versus government regulation: an externality view

Who should be responsible for industry regulation, a private self-regulatory agency or a public agency? This paper provides a simple framework to analyze the optimal scope of a private self-regulatory organization (SRO) versus government regulation. The trade-off depends on three key elements: externalities, monopoly distortions, and the degree of asymmetric information. Self-regulation is more desirable than government regulation if the degree of asymmetric information between the public regulator and private industry is larger than the size of the monopoly distortion and externalities from the industry to society. An optimal mechanism consists of both self-regulation and government regulation where an SRO internalizes externalities within the industry and the government corrects any distortions generated by the SRO. These insights can be applied to many practical settings and policy discussions—for example, in the context of the financial sector, as with the Financial Industry Regulatory Authority.

Why Punishment Does Not Fit the Crime: Experimental Evidence That Situational Circumstances Crowd Out Damage Done

ABSTRACT Regulators desire punishment that restores individuals to monetary positions before the damage and deters future violations. Thus, enforcement effectiveness is partially a function of punishment severity. Under the Securities and Exchange Commission's oversight, the Financial Industry Regulatory Authority provides enforcement and punishment guidelines for securities fraud cases. However, motivation crowding theory suggests extenuating and aggravating circumstances may complicate punishment. We investigate the concern that individuals charged with punishing securities fraud might be excessively tolerant, illustrated by recommended sanctions. Using two samples of participants—compliance examiners and securities arbitrators—in an experimental task that manipulates the fraudster's motivation, history, and personal gain, we find participants may be overly influenced by situational circumstances. Further, participants recommend monetary sanctions that fail to achieve regulators' restoration goals. We discuss practical implications of these findings for regulators. Further, we illustrate the need to extend motivation crowding theory to consider factors associated with non-direct financial benefits.

Principal Trading Firm Activity in Treasury Cash Markets

This FEDS Note aims to share insights on Treasury cash transactions reported in the Financial Industry Regulatory Authority (FINRA)'s Trade Reporting and Compliance Engine (TRACE). Following earlier joint FEDS Notes and Liberty Street Economics blog posts that examined aggregate trading volume in the Treasury cash market across venues and security types, this post sheds light on the trading activity of Principal Trade Firms (PTFs) and other market participants that are not registered broker-dealer members of FINRA.

Fixed Income Market Structure: Treasuries vs. Agency MBS

This FEDS Note analyzes the structure of the agency mortgage-backed securities (MBS) market through the lens of the TRACE Treasury data initiative, which is a significant component of a broader inter-agency effort to enhance understanding and transparency of the Treasury securities market. As in several previous FEDS Notes describing the Treasury cash market structure, this note uses transactions reported to the Financial Industry Regulatory Authority (FINRA)'s Trade Reporting and Compliance Engine (TRACE) to examine aggregate trading volumes in the agency MBS market across venues, security types and participants. We show how agency MBS provide a useful counterfactual to cash Treasuries when analyzing the evolution of Treasury cash market structure and its implications for liquidity. We provide evidence that the participation of Principal Trading Firms (PTFs) in Treasury markets has caused the overall volume of intermediation to rise there, particularly in the interdealer broker (IDB) venue. We also find that, relative to Treasury markets, intermediation in the agency MBS market is concentrated among fewer firms, and in particular the primary dealers, suggesting that PTF participation in Treasury markets has diversified intermediation in the IDB venue across a larger number of firms.

Short selling and dark pool volume

PurposePrior research posits that traders with short-lived information favor lit exchanges over dark pools due to execution certainty. This paper aims to focus on the relation between informed trading based on firm fundamentals and dark pool volume because the preferred venue for traders with longer-lived information is less certain.Design/methodology/approachThe authors examine the effect of short interest, a proxy for informed traders with long-lived information, on dark pool volume using fixed effects, first difference and instrumental variable approaches. They examine the effect of dark pools on the profitability of long-lived information using market- and characteristic-adjusted returns.FindingsThe proportion of trading volume executed in dark pools is positively correlated with short interest. This result is stronger for stocks that suffer from greater uncertainty and stocks targeted by transient institutional investors. Short sellers profit substantially from their information as subsequent returns are lower for heavily shorted stocks with greater dark pool volume.Research limitations/implicationsIn 2014, the Financial Industry Regulatory Authority began making trading data available for dark pools. Before that, only limited information was publicly available. The authors use that data to shed more light on dark pools activity.Practical implicationsThe evidence presented in the paper helps inform the current discussion about the role and regulation of dark pools.Originality/valueThis is the first study to show that informed traders with long-lived information favor dark pools due to their opacity and the possibility of price improvement.

Payment-For-Order-Flow Implications for Robinhood Users

The digital age has transformed financial exchanges from high-stress trading floors to automated processes ruled by algorithms and online brokerage firms. Payment-for-order-flow is a controversial practice, ironically instituted by Bernard Madoff (Farrell, 2008, pg.19) and approved by the New York Stock Exchange (NYSE) in 2009. Although the practice has expanded liquidity to the NYSE and has made markets more efficient, there are questionable aspects of payment-for-order-flow, spearheaded by online brokerage firms, that contribute to the potential exploitation of retail investors. This term paper highlights problems associated with payment-for-order-flow, assesses current policies regulating and allowing this practice, and explores policy alternatives. Additionally, it utilizes Robinhood Financial, an online brokerage firm, as a case study to characterize payment-for-order-flow and its broader implications for stakeholders in the United States. This term paper addresses implications of Financial Industry Regulatory Authority and Securities and Exchange Commission policies, the use of data by market makers, lack of transparency, and conflicts of interest that brokers face. The recommended policy alternative, in this paper, aims to respect individual autonomy over digital financial data yet allows for the market and economy to maximize benefits. The proposed policy will enable payment-for-order-flow to continue to exist but ensure that retail investors have the option to opt-out but continue to engage in the market. Additionally, the policy requires that brokerage firms immediately notify retail investors of any order routing decisions along with accompanying explanations for these decisions.

“Manifest Disregard of Law” Doctrine as the grounds for cancellation of arbitration decisions FINRA (United States)

This article explores the process of emergence and practical implementation of the &amp;ldquo;Manifest Disregard of Law&amp;rdquo; Doctrine as the grounds for cancellation of arbitration decisions rendered in accordance the rules of Financial Industry Regulatory Authority of the United States (FINRA). The content of the doctrine is formulated by the Supreme Court of the United States. De jure, it is not one of the bases for cancellation of arbitration decisions stipulated by the Sector 10 of the Federal Arbitration Act of 1925; de facto, this doctrine constitutes a new independent basis for such cancellation. The scientific novelty consists in the fact that the &amp;ldquo;Manifest Disregard of Law&amp;rdquo; Doctrine has not been examined within the Russian legal science, excluding the instances of brief mentions. The conclusions is made the revelation of facts of the &amp;ldquo;manifest disregard of law&amp;rdquo; by the arbitrators does represent independent grounds for cancellation of arbitration decision along with other grounds established by the Federal Arbitration Act of 1925. At the same time, practical application of such grounds by the state courts is associated with the need for compliance with the existing limits of the procedural freedom of arbitrators.

Who Are Robo-Advisor Users?

The purpose of this study is to explore the demand for robo-advising services by analyzing the participants’ behavioral characteristics and investment patterns. With the 2015 Financial Industry Regulatory Authority Investor data, we found that robo-advisor users were younger investors with high risk tolerance, whose self-assessment of financial knowledge is comparatively higher than their actual knowledge, and were independent decision-makers. By controlling for those behavioral attributes of robo-advisor users, we also found that robo-advisor users were reluctant to invest in individual stocks, while they showed the largest preference for investing in pooled investment products such as Exchange Traded Funds. Implications of this study’s findings can be beneficial to financial planning practitioners, academics, and regulators.

FINRA’s disciplinary actions in 2018:Increased fines ordered with significant drop in number of cases

Purpose To analyze FINRA’s 2018 disciplinary actions, the issues that resulted in the most significant fines and restitution, and the emerging enforcement trends from 2018 and beyond. Design/methodology/approach Discusses the disciplinary actions in 2018 and prior years; details the top 2018 enforcement issues measured by total fines assessed, including anti-money laundering, suitability, variable annuity, and short selling; and explains current enforcement trends, including higher fines per case, more cases with larger sanctions in the second half of the year, share class issues, and inadequate resources. Findings In 2018, the Financial Industry Regulatory Authority (FINRA) ordered fewer fines than in 2017, and the number of cases and amount of restitution were down. Practical implications Firms and their representatives should heed the trends in both the substantial fines per case that FINRA is ordering and the related enforcement issues in the cases FINRA has brought. Originality/value Expert analysis and guidance from experienced securities enforcement lawyers.