Tax Deductibility of Fines by Regulators in the Financial Industry

Feb 26, 2018 | Blog

The Tax Cuts and Jobs Act (“Act”) has significant tax implications to members of the financial industry who settle enforcement claims with their regulators.

The most significant change is that fines and penalties paid to non-governmental entities that “exercise self-regulatory powers (including imposing sanctions) in connection with a qualified board or exchange (as defined in section 1256(g)(7))” or “as part of performing an essential governmental function” are no longer tax deductible. The Financial Industry Regulatory Authority (“FINRA”), the Municipal Securities Rulemaking Board (“MSRB”), and the National Futures Association (“NFA”) would appear to fit within that definition.

Additionally, to be able to deduct a sanction of restitution the settlement must expressly identify such in the agreement. While this is often not an issue in a settlement with the aforementioned regulators because they fastidiously identify all of the financial elements of a settlement, it may now make the decision to pay restitution to customers more advantageous than paying a punitive sanction to the regulator. Of course, the implications of doing so – not only in terms of admission of liability but reputational risk – still need to addressed and should be discussed with counsel before settling any matter with a regulator.