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FINRA’s Recent Enforcement Actions Pack A Hard Punch

FINRA’s Recent Enforcement Actions Pack A Hard Punch

Based on an analysis of FINRA’s monthly disciplinary reports, press releases and online database, the fines reported by FINRA in 2018 increased slightly to $68 million from $65 million in 2017, a 5 percent jump, yet were down significantly (61 percent) from the record-setting fines of $176 million in 2016.

By Brian Rubin, Adam Pollet, Rebekah Runyon and Gregory Amoroso for Law360.com

A review of the disciplinary actions brought by the Financial Industry Regulatory Authority in 2018 shows that the amount of fines ordered by FINRA increased compared with 2017. However, FINRA also brought fewer actions and ordered decreased restitution.

Fines, Restitution and Disciplinary Actions

Based on an analysis of FINRA’s monthly disciplinary reports, press releases and online database, the fines reported by FINRA in 2018 increased slightly to $68 million from $65 million in 2017, a 5 percent jump, yet were down significantly (61 percent) from the record-setting fines of $176 million in 2016.

Additionally, the fines in 2018 were 28 percent lower than the $94 million in fines reported in 2015. Despite this reduction, fines have increased by 143 percent in the ten years since 2008, when FINRA assessed fines of $28 million.

Although the amount of fines increased, the number of very large fines declined in 2018. FINRA assessed 13 fines of $1 million or more (what we call “supersized” fines). In contrast, in 2017, FINRA assessed 15 “supersized” fines. Similarly, in 2018, FINRA assessed five fines of $5 million or more (what we call “yuuuge” fines), and, in contrast, in 2017, only two cases resulted in “yuuuge” fines.

While 2018 brought more fines than did 2017, 2018 also brought significantly lower restitution amounts. In 2018, FINRA reported restitution of approximately $31 million, a 54 percent decrease from the $67 million in restitution reported in 2017 and well below the record of $96 million reported in 2015.

The decrease in restitution is less pronounced when FINRA’s overall monetary sanctions are analyzed. In 2018, the total monetary sanctions ordered by FINRA (fines, restitution and disgorgement) were $124 million. In contrast, the total sanctions ordered in prior years were as follows: $150 million in 2017; $207 million in 2016; and $193 million in 2015.

Like restitution amounts, the number of cases reported by FINRA also decreased last year. In 2018, FINRA reported 638 disciplinary actions, which was a decrease of about 37 percent from the 1,007 cases FINRA reported in 2017.[1]

Additionally, the number of individuals barred, suspended or expelled by FINRA decreased in 2018 compared to 2017. In 2018, FINRA barred 211 individuals, which was only a 1 percent decline from the 214 individuals barred in 2017.

The number of firms expelled and suspended by FINRA dropped significantly in 2018. The number of firms expelled by FINRA decreased from 7 in 2017 to 4 in 2018, a decrease of 43 percent. Additionally, the number of individuals suspended by FINRA also decreased significantly from 413 in 2017 to 254 in 2018, a decrease of 38 percent.

The chart below displays FINRA’s fines and the number of disciplinary actions during each of the past 10 years:

FINRA’s Sanctions Statistics, 2009-2018[2]

Fines ReportedPercentage ChangeDisciplinary ActionsPercentage Change
FINRA StatisticsFINRA Online Data
 2009 $50 million1,1581,040
2010$42 million(16)1,3101,14710
2011$72 million711,4881,2499
2012$69 million(4)1,5411,2813
2013$60 million(13)1,5351,2830.2
2014$134 million1231,3971,212(6)
2015$94 million(30)1,4621,34411
2016$176 million871,4341,201(11)
2017$65 million(58)1,3691,007(16)
2018$68 million5TBD638(37)

The chart below displays the restitution FINRA reported during each of the past 10 years:

FINRA’s Restitution Statistics, 2009-2018

 Restitution Reported  Percentage Change 
 2009 $8 million
2010$6 million(25)
2011$19 million217
2012$34 million79
2013$10 million(71)
2014$32 million220
2015$96 million200
2016$28 million(71)
2017$67 million136
2018$31 million(54)

Top Enforcement Issues Measured by Total Fines Assessed

In 2018, FINRA disciplinary actions addressed an array of enforcement issues. An analysis of the top FINRA enforcement issues for 2018 measured by total fines assessed shows that in addition to continuing its focus on anti-money laundering in 2018, FINRA also pursued more “nuts and bolts” issues such as suitability, variable annuities and supervisory policies and procedures.[3]

Anti-Money Laundering Cases

For the third year in a row, AML cases resulted in the most fines assessed by FINRA. In 2018, FINRA reported a total of 17 disciplinary actions involving AML issues, which resulted in $27.3 million in fines.

While the number of cases was almost the same as in 2017, during which FINRA reported 16 cases, the fines increased by $12.7 million in 2018, an 87 percent increase. AML maintained the top spot due in part to the largest single fine FINRA assessed in any case in 2018 ($10 million).[4]

In that case, the firm’s AML surveillance system allegedly did not receive data from several systems, undermining its surveillance of wire and foreign currency transfers. The firm also allegedly failed to devote sufficient resources to the review of alerts generated by its AML surveillance system. Finally, FINRA claimed the firm did not reasonably monitor the deposit and subsequent sale of penny stocks for suspicious activity.

AML’s repeated presence at the top of the list is evidence that FINRA will likely continue to closely monitor how firms are handling their AML compliance obligations.

Suitability Cases

Although the number of suitability cases brought by FINRA decreased in 2018, the total amount of fines from suitability cases increased significantly, causing suitability cases to generate the second most fines for FINRA in 2018. Last year, FINRA reported 91 suitability cases, which was a 7 percent decrease from the 98 cases brought in 2017.

The 91 cases resulted in $11.8 million in fines, a 228 percent increase from the $3.6 million in fines reported in 2017. FINRA also ordered $11.6 million in restitution in suitability cases, compared with $30.3 million in 2017.

As discussed below, one of the large suitability cases in 2018 related to variable annuities resulted in a fine of $4 million and restitution of $2 million. FINRA also fined a firm and its associated persons $713,000, and ordered $1.3 million in restitution in connection with churning and supervising customers’ accounts.[5] In another matter, FINRA fined a firm $800,000 for failing to adequately supervise the suitability of its representatives’ recommendations.[6]

Variable Annuity Cases

For the first time since 2016, variable annuities made the list of top FINRA enforcement issues based on fines assessed. In 2018, variable annuity cases resulted in the third most fines for FINRA with a reported 28 variable annuity cases, which resulted in a total of $8.1 million in fines.

The number of cases increased 22 percent from the 23 cases brought in 2017, and the amount of fines increased 305 percent from the $2 million in fines reported in 2017. FINRA also ordered $8.7 million in restitution in variable annuity cases last year, compared with $428,000 in 2017.

In one matter, FINRA fined a firm $4 million and ordered $2 million in restitution for failing to supervise the sale of variable annuity exchanges.[7] In another variable annuity matter, FINRA fined four affiliated firms a total of $1.69 million and ordered restitution of $6 million for failing to establish and implement adequate supervisory procedures regarding the sale of multi-share class variable annuities, especially L-shares.[8]

Short Selling Cases

Finally, short selling cases resulted in the fourth most fines for FINRA in 2018. This is the first time that short selling made the list of FINRA’s top enforcement issues based on fines assessed.

In 2018, FINRA reported seven short selling cases for a total of $7.8 million in fines. Although the number of cases decreased 70 percent from the 23 cases brought in 2017, the amount of fines increased 387 percent from the $1.6 million in fines reported in 2017.

Short selling’s appearance on FINRA’s top enforcement issues list was primarily the result of a single matter. In that case, a firm was fined $5.5 million for failing, despite numerous red flags and warnings, to establish supervisory procedures that were reasonably designed to achieve compliance with the requirements of Regulation SHO, which included failing to close out fails-to-deliver, accepting short orders without first borrowing (or arranging to borrow) the security and permitting the execution or display of short sales at prices less than or equal to the current national best bid.[9]

Enforcement Trends

An analysis of the FINRA’s disciplinary actions shows some clear enforcement trends of 2018 and provides helpful insights into FINRA’s enforcement decisions last year.

Packing a Harder Punch

In 2018, FINRA brought 638 disciplinary actions, down considerably from previous years and continuing a trend from 2017. Although the number of cases was down significantly, the amount of fines appears to be packing more of a punch. For example, in 2017, FINRA brought 1,007 cases[10] with fines totaling $65 million, for an average fine of approximately $65,000 per case. But in 2018, the average fine per case was approximately $107,000, with 638 cases totaling $68 million in fines.

FINRA Is a Second-Half Team

Many of FINRA’s big-ticket fines are brought in the second half of the year, often in year-end cases. In 2018, FINRA reported fines of $42 million in the second half of the year compared to $26 million in the first half. Similarly, in 2017, FINRA levied $41 million in fines in the second half of the year and $24 million in the first half.

In 2018, the large fines in the second half were in part the result of FINRA fining four firms $21 million in December 2018 alone, representing nearly one-third of the $68 million in total fines for the year.

Sales Charge Waiver/Share Class Cases

FINRA continues to pursue firms for failing to provide sales charge waivers for retirement plans and charitable organizations. In 2018, FINRA brought six enforcement actions against firms for failing to provide these sale charge waivers when applicable. FINRA levied fines in only two of the matters totaling $150,000, but ordered restitution of $3.1 million.

This practice is consistent with a continuing trend of FINRA not ordering fines against firms that self-report and engage in extraordinary cooperation, and focusing on making harmed customers whole through restitution.

In January 2019, FINRA announced its 529 Plan Share Class Initiative, encouraging firms to review and self-report deficiencies in their supervisory systems and procedures governing 529 plan share class recommendations.[11] Firms that self-report will be subject to a settlement that includes restitution for affected customers, but no fine.

Inadequate Resources

In a couple of cases in 2018, FINRA cited firms for failing to commit sufficient resources to their regulatory obligations. These two matters resulted in sanctions of $10.8 million.

In the first matter, FINRA alleged that the firm relied on three individuals to manually review suitability for over 600 representatives in over 250 branches.[12] As a result, FINRA found the firm failed to have a reasonable supervisory system for the suitability review of customer transactions.

In the second matter, FINRA alleged that a firm failed to devote sufficient resources to review AML alerts, resulting in AML analysts carrying a large workload and failing to conduct sufficient investigations of potentially suspicious activity.[13]

These cases are consistent with an approach outlined in a 2018 speech by FINRA’s Director of Enforcement Susan Schroeder.[14] She stated that in disciplinary actions FINRA would be identifying the root cause of regulatory deficiencies.

A plain reading of last year’s numbers shows that FINRA brought fewer cases, but with higher total fines. What does that tell us about FINRA’s enforcement decisions last year, and what may we expect going forward? Well, it appears that FINRA is signaling to the industry that when it decides to bring a case, it intends to do so with full force.

With that in mind, firms may want to focus on ensuring that they are committing appropriate resources to compliance efforts, especially those issues that made FINRA’s list of top enforcement issues, as well as the subjects outlined in FINRA’s 2019 Annual Risk Monitoring and Examination Priorities Letter.[15]

Brian L. Rubin is a partner, Adam C. Pollet is counsel, Rebekah R. Runyon is an associate and Gregory S. Amoroso is a securities litigation consultant at Eversheds Sutherland.

The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.

[1] The number of disciplinary actions is taken from FINRA’s Disciplinary Actions Online database. FINRA has not yet published its annual report or updated its “Statistics” webpage, which are the “official” numbers.

[2] The 2009-2017 data contained in this chart and the next chart can be found in FINRA’s annual reports and FINRA’s “Statistics” webpage. See, e.g., FINRA 2015 Year in Review and Annual Financial Report, FINRA, available at http://www.finra.org/sites/default/files/2015_YIR_AFR.pdf, and Statistics, FINRA, https://www.finra.org/newsroom/statistics. Under Disciplinary Actions, the “FINRA ‘Statistics’” are the number of disciplinary actions reported in FINRA’s Annual Reports or “Statistics” webpage, while the “FINRA online data” is the number of actions listed on FINRA’s Disciplinary Actions Online database. FINRA has not yet released its Annual Report or updated its “Statistics” webpage for 2018. “The Percentage Change” is calculated using the number of actions listed on FINRA’s Disciplinary Actions Online database.

[3] Because cases may involve more than one alleged violation (e.g., suitability and variable annuities), a case may be included in more than one category in this analysis.

[4] AWC No. 2014041196601 (Dec. 26, 2018).

[5] http://www.finra.org/sites/default/files/fda_documents/2012030564701%20Newport%20Coast%20Securities%2C%20Inc.%20CRD%2016944%20Douglas%20A.%20Leone%202453784%20Andre%20V.%20La%20Barbera%20CRD%202072370%20NAC%20Decision%20va.pdf(June 22, 2018).

[6] AWC No. 201403971101 (Sept. 11, 2018).

[7] AWC No. 2013035051401 (May 8, 2018).

[8] AWC No. 2015047177001 (July 24, 2018).

[9] AWC No. 2014043143401 (Aug. 16, 2018).

[10] Since FINRA has not yet released its official 2018 figures, the number of cases cited in these examples are from FINRA’s Disciplinary Actions Online database for an “apples-to-apples” comparison.

[11] Regulatory Notice 19-04.

[12] AWC No. 2014039071101 (Sept. 11, 2018).

[13] AWC No. 2014041196601 (Dec. 26, 2018).

[14] See Susan Schroeder, Remarks at SIFMA AML (Feb. 12, 2018), available at https://www.finra.org/newsroom/speeches/021218-remarks-sifma-aml.

[15] http://www.finra.org/industry/2019-annual-risk-monitoring-and-examination-priorities-letter.

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The team of investment fraud lawyers at Starr Austen & Miller LLP fights for the protection of investors and handles cases involving securities arbitration misrepresentation, overconcentration, broker fraud, negligence and breach of trust.