As a result of the financial crisis, the Financial Industry Regulatory Authority (FINRA) has significantly increased number of enforcement actions and the amount of sanctions imposed on broker-dealers in the previous year. According to Sutherland Asbill & Brennan LLP’s annual sanctions survey, the 13% increase in disciplinary actions resulted in increased fines of 51%.
FINRA filed 1,488 disciplinary actions in 2011, an increase from the 1,310 actions that it initiated in 2010. This made 2011 the third straight year in which the number of FINRA disciplinary actions has grown. The survey also found that the number of professionals barred by FINRA increased from 288 in 2010 to 329 in 2011.
Total fines jumped from $45 million in 2010 to $68 million in 2011, which is a 51% increase. The survey report stated, “While the $68 million reported in 2011 is still a far cry from the $184 million and $111 million that FINRA fined firms and representatives in 2005 and 2006, respectively, it may signal continued enforcement efforts for the near future.”
The survey also took notice of the top enforcement issues that FINRA made a priority in 2011. Sanctions relating to advertising top the list with a jump from $4.75 million in 2012 to $21.1 million in 2011. The number of cases nearly doubled in 2011 from 24 to 45. 45% of all the advertising fines in 2011 stem from Auction Rate Securities (ARS) and there were a number of cases involving allegedly misleading advertising materials provided to investors on firm websites. The report warned firms that “the increasing number of advertising cases, and the amount of resulting fines, demonstrate that FINRA is taking seriously perceived violations of its advertising rules and deficiencies in disclosures to investors. Firms may want to review the disclosures made in their advertising materials, especially those involving complex products for accuracy and completeness, both in materials provided to investors and internal marketing or training materials.” We discussed the problems firms face when marketing complex products in a previous blog, FINRA Wants Heightened Supervision of Complex Products.
The second enforcement issue which became a priority for FINRA in 2011 was short selling, which generated $16.8 million in fines. One case alone resulted in a $12 million fine which was FINRA’s largest fine in 2011. FINRA alleged that a firm violated Regulation SHO as well as other corresponding supervisory deficiencies. Regulation SHO requires a seller to reasonably believe a security can be acquired and delivered before it may be sold short and the sellers must mark the shares as either long or short. The survey report claims “FINRA will be reviewing the thoroughness and effectiveness of firms’ supervisory systems and procedures relating to short sales and Regulation SHO.”
Some of the other issues that the survey stated were top enforcement issues in 2011 are Auction Rate Securities, suitability and improper form U4, U5 and 3070 filings. ARS cases resulted in $10 million in fines, an increase of $1.75 million in the previous year. Suitability fines jumped from $3.75 million in 2010 to $7.7 million in 2011. There were more than $6.6 million in reported fines last year relating to improper form filings, an increase from the $1.45 million in 2010.
Parker MacIntyre provides legal and compliance services to investment advisers, broker-dealers, registered representatives, hedge funds and issuers of securities, among others. Our regulatory practice group assists financial service providers with the complex issues that arise in the course of their businesses, including compliance with federal and state laws and rules.