Is Compliance in FINRA’s Crosshairs?

FINRA fines shattered a record last year – and, according to a recent analysis, compliance officers are increasingly finding themselves in FINRA’s crosshairs.

Those are among the findings of Eversheds Sutherland LLP’s annual study of the disciplinary actions reported by the Financial Industry Regulatory Authority (FINRA) in 2016 based on their review of FINRA’s monthly disciplinary reports and press releases. In 2016 the amount of fines ordered by FINRA ($176 million) shattered its previous record of $134 million set in 2014. And while the number of cases reported was on par with prior years, the amount of restitution ($28 million) declined significantly from 2015’s record total of $96 million, according to the report.

Compliance ‘Crackdown’?

The report notes that in 2016, 27 cases involved some type of sanction against a firm’s compliance officer, although some of these compliance officers wore multiple “hats” (i.e., in addition to being compliance officers, they acted in other capacities such as firm president or chief executive officer).

In addition to the compliance officer crackdown, the report notes that other enforcement trends included:

An explosive increase in fines was the key FINRA enforcement trend in 2016. The report notes that fines jumped from $94 million in 2015 to $176 million in 2016, an increase the report attributed primarily to the significant rise in the size and number of, what the report called “supersized” fines of $1 million or greater and, “yuuuge” fines of $5 million or greater. In 2015, 18 “supersized” fines were assessed, totaling $52.2 million, but last year 34 “supersized” fines were assessed, totaling more than $137 million. Of those, eight were “yuuuge” fines, totaling nearly $89 million. The report authors claim that this trend signals that FINRA will continue to assess substantial fines against firms even where there is limited or no measurable harm to customers.

Suitability. Though this category failed to land on Eversheds Sutherland’s Top Enforcement Issues list in 2016, FINRA still reported 87 suitability cases, totaling $15.3 million, a 14% increase from the 76 cases brought in 2015. However, the fines decreased 16% from the $18.3 million reported in 2015. Last year, FINRA reported a few suitability cases relating to, for example, the sale of non-traditional exchange-traded funds to retail investors, mutual fund share classes, and municipal bonds and closed-end funds. That said, this turned out to be just the third time in eight years that suitability did not crack Eversheds Sutherland’s Top Enforcement Issues list.

While fines jumped significantly and restitution decreased in 2016, the number of cases reported by FINRA decreased slightly last year: FINRA reported filing 1,434 disciplinary actions in 2016, a decrease of about 2% from the 1,462 cases FINRA reported in 2015 and similar to the number reported over the past five years, according to the report.

Top Enforcement Issues

As for the top FINRA enforcement issues (based on total fines):

Anti-money laundering (AML) cases resulted in the most fines for FINRA in 2016, the third year in a row that AML has been on Eversheds Sutherland’s Top Enforcement Issues list. FINRA reported 32 AML cases in 2016, which resulted in $45.9 million in fines. The number of cases decreased by 11% from 36 in 2015, but the fines reported soared from $20.6 million in 2015, an increase of 123%. The rise of AML to the top spot was driven by a number of large fines, including one settlement with two affiliated firms for allegedly failing to establish and implement adequate AML procedures, resulting in the failure to properly prevent or detect, investigate and report suspicious activity for several years (this included the sanction of the AML Compliance Officer).

Variable annuities cases resulted in the second largest amount of fines assessed by FINRA and the largest single fine in 2016 ($20 million) — the first time that variable annuities have been on Eversheds Sutherland’s Top Enforcement Issues list since 2009. In 2016, FINRA reported $30.3 million in fines for 30 variable annuities cases. Compared to 2015, these figures represent a 191% increase in fines (up from $10.4 million) and a 20% increase in the number of cases (up from 25). The increase in fines was largely driven by the $20 million fine assessed against a firm for allegedly making negligent misrepresentations and omissions to customers about the costs and guarantees relating to replacement variable annuities.

Trade reporting cases resulted in the third most fines for FINRA in 2016, down from its number one spot last year on Eversheds Sutherland’s Top Enforcement Issues list. This is the fourth year in a row that trade reporting has appeared on this list. In 2016, FINRA reported $24.4 million in fines in 146 trade reporting cases, a 19% decrease in fines from the $30.3 million in 2015 and an 8% decrease in the number of cases from 159.

Books and records cases resulted in the fourth most fines for FINRA in 2016 — the first time that this issue has appeared on Eversheds Sutherland’s Top Enforcement Issues list. FINRA reported 99 books and records cases in 2016, which resulted in $22.5 million in fines. Compared to 2015, these figures represent a 423% increase in fines (up from $4.3 million) and a 7% decrease in the number of cases (up from 106). The report notes that this sudden surge in books and records cases was driven largely by enforcement actions against 12 firms for, among other things, failing to preserve records in “write once, read many” (WORM) format.

Another first-time issue on the top list was unregistered securities cases. FINRA reported 32 unregistered securities cases in 2016, which resulted in a total of $18.4 million in fines. This was an increase of 581% in fines from $2.7 million reported in 2015 and an increase of 39% from the 23 cases reported in 2015. (Twelve of the 32 cases involved AML.) The drastic increase in fines for unregistered securities cases was driven primarily by a $16.5 million fine against a firm for failing to implement sufficient procedures to comply with federal securities laws relating to unregistered securities, among other issues (including AML deficiencies).

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