While the number of cases reported by FINRA was down last year, the level of fines appears to be increasing, according to a new report.
Eversheds Sutherland’s annual analysis of FINRA disciplinary actions shows that the self-regulatory agency in 2018 brought 638 actions, which was down considerably from previous years and continuing a trend from 2017. Yet, even though the number of cases was down, the fines reported by FINRA increased by 5% to $68 million from $65 million in 2017.
Consequently, the 1,007 cases that FINRA brought in 2017 totaling $65 million equated to an average fine of approximately $65,000 per case, but the 638 cases in 2018 totaling $68 million resulted in an average fine per case of approximately $107,000.
“Last year, the amount of fines per case went up dramatically, while the number of cases decreased from the previous year, appearing to indicate that FINRA is coming down harder on firms when it decides to bring a case,” explains Brian Rubin, Eversheds Sutherland Partner and coauthor of the report.
Nevertheless, these numbers are still down significantly from the record-setting fines of $176 million in 2016, but they have increased by 143% in the 10 years since 2008, when FINRA assessed fines of $28 million, the study notes.
Eversheds Sutherland’s analysis is based on a review of data from FINRA’s monthly disciplinary reports, press releases and online database.
‘Supersized’ Fines
Though the amount of fines increased, the number of very large fines declined in 2018, the study shows. FINRA assessed 13 fines of $1 million or more, but in 2017 the organization assessed 15 of these so-called “supersized” fines. However, FINRA in 2018 assessed five fines of $5 million or more, while only two cases of this size were assessed in 2017.
Restitution ordered by FINRA was also apparently down in 2018. According to the analysis, FINRA reported restitution of approximately $31 million in 2018 – a decrease of 54% from the $67 million reported in 2017 and only a third of the record $96 million reported in 2015.
The decrease in restitution is less pronounced when FINRA’s overall monetary sanctions are analyzed, the study further observes. In 2018, the total monetary sanctions ordered by FINRA – fines, restitution, and disgorgement – were $124 million, compared to $150 million in 2017 and $207 million in 2016.
Suitability Cases
While anti-money laundering cases resulted in the most fines assessed by FINRA in 2018, suitability cases resulted in the second most, landing in the law firm’s “Top Enforcement Issues” list for the first time since 2015.
FINRA reported 91 suitability cases, with $11.8 million in fines in 2018. And while the number of cases decreased 7% from the 98 brought in 2017, fines increased 228% from the $3.6 million reported in 2017, the study shows.
FINRA also ordered $11.6 million in restitution in suitability cases, but this was down from more than $30 million in 2017. In addition, there were three large suitability cases in 2018 related to variable annuities, which resulted in fines of $6.7 million and $8 million in restitution.
Suitability will remain one of FINRA’s top examination priorities, according to the organization’s 2019 exam priorities letter, including deficient supervisory controls, overconcentration in illiquid securities and recommendations to purchase share classes not in line with a customer’s investment time horizon, consistent with its 2018 findings.
Variable Annuity Cases
Following suitability, variable annuity cases resulted in the third most fines for FINRA in 2018, pushing it back onto the firm’s top enforcement issues list for the first time since 2016.
FINRA reported 28 variable annuity cases for a total of $8.1 million in fines. In addition, the number of cases increased 22% from the 23 brought in 2017 and the amount of fines increased 305% from the $2 million in fines reported in 2017.
The organization also ordered $8.7 million in restitution in variable annuity cases last year, compared with $428,000 in 2017. The study notes that in one case, FINRA fined a firm $4 million and ordered $2 million in restitution for failing to supervise the sale of variable annuity exchanges.
Four affiliated firms were also fined a total of nearly $1.7 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, according to the study.
Share Class Cases
FINRA continues to pursue firms for failing to provide sales charge waivers for retirement plans and charitable organizations, Eversheds Sutherland notes. In 2018, FINRA brought six enforcement actions against firms for failing to provide these sale charge waivers when applicable.
The organization reportedly levied fines in only two of the matters totaling $150,000, but ordered restitution of $3.1 million. The authors explain that this practice is consistent with a continuing trend by the organization to focus on making harmed customers whole through restitution rather than fines.
