More On Legal & Compliancefrom The Advisor's Professional Library
- Where Are We Headed? The ultimate compliance goal is to help ensure that everyone associated with an advisory firm acts ethically at all times. Advisors and RIAs should do the right thing, even when regulators are not looking over their shoulders.
- Using Solicitors to Attract Clients Rule 206(4)-3 under the Investment Advisors Act establishes requirements governing cash payments to solicitors. The rule permits payment of cash referral fees to individuals and companies recommending clients to an RIA, but requires four conditions are first satisfied.
Broker-dealers and registered reps shouldn’t always fear litigating against the Securities and Exchange Commission (SEC) or the Financial Industry Regulatory Authority (FINRA) as new research from the law firm Sutherland Asbill & Brennan shows it sometimes pays to “swing for the fences” rather than settle.
Since 2005, Sutherland has conducted a study of litigated disciplinary proceedings brought by FINRA against broker-dealers, registered representatives and associated persons. Newly released data by the law firm analyzes cases from October 2008 through September 2010 where broker-dealers and individuals were charged with violating SEC and FINRA statutes, regulations and rules. That time period coincides with the SEC’s 2009 and 2010 fiscal years.
Of the 237 charges that were litigated by the SEC and FINRA and resulted in SEC initial decisions or FINRA Hearing Panel decisions during FY 2009 and FY 2010 (October 2008 through September 2010), broker-dealers and individuals succeeded in getting approximately 13% of the charges dismissed, Sutherland found.
Those BDs taking on the SEC had a relatively high success rate during the period (approximately 28%), which was greater than in FY 2008 (approximately 19%). Those taking on FINRA succeeded in getting approximately 7.6% of the charges dismissed, although they had slightly greater success during FY 2010 (8.6%) compared with FY 2009 (7%). Both years represent declines from FY 2008 when FINRA respondents succeeded in getting 15% of the charges dismissed, Sutherland found.
The study also revealed that those BDs and registered reps taking on FINRA with counsel are significantly more successful than those without. FINRA respondents represented by counsel succeeded in getting approximately 9.8% of charges dismissed, the study found. FINRA respondents without counsel, on the other hand, went 0-for-39 during the period. Since January 2006, only one pro se FINRA respondent, that is, without counsel, has succeeded in getting any charge dismissed.
Fraud charges are harder to prove, the study found, because regulators need to prove that the broker or advisor acted with bad intent. According to the study, SEC Staff failed to prove fraud charges approximately 57% of the time in FY 2009-2010; however, all of the fraud charges lost by the SEC staff were in one case. Interestingly, the study notes, in FY 2009-2010, FINRA staff succeeded in proving all of its fraud charges (five fraud charges against four respondents in four cases). In contrast, in FY 2008, SEC and FINRA staff failed to prove fraud approximately 28% of the time (approximately 22% for the SEC and 33% for FINRA).
As for monetary sanctions, when SEC and FINRA respondents were found to be liable for one or more charges, 33% of the time the ALJ or Hearing Panel imposed lower monetary sanctions than those sought by the two regulators’ staff. This is a notable drop from FY 2008, when respondents succeeded in obtaining lower monetary sanctions 60% of the time, the study notes.
Those taking on the SEC convinced ALJs to impose lower monetary sanctions 50% of the time in FY 2009-2010. In contrast, in FY 2008, ALJs lowered monetary sanctions approximately 83% of the time.
Those taking on FINRA convinced Hearing Panels to reduce the proposed monetary sanction approximately 27% of the time in FY 2009-2010. When fines were reduced, the proposed fine ranged from $10,000 to $30,000 and averaged approximately $17,000. The amount ordered ranged from $0 to $10,000 and averaged approximately $5,000 (a reduction of approximately 71%).
FINRA respondents similarly had less success in obtaining reduced monetary sanctions than in FY 2008, when they succeeded 50% of the time.