More On Legal & Compliancefrom The Advisor's Professional Library
- Privacy Policies and Rules Whether an RIA is SEC or state-registered, the firm must have policies and procedures in effect to protect clients privacy. Policies and procedures should explicitly require an RIA to send out its privacy notice each year.
- Anti-Fraud Provisions of the Investment Advisers Act RIAs and IARs should view themselves as fiduciaries at all times, whether they meet the legal definition or not. Deviating from the fiduciary standard of full disclosure while courting clients may cause the advisor significant problems.
Fines issued by the Financial Industry Regulatory Authority increased significantly in 2011, jumping 51% to $68 million from fines levied by the regulator in 2010, which amounted to $48 million, according to Sutherland Asbill & Brennan’s annual FINRA Sanctions Survey, released Monday.
FINRA also filed 1,488 disciplinary actions in 2011, a considerable increase from the 1,310 cases it initiated in 2010.
“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,” said Brian Rubin, Deborah Heilizer, and Andrew McCormick, the Sutherland attorneys who conducted the survey.
More reps were also barred by FINRA last year than in 2010: 329 last year versus 288 in 2010, an increase of more than 14%.
Sutherland's survey also includes a list of "trends" that the law firm believes FINRA will be focusing on in 2012, which AdvisorOne will review later this week.
In the Sutherland survey, here are the top five enforcement issues for FINRA in 2011 ranked by total amount of fines:
5) Improper Form U4, U5, and Rule 307 ($6.6 million)
These incorrect filings resulted in 91 FINRA disciplinary actions and more than $6.6 million in reported fines in 2011 (compared to 67 cases and fines of $1.45 million in 2010). Although allegations concerning isolated problems with these regulatory filings often led to fines of $5,000 to $10,000, there were four 2011 cases where each firm was fined more than $600,000 for failing to report material information on Forms U4 and U5, including Securities and Exchange Commission investigations and customer settlements.
4) Suitability ($7.7 million)
Suitibility cases resulted in $7.7 million in reported fines in 2011. The 106 cases that involved suitability allegations in 2011 doubled the 53 cases reported in both 2009 and 2010. Similarly, the fines reported in suitability cases jumped from $3.75 million in 2010 to $7.7 million in 2011, a 105% increase.
3) Auction Rate Securities ($10 million)
ARS' continued to be an important focus for FINRA in 2011, as seven such cases resulted in nearly $10 million in fines. This was a substantial increase from 2010 when two ARS cases were reported that resulted in $1.75 million in total fines. Most of the 2011 cases concerned the alleged failure to disclose material facts to investors, often in advertising materials.
2) Short Selling ($16.8 million)
Cases of short selling were the second biggest enforcement issue reported by FINRA in 2011, generating $16.8 million in fines. The 2011 fines for short selling represent a more than fourfold increase compared with the fines reported in 2010. This substantial increase was largely driven by a single $12 million fine imposed on a firm that was accused of violating Regulation SHO by failing to properly supervise millions of short sale orders that were mismarked and placed to the market without reasonable grounds to believe that the securities could be borrowed.
1) Advertising ($21.1 million)
Sanctions for advertising jumped from $4.75 million in 2010 to $21.1 million in 2011. The number of cases involving alleged advertising violations doubled in number to 45 in 2011. In 2010, advertising cases ranked first, although fines dropped to $4.75 million. In last year’s analysis, Sutherland predicted that FINRA would continue placing greater emphasis on advertising materials. This prediction proved to be correct in 2011, as advertising cases resulted in fines totaling $21.1 million, an increase of 344% compared with 2010.
As in 2009 and 2010, a significant amount of the 2011 advertising fines ($9.5 million) related to the sale of auction rate securities. In addition, nearly $8 million in fines stemmed from nine cases involving the use of allegedly misleading advertising materials on firm websites available to investors. This included advertisements for complex products, such as Auction Rate Securities, and for more traditional investments like annuities.
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