More On Legal & Compliancefrom The Advisor's Professional Library
- Preventing and Dealing with Client Complaints Although the SEC has not provided specific guidance on how client complaints should be handled, a firms policies and procedures should provide clear direction how to do so, as neglecting complaints can exacerbate a bad situation.
- Differences Between State and SEC Regulation of Investment Advisors States may impose licensing or registration requirements on IARs doing business in their jurisdiction, even if the IAR works for an SEC-registered firm. States may investigate and prosecute fraud by any IAR in their jurisdiction, even if the individual works for an SEC-registered firm.
The Financial Industry Regulatory Authority (FINRA) brought a record number of enforcement cases in 2011—approximately 1,500—and is on pace to bring just as many cases in 2012.
While FINRA has heard complaints that it has failed to take a tough enough stance on larger firms since the 2008 financial crisis, Brad Bennett, head of FINRA's enforcement division, said at FINRA's annual conference in Washington on Tuesday that’s “just not true. There’s no way we haven’t gone after the big firms.”
In 2011, approximately 33% of the large firms faced an enforcement action while less than 5% of the small firms faced an action.
FINRA is "running within a couple percentage points now" in terms of the number of cases it brought in 2011, Bennett told AdvisorOne on Wednesday.
Dishonesty and unapproved outside businesses are two of the top areas where FINRA’s cases have been focused.
Approximately 170 of FINRA's member firms are considered "large" firms with 500 or more reps, while about 4,000 are considered "small" firms with between one and 150 reps.
But just because large firms may be sanctioned in a “disproportionate number of cases, that doesn’t mean that FINRA is treating large and small firms the same, or is being tougher on larger firms,” Brian Rubin, a partner in the Washington office of Sutherland Asbill & Brennan, told AdvisorOne.
What must be considered, Rubin says, is the amount of the fine. “A $1 million fine would be a tiny percentage of the revenue for a large firm but a $50,000 fine may be a huge percentage for smaller firms,” Rubin says.
Another issue: “how often FINRA is sanctioning employees,” Rubin says. “The perception is that employees of small firms, such as presidents and chief compliance officers (CCOs), are sanctioned far more frequently than employees of large firms. If FINRA views conduct as a firm issue for large firms, which shouldn’t result in sanctions against an employee, FINRA should view the case the same way for small firms.”
Sutherland’s annual FINRA Sanctions Survey, released in early March, found that fines issued by FINRA increased significantly in 2011, jumping 51% to $68 million from fines levied by the regulator in 2010, which amounted to $48 million.
FINRA is placing a large focus on complex products. As Richard Ketchum (left), chairman and CEO of FINRA noted Monday at the conference, the regulator has brought a number of enforcement actions involving complex products where “firms didn't adequately supervise the sale of the products, the recommended products were unsuitable for the investors, or the sales material were misleading.”
Ketchum said that while FINRA recognizes the challenge firms face “when managing compliance oversight at a time when more customers are searching for yield and financial advisors are looking for products to meet these requests,” the suitability rule remains in effect, “and it is the obligation of every firm to take steps reasonably designed to ensure that the suitability issues related to complex and other products are adequately addressed.”
Before any complex product is offered to a retail client, Ketchum said, the financial advisor “should be able to write down on a single page why this investment is in the best interests of your client. This does not have to wait until you find out the details of any fiduciary rulemaking the SEC may make,” he said. “Being able to articulate why an investment is in the best interests of your client is fundamental to what the securities industry must be about if it is to deserve the trust of investors. The time to do it is now.”