More On Legal & Compliancefrom The Advisor's Professional Library
- Trading Practices and Errors When SEC-registered investment advisors conduct annual audits of firm policies and procedures, they should pay close attention to trading practices. Though usually not required to, state-registered advisors should look at their trading practices and revise policies that do not fully protect clients.
- Client Commission Practices and Soft Dollars RIAs should always evaluate whether the products and services they receive from broker-dealers are appropriate. The SEC suggested that an RIAs failure to stay within the scope of the Section 28(e) safe harbor may violate the advisors fiduciary duty to clients, so RIAs must evaluate their soft dollar relationships on a regular basis to ensure they are disclosed properly and that they do not negatively impact the best execution of clients transactions.
Fines issued by the Financial Industry Regulatory Authority last year totaled $78.2 million, a 15% jump from the $68 million levied in 2011, with suitability violations the top fine-getter, according to data just released by the law firm Sutherland Asbill & Brennan.
Indeed, as Sutherland found in its yearly analysis of FINRA sanctions, released Wednesday, suitability cases were the top enforcement issue in 2012, followed by due diligence, research, advertising and ETF violations.
FINRA assessed fines totaling $19.4 million in cases involving suitability allegations, representing a 152% increase from the $7.7 million in fines reported in 2011.
In 2012, there were 117 suitability cases, a 10% increase from the 106 cases reported in 2011, Sutherland found. The surge in suitability fines was largely driven by the $7.5 million in fines assessed in four exchange-traded fund (ETF) cases, as well as “supersized” fines of $1 million or more in cases involving complex products such as reverse convertible notes and unit investment trusts.
FINRA reported filing 1,541 disciplinary actions in 2012, a slight increase of 3.6% from the 1,488 cases the regulator initiated in 2011. Last year marked the fourth straight year of growth in the number of disciplinary actions, Sutherland notes.
The $78 million of fines reported in 2012 marks a 179% increase from the $28 million of FINRA fines reported in 2008, Sutherland notes.
The boost in fines, Sutherland says, “may signal FINRA’s continued willingness to flex its enforcement muscle for the near future, particularly in areas such as restitution.” In 2012, the regulator ordered firms and representatives to pay a record $34 million of restitution to investors, the law firm notes, which represents an 80% increase from the $19 million of restitution ordered by FINRA in 2011.
Other top enforcement issues measured by total fines assessed by FINRA in 2012, according to Sutherland, were:
Due Diligence cases resulted in the second-highest amount of fines assessed by FINRA in 2012. FINRA brought 62 due diligence cases in 2012, resulting in fines of $12.8 million. These figures represent significant increases from 2011’s totals, when FINRA reported 44 cases involving due diligence allegations, which resulted in only $1.6 million in fines. The rise in the number of due diligence cases represents an increase of 41%. While that is an impressive increase, it pales in comparison to the 700% jump in the amount of sanctions imposed in due diligence cases between 2011 and 2012. This substantial increase was largely fueled by “supersized” fines of $1+ million assessed in due diligence cases involving complex products and alternative investments. In 2012, FINRA also ordered $19 million of restitution in cases involving due diligence allegations.
Advertising was the fourth-biggest fine generator in 2012. This is the first time advertising has not been ranked first in Sutherland’s Top Enforcement Issues list since 2009. FINRA reported 50 cases involving alleged advertising violations in 2012, which resulted in fines of $10.4 million. Although the number of advertising cases increased from the 45 reported in 2011 (an increase of 11%), the amount of fines decreased dramatically from 2011’s $21.1 million. This 51% decrease largely stems from the steep decline in the number of auction rate securities (ARS) cases filed by FINRA. While FINRA assessed fines of $9.5 million in 2011 in ARS cases involving advertising allegations, there were no such cases reported in 2012.
Exchange-Traded Fund (ETF) cases jumped from four in 2011 to nine in 2012, an increase of 125%. The four 2011 ETF cases resulted in only $123,000 in fines, but FINRA imposed $7.6 million in fines in 2012 ETF cases, an increase of more than 6,000%. This explosion in fines was the result of four cases that each resulted in a fine of at least $1.5 million. Those cases concerned leveraged and inverse ETFs that FINRA alleged were unsuitable for conservative investors and were sold without sufficient due diligence review.