More On Legal & Compliancefrom The Advisor's Professional Library
- Risk-Based Oversight of Investment Advisors Even if the SEC had a larger budget and more resources, it is doubtful that the Commission would have the resources to regularly examine all RIAs. Therefore, the SEC is likely to continue relying on risk-based oversight to fulfill its mission of protecting investors.
- Code of Ethics Rule The Code of Ethics Rule, found in Rule 204A-1, uses severe consequences for violation to help ensure investment advisors will do the right thing.
Financial Industry Regulatory Authority fines are on track to hit a three-year low in 2013 — likely down 41% from the dollar amount assessed last year. But disciplinary actions have only fallen slightly this year.
During the first half of 2013, FINRA reported $23 million of fines in its monthly Disciplinary and Other FINRA Actions report, according to the law firm Sutherland Asbill and Brennan. In contrast, during the first half of 2012, FINRA reported fining broker-dealers and associated persons $39 million, and it assessed fines of $78 million for all of 2012.
Brian Rubin, head of Sutherland’s securities litigation and enforcement group, says that sanctions are likely dropping because “FINRA has likely brought most of its significant cases related to the market crisis.” In addition, he noted that “FINRA has brought far fewer ‘supersize’ fines, which is what we call fines of $1 million or more.”
During the first six months of 2012, FINRA reported seven supersize fines, totaling $24 million. Only two such fines, totaling $2.25 million, had been published in FINRA’s monthly disciplinary reports through June 2013, Sutherland reported.
Indeed, Sutherland says that if FINRA continues at the current rate, this year’s fines will fall 41% from the total fines reported by the regulator in 2012, down to an estimated $46 million from $78 million. That would be the lowest total since $45 million in fines were imposed in 2010.
Despite the dramatic drop in the size of fines, the number of cases reported by FINRA during the first half of the year was nearly identical to the period a year ago.
The top five enforcement issues for FINRA during the first half of 2013, in terms of the total amount of fines reported in Disciplinary and Other FINRA Actions, were:
1. Municipal securities: $4.3 million, 25 cases
2. Electronic communications: $2.5 million, 27 cases
3. Mutual funds: $2.1 million, 18 cases
4. Suitability: $1.7 million, 31 cases
5. Short selling: $1.5 million, 16 cases
While fines are dropping, the number of disciplinary actions has only fallen slightly.
During the first six months of 2012, FINRA reported 609 disciplinary actions, compared with 597 actions in the first six months of 2013, a decline of 2%.
The percentage of actions involving firms, as opposed to individuals, was higher during the first six months of 2013 than in 2012. Between January and June 2012, 208 of the 609 (34%) cases involved charges against firms. This percentage grew to 38% (226 of 597 cases) during the first six months of 2013.
In July, FINRA reported in Disciplinary and Other FINRA Actions that it fined a firm $7.5 million and ordered the firm to pay $1.5 million in restitution to investors for systematic electronic email retention and review issues, Sutherland reported.
In addition, FINRA reported in August that it imposed supersize fines against three other firms. “It remains to be seen whether these recent cases are precursors of increased disciplinary activity in the last half of 2013 or simply blips on FINRA’s enforcement radar,” Sutherland said.
Check out Former SEC Compliance Chief Tells White: Stop Suing Compliance Officers on ThinkAdvisor.