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- Scope of the Fiduciary Duty Owed by Investment Advisors A fiduciary obligation goes beyond the suitability standard typically owed by registered representatives of broker-dealer firms to clients. The relationship is built on the premise that the advisor will always do the right thing for the person or entity receiving advice.
Electronic communications was the category hit with the biggest overall fines for the Financial Industry Regulatory Authority in 2013, with the self-regulator levying $15.1 million in such fines against 66 firms last year, a whopping 132% increase from the $6.5 million in fines assessed in 2012, according to a study released by the law firm Sutherland Asbill & Brennan.
In its annual review of FINRA sanctions, Sutherland found the other top four enforcement issues measured by total fines assessed in 2013 were trade reporting (198 trade reporting cases totaling $12.1 million in fines); short selling ($7.2 million in fines); books and records (95 cases and $7.1 million in fines); and municipal securities (51 cases and $6 million in fines).
While the total number of fines assessed by FINRA last year dropped by 27%, the number of cases brought were nearly the same as the previous year. Sutherland found that FINRA imposed fines of $57 million, a decrease of 27% from the $78 million in fines it assessed in 2012.
The biggest email fine went to LPL Financial, when FINRA fined the independent broker-dealer $9 million for 35 separate “significant email system failures.”
Brian Rubin, a partner at Sutherland who heads the Securities Litigation and Enforcement Group, told ThinkAdvisor that while the bulk of the electronic communications’ fines involved email infractions a “few” of the cases did involve text and instant messages.
The number of firms expelled by FINRA also declined from 30 to 24 in 2013, a decrease of 20%, while the number of individuals suspended or barred rose. The number of individuals suspended jumped from 549 to 670 in 2013, an increase of 22%, while the number of individuals barred rose from 294 to 429 in 2013, an increase of 46%.
“This was the lowest amount of fines imposed by FINRA since member firms and associated persons were fined $45 million by the regulator in 2010,” noted Rubin and Associate Andrew McCormick, who performed the analysis. According to FINRA’s “Statistical Review,” 1,535 disciplinary actions were filed in 2013, a decrease of less than 1% from the 1,541 cases the regulator initiated in 2012. According to those FINRA statistics, 2013 was the first time the number of disciplinary actions declined since 2008.
Rubin said that “the fines have likely fallen because FINRA has run through its inventory of cases stemming from the financial crisis of 2007 to 2008. To a large degree, FINRA is bringing more basic cases that don’t generate high fines.”
The two lawyers note that in addition to the $57 million in fines assessed by FINRA in 2013, the regulator also ordered firms and their representatives to pay nearly $24 million in restitution in 2012, a decrease of approximately 29% from 2013’s record-breaking $34 million.
Sutherland found that last year was the first time that suitability cases failed to appear on FINRA’s top enforcement issues list. Suitability cases ranked second in 2008 and 2009, fourth in 2010 and 2011, and first in 2012. The fines in suitability cases dropped from $19.4 million in 2012 to $5.1 million in 2013, a decrease of 74%.
“When products fail to perform as anticipated in the future, like auction-rate securities did during the financial crisis, advertising cases will likely become a higher priority for FINRA once again,” said Rubin and McCormack.
“Supersized” fines also experienced a significant drop in 2013, with only eight “supersized” fines totaling $18.5 million.
Complex products was also an area that saw a significant slowdown for FINRA fines in 2013, which Sutherland says is likely related to the substantial decreases in the amount of fines in suitability, advertising and due diligence cases last year.
The two Sutherland lawyers note that although what constitutes a complex product is subjective, some of the following products might be considered to be complex for certain investors: collateralized mortgage obligations ($6.8 million in fines in 2012; decreased by 96% to $295,000 in fines in 2013), unit investment trusts ($4.3 million in fines in 2012; decreased by 97% to $120,000 in fines in 2013), and real estate investment trusts ($3.1 million in fines in 2012; decreased by 99% to $40,000 in fines in 2013).
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