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FINRA Slows Fines and Enforcement Actions

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A new study has found that FINRA’s fines and enforcement actions against broker/dealers and registered representatives dropped sharply in 2008, the first full year that FINRA represented the combined regulatory arms of NASD and NYSE.

According to the study, penned by lawyers at Sutherland Asbill & Brennan LLP, FINRA fined firms and individuals approximately $35 million in 2008, compared to $77.6 million imposed during 2007, a decline of 55%. The 2008 fines represent an even sharper decline from the peak in 2005, when NASD and the NYSE fined firms and individuals approximately $184 million, and 2006 when the fines totaled approximately $111 million. Moreover, there was a significant drop in “supersized” fines (i.e., fines over $1 million), from 19 in 2007 to three in 2008, the lawyers found.

Sutherland says that the number of disciplinary actions also declined in 2008, with FINRA resolving 1,007 formal disciplinary actions, a decline of about 9% from 2007, when FINRA resolved 1,107 disciplinary actions.

The magnitude of this drop is more significant than the numbers indicate, the lawyers write, “because the 2007 statistics are for (1) NASD alone for one-half of the year and (2) the combined NASD and the NYSE for the second half of the year, while the 2008 statistics are for the combined entity. The 2007 and 2008 statistics represent a significant decline from prior years: NASD and the NYSE resolved 1,454 disciplinary actions in 2005 and 1,428 in 2006.”

Sutherland found that “Blockbuster” issues (where industry practices allegedly resulted in significant customer harm), such as market timing, late trading, directed brokerage, revenue sharing, and mutual fund share class issues, characterized enforcement actions in 2005. “These matters each resulted in several enforcement actions involving large fines. As a result, in 2005 there were a record number–35–of “supersized” (or $1 million-plus) fines, including seven fines in excess of $5 million,” the lawyers write. “The number of “supersized” fines decreased to 19 in both 2006 and 2007. In 2006 only three fines were greater than $5 million, while in 2007 one was greater than $5 million. As discussed above, in 2008, FINRA assessed only three “supersized” fines and no single fine exceeded $5 million.”

The top five fine-generating issues for FINRA in 2008 were: mutual funds, suitability, licensing, excessive brokerage compensation (commissions/markups/markdowns), and electronic communications, the study found. Sutherland says that while this list includes some of the “usual suspects” like mutual funds, suitability, and electronic communications, there are some surprises (such as excessive brokerage compensation and licensing).

Suthlerand said that an analysis of the disciplinary actions in the top five categories reveals the following trends:

? The “blockbuster” mutual fund cases of the past few years (e.g., market timing, late trading, unsuitable sales of Class B mutual fund shares, and directed brokerage) are on the wane;

? The issues that FINRA has been trying to turn into “blockbusters,” such as variable product and hedge fund sales, sales to seniors, and anti-money laundering generally have not yet generated “supersized” fines; and

FINRA seems to have been more attentive to more traditional, individual sales practice and gatekeeping violations (e.g., suitability and licensing violations), than to more novel rulemaking-by-enforcement industry violations, such as market timing.


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