The significant jump in fines issued by the Financial Industry Regulatory Authority (FINRA) in 2011 provides a look into the top areas that the regulator will be focusing on in 2012, according to the law firm Sutherland Asbill & Brennan.
Sutherland’s annual FINRA Sanctions Survey ranked the Top 5 Enforcement Issues in 2011, which AdvisorOne covered Monday. The survey 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 also filed 1,488 disciplinary actions in 2011, a considerable increase from the 1,310 cases it initiated in 2010. More reps were also barred by FINRA last year than in 2010: 329 last year versus 288 in 2010, an increase of more than 14%.
Read on to see why Sutherland is warning firms to be particularly cognizant of their compliance efforts in the following five areas:
Advertising made its debut on Sutherland’s Top Enforcement Issues list in 2009, ranking fifth with $5.5 million in total fines. In 2010, advertising cases ranked first, although fines dropped to $4.75 million. In last year’s analysis, Sutherland predicted that FINRA would continue placing greater emphasis on advertising materials. This prediction proved to be correct in 2011, as advertising cases resulted in fines totaling $21.1 million, an increase of 344% compared with 2010.
In 2011, advertising cases involving Auction Rate Securities (ARS) played a prominent role. In fact, 45% of the 2011 advertising fines ($9.5 million) involved ARS. One of the largest sanctions imposed in an ARS advertising case was a $3 million fine against a firm for allegedly creating misleading marketing materials that were used when the securities were sold to retail customers. FINRA charged that these advertisements did not adequately disclose the liquidity risks of ARS (including the possibility of auction failure) and that they improperly described these securities as “safe and liquid investments.”
2) Municipal Securities
FINRA has emphasized that member firms need to understand the municipal securities they sell and corresponding regulatory requirements. FINRA’s 2011 enforcement activity reflected a growing regulatory concern for municipal securities, as the number of cases reported jumped 81% in 2011 (32 cases reported in 2010 compared to 58 in 2011). Similarly, the amount of fines reported in 2011 ($3.7 million) more than doubled the $1.5 million imposed in cases involving municipal securities in 2010.
2) Return of “Supersized” Fines