FINRA at 5 Years: Highlighting 7 Areas of Action

The Financial Industry Regulatory Authority (FINRA) marked on July 30 its five-year anniversary since it was created by the consolidation of the National Association of Securities Dealers (NASD) and the member regulation, enforcement and arbitration operations of the New York Stock Exchange (NYSE).

Quite a bit has happened in that five years, with, for instance, FINRA lobbying hard to become the self-regulatory organization (SRO) for advisors and legislation being introduced in the House Financial Services Committee to do just that.

Industry officials are still busy digesting another significant development—FINRA’s new suitability rule, Rule 2111, which took effect July 9. It not only puts more onerous due diligence requirements on BDs, but it also requires reps to take on what looks to be fiduciary responsibility—a development embraced by the advisory community.

A just-released midyear review by the law firm Sutherland, Asbill & Brennan finds that FINRA’s fines and disciplinary actions for 2012 are on track to “significantly outpace” those for 2011. The results of the review show that during the first half of 2012, FINRA ordered broker-dealers and associated persons to pay $39.4 million in fines.

“If fines continue to be assessed at this rate, 2012 will represent a 15% increase from the total fines reported by FINRA in 2011,” said Brian Rubin, a Sutherland partner. “Essentially, we are looking at a jump from $68 million in 2011 to projected fines of $78.4 million in 2012.”

FINRA also just launched a conflict-of-interest sweep, telling broker-dealers to compile a bunch of information and prepare for face-to-face meetings with FINRA exam personnel. While FINRA says the sweep is just a way to “better understand” BDs current practices, lawyers with BD clients suggest potential enforcement actions may be brewing.

FINRA must also consolidate the NYSE and NASD rulebooks, a project that has been ongoing for some time, but one that is nearly 90% completed, a FINRA spokesperson told AdvisorOne.

In marking its fifth birthday, FINRA highlighted seven areas of achievements, like in disciplinary actions and its focus on fraud. Here is FINRA’s statement on what it claims to be its highlights over the past five years: Disciplinary Actions

FINRA has acted to sanction firms and individuals who violated its rules and harmed investors. Since July 30, 2007, FINRA has brought 6,291 disciplinary actions and levied fines totaling $254.1 million. FINRA also ordered nearly $54.5 million in restitution to hurt investors. FINRA expelled 99 firms from the securities industry, barred 1,647 individuals and suspended 1,992 from association with FINRA-regulated firms. Some notable enforcement actions include the following:

• FINRA fined UBS $12 million for violations involving short sales. (October 2011)
• FINRA fined Goldman Sachs $22 million for violations related to trading huddles at the firm. (April 2012)
• FINRA fined 20 firms a total of $15.4 million involving sales of auction rate securities, and firms agreed to buy back more than $2 billion of frozen ARS from their customers.
• FINRA brought 23 actions with fines totaling $28.7 million related to the sale of subprime and mortgage-backed securities, and ordered $8.8 million in restitution.
• FINRA censured and fined Trillium Brokerage Services $1 million for using an illicit high-frequency trading strategy and related supervisory failures. (Sept 2010)

 Focus on Fraud

In the aftermath of the financial crisis and significant frauds like those perpretrated by Bernie Madoff and Allen Stanford, FINRA took a look at its regulatory programs to focus on trying to make them more effective in identifying and fighting fraud. The organization made a number of critical enhancements as a result, including:

• Creating, in March 2009, the Office of the Whistleblower to expedite the review of high-risk tips by FINRA senior personnel and ensure a rapid response for tips believed to have merit.
• Establishing the Office of Fraud Detection and Market Intelligence (OFDMI), which was launched in 2009 to focus resources on the detection and investigation of suspected fraud, insider trading, microcap fraud and Ponzi schemes, and work to coordinate regulatory intelligence across the FINRA enterprise. OFDMI reviews incoming allegations of serious fraud, and serves as a centralized point of contact internally and externally on fraud issues. OFDMI has provided assistance to federal and state regulators in identifying numerous cases, many of them high-profile, involving insider trading, Ponzi schemes and microcap fraud. Since OFDMI was established, it has:
• referred more than 1,750 matters involving potential fraudulent conduct to the SEC or other federal or state law enforcement agencies; and
• made more than 775 referrals involving boiler rooms and microcap fraud, and more than 820 insider trading referrals to the SEC and other federal or state law enforcement agencies.

Revamped Exam Program

FINRA revamped its examination program to hopefully better detect potential fraud and focus on areas of greatest risk. In addition to examining each firm on site, it has continued to build out a surveillance program that monitors firms off site on a continuous basis, and has reshaped its ability to capture and leverage more granular operational and risk data to help better understand each firm’s business model and the embedded risk of that model.

Furthermore, FINRA examiners place greater focus at the point of sale, increasing the number of branch exams and spending more time on site at the branch offices. FINRA also has increased the number of staff in district offices who are tasked with having an in-depth and ongoing understanding of specific firms, including increased real-time monitoring of business and financial changes.

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