FINRA Fines Jump in Suitability, Due Diligence

The boost in fines, Sutherland says, “may signal FINRA’s continued willingness to flex its enforcement muscle for the near future, particularly in areas such as restitution.” In 2012, the regulator ordered firms and representatives to pay a record $34 million of restitution to investors, the law firm notes, which represents an 80% increase from the $19 million of restitution ordered by FINRA in 2011.

Other top enforcement issues measured by total fines assessed by FINRA in 2012, according to Sutherland, were:

Due Diligence cases resulted in the second-highest amount of fines assessed by FINRA in 2012. FINRA brought 62 due diligence cases in 2012, resulting in fines of $12.8 million. These figures represent significant increases from 2011’s totals, when FINRA reported 44 cases involving due diligence allegations, which resulted in only $1.6 million in fines. The rise in the number of due diligence cases represents an increase of 41%. While that is an impressive increase, it pales in comparison to the 700% jump in the amount of sanctions imposed in due diligence cases between 2011 and 2012. This substantial increase was largely fueled by “supersized” fines of $1+ million assessed in due diligence cases involving complex products and alternative investments. In 2012, FINRA also ordered $19 million of restitution in cases involving due diligence allegations. Research Report and Research Analyst cases resulted in $12.4 million of FINRA fines in 2012. Although the number of “research” cases dropped from 15 cases in 2011 to 13 in 2012, the total fines from these cases jumped from $1.5 million to $12.4 million. This exponential increase is due to a single case that resulted in an $11 million fine to FINRA (and an $11 million penalty to the Securities and Exchange Commission). This case involved allegedly improper communications about research analyst ratings and resulted in the largest fine assessed by FINRA in 2012.

Advertising was the fourth-biggest fine generator in 2012. This is the first time advertising has not been ranked first in Sutherland’s Top Enforcement Issues list since 2009. FINRA reported 50 cases involving alleged advertising violations in 2012, which resulted in fines of $10.4 million. Although the number of advertising cases increased from the 45 reported in 2011 (an increase of 11%), the amount of fines decreased dramatically from 2011’s $21.1 million. This 51% decrease largely stems from the steep decline in the number of auction rate securities (ARS) cases filed by FINRA. While FINRA assessed fines of $9.5 million in 2011 in ARS cases involving advertising allegations, there were no such cases reported in 2012.

Exchange-Traded Fund (ETF) cases jumped from four in 2011 to nine in 2012, an increase of 125%. The four 2011 ETF cases resulted in only $123,000 in fines, but FINRA imposed $7.6 million in fines in 2012 ETF cases, an increase of more than 6,000%. This explosion in fines was the result of four cases that each resulted in a fine of at least $1.5 million. Those cases concerned leveraged and inverse ETFs that FINRA alleged were unsuitable for conservative investors and were sold without sufficient due diligence review.