Despite advisors’ and broker-dealers’ fears that litigating against the Securities and Exchange Commission and the Financial Industry Regulatory Authority is futile, new findings show that it does pay for advisors and BDs to fight charges brought against them.
In its annual survey of litigated enforcement actions levied against members of the securities industry, Sutherland Asbill & Brennan found that of the advisors, broker-dealers and their reps that chose to litigate rather than settle with an SEC administrative law judge (ALJ) or FINRA hearing panel, 46.7% were able to get some of the charges dismissed or receive a sanction lower than that requested by regulatory staff.
Similarly, study authors Brian Rubin and Charlie Kruly (a former Sutherland associate) found that among defendants in U.S. District Court who moved for summary judgment against the SEC or took their case to trial, 60% succeeded in proving that the SEC did not establish some of its charges.
Among respondents who appealed to FINRA’s National Adjudicatory Council (NAC), the SEC, or a U.S. Court of Appeals, 18.5% were able to achieve some success, the study notes.
Indeed, Rubin, former deputy chief counsel of enforcement for FINRA’s predecessor, the National Association of Securities Dealers, and former senior enforcement counsel at the SEC, says that many firms and their reps “fear litigating against the SEC or FINRA because the regulators have often spent months or even years investigating the conduct,” and because both regulators “are well-funded and often bring cases in ‘friendly’ forums where decisions are rendered by their own employees applying procedural rules designed by the regulators.”
But, as Sutherland’s studies have shown “it often pays for firms and representatives to litigate, rather than to settle,” he says.
Sutherland expanded this year’s survey, which studied data from April 2012 through September 2013, to include SEC enforcement actions brought against investment advisors and their reps.
In the category of liability, in fiscal 2013, respondents convinced ALJs that the SEC staff did not prove 43.5% of the charges, whereas in fiscal 2012, ALJs found that the SEC did not prove 12.5% of the charges.
As to sanctions, including monetary penalties and suspensions or bars, in FY 2013, ALJs imposed less-than-requested monetary sanctions for 100% of respondents.
in FY2012, ALJs imposed higher-than-requested monetary sanctions for 66.6% of respondents and the same-as-requested monetary sanctions for 33.3% of respondents.
As to suspensions and bars, in fiscal 2013, ALJs imposed less-than-requested suspensions/bars for one out of six respondents (16.7%). In fiscal 2012, ALJs imposed lower-than-requested suspensions/bars against 16.7% of respondents and the requested suspensions/bars against 83.3% of respondents.