While the Financial Industry Regulatory Authority continues to zero in on abuses involving mutual fund share classes and senior financial fraud, restitutions ordered by the self-regulatory organization are way up while fines levied and the number of disciplinary cases pursued in the first half of 2017 are way down, according to a just-released analysis by Eversheds Sutherland.
To compile the data, Eversheds reviewed FINRA’s monthly Disciplinary and Other FINRA Actions publications and press releases from January through June 2017.
FINRA ordered $38.1 million in restitution during the first six months of 2017, a pace, that if continued will likely result in 2017 year-end restitution nearing $76 million — a 171% increase from the total restitution reported in 2016 ($28 million) and a 21% decrease from the record-setting amount in 2015 ($96 million), according to the Evershed’s annual midyear analysis of the disciplinary actions reported by FINRA.
Brian Rubin, head of Eversheds Sutherland’s Washington DC Litigation Practice Group, told ThinkAdvisor on Monday that the restitution figures “are skewed”: Of the $38.1 million in restitution during the first six months, the overwhelming majority ($24.6 million) is attributable to one litigated case.
“If that number is taken out, the restitution would have totaled $13.5 million. If we extrapolate that number, we get $27 million for the entire year. That figure puts restitution more in line with last year’s total restitution, which was $28 million.”
FINRA’s year-end overall fines look to be on a significant plunge downward, the study notes, with Rubin suggesting that may “be for a variety of reasons, such as [FINRA is] bringing different types of cases or they have heard the industry’s criticisms and they are trying to be ‘kinder and gentler’ regulator.”
During the first half of 2017, FINRA reported $23.5 million in fines compared with $79.4 million during the first half of 2016, a drop of more than 70%, Eversheds Sutherland found.
If the SRO continues at this pace, fines would total approximately $47 million — a 73% drop from the total $176 million in fines reported in 2016, and the lowest total since 2010, when FINRA ordered $42 million in fines.
Disciplinary actions reported by FINRA during the first half of 2017 also plummeted as well compared with 2016.
FINRA reported 459 disciplinary actions during the first six months of 2017, a 16% decline compared with the first six months of 2016 (547 disciplinary actions), the survey said.
“The up-and-down nature of the first half of the year may indicate a possible shift toward more focused fines and more targeted cases,” Rubin said in a statement. “But despite an overall reduction in fines and the number of disciplinary actions, FINRA’s emphasis on certain areas shows that firms should still concentrate on core issues like suitability, books and records, trade reporting and supervisory policies and procedures.”
Here’s how last year’s five biggest FINRA fine categories stacked up this year:
During the first six months of 2017, the top five areas for FINRA fines were:
1. Trade Reporting cases resulted in the most FINRA fines for the first six months of 2017, up from its No. 3 spot at the end of 2016 on Eversheds Sutherland’s Top Enforcement Issues list. So far, FINRA has reported 59 cases resulting in $8 million in fines in 2017. Compared with the same period in 2016, FINRA reported 65 cases resulting in $12.6 million in fines. For year-end 2016, FINRA reported $24.4 million in fines in 146 trade reporting cases.
2. Books and Records cases resulted in a total of $2.2 million in fines for 38 cases reported during the first six months of 2017. During the same period in 2016, FINRA reported 47 cases, resulting in $3.7 million in fines. For year-end 2016, FINRA reported $22.5 million in fines in connection with 99 books and records cases.
3. Senior/Retiree cases resulted in a total of $558,000 in fines for 37 cases reported during the first six months of 2017. Compared to the same period in 2016, FINRA reported 11 cases, resulting in $37,500 in fines. For year-end 2016, FINRA reported $3 million in fines in connection with 27 senior/retiree cases.
4. Mutual Fund cases resulted in a total of $754,000 in fines for 25 cases reported during the first half of 2017. Over the same time period in 2016, FINRA reported 20 cases resulting in $215,000 in fines. For year-end 2016, FINRA reported $3.3 million in fines in connection with 35 mutual fund cases. FINRA has been focused on the same types of mutual fund cases that it brought last year—sanctioning firms for selling mutual fund shares with front- or back-end sales charges to certain customers who were eligible to receive sales charge waivers
5. Forms U4/U5/3070 cases resulted in a total of $1.2 million in fines in 57 cases. Over the same period in 2016, FINRA reported 55 cases, resulting in $720,000 in fines. The 2016 year-end totals for Forms U4/U5/3070 were $6 million in fines in 134 cases. These cases—primarily against individual representatives—stem from FINRA’s increased emphasis on registered representatives’ disclosures, typically focusing on failures to disclose tax liens, bankruptcies, criminal histories and other events on Forms U4.
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