While restitution ordered by the Financial Industry Regulatory Authority skyrocketed in 2017, with $66 million ordered repaid to investors — an increase of 136% from the $28 million in restitution reported in 2016 — fines issued by the broker-dealer self-regulator dropped significantly last year, according to a just-released survey by Eversheds Sutherland.
The 2017 restitution amount still falls short of the record of $96 million reported in 2015.
Meanwhile, fines reported by FINRA last year fell to $73 million from the “record-setting” fines of $176 million in 2016, a 58% drop, according to the annual Eversheds Sutherland study of FINRA enforcement actions, which the law firm compiles by reviewing FINRA’s monthly disciplinary reports, press releases and online database.
The 2017 fines were also 22% less than the $94 million in fines reported in 2015. Despite this shortfall, fines have increased by 161% since 2008, when FINRA assessed fines of $28 million, the survey said.
In 2017, “restitution more than doubled from the prior year, resulting in the fourth highest total sanctions assessed by FINRA over the past 10 years,” said Eversheds Sutherland Partner Brian Rubin and Associate Adam Pollet, in releasing the survey.
The top enforcement issues in 2017 measured by total fines assessed were:
1. Anti-money laundering (AML) cases resulted in the most FINRA fines in 2017. FINRA reported 16 AML cases in 2017, which resulted in $14.6 million in fines. While the number of cases decreased by 50% from 32 in 2016, the fines reported also dropped from $45.9 million in 2016, a decrease of 68%. AML maintained the top spot due to the largest single fine in 2017 ($13 million).
“AML’s presence at the top of this list for the second year in a row confirms that both FINRA and the SEC are concerned with how firms are handling their AML compliance obligations,” Pollet said.
2. Trade reporting cases resulted in the second most fines for FINRA in 2017. FINRA reported $14.3 million in fines in 112 trade reporting cases. Compared with 2016, fines decreased 41% from $24.4 million, and the number of cases decreased 23% from the 146 cases reported in 2016.
3. Electronic communications cases resulted in the third largest amount of fines assessed by FINRA, with the SRO reporting $8.3 million in fines for 44 electronic communications cases. Compared to 2016, these figures represent a 39% decrease in fines from $13.6 million and a 36% decrease from the 69 cases reported in 2016.
4. Books and records cases resulted in the fourth most fines for FINRA, with 81 books and records cases in 2017, result in $6.2 million in fines. Compared to 2016, these figures represent a 72% decrease in fines from $22.5 million and an 18% decrease from the 99 cases reported in 2016. Books and records cases on was driven largely by enforcement actions against three firms primarily for failing to preserve records in a “write once, read many” (WORM) format.
5. Research analyst and research report cases resulted in the fifth most fines for FINRA with 10 research analyst and research report cases in 2017, resulting in a total of $6 million in fines. This was a decrease of 57% in fines from $13.8 million in fines reported in 2016 and a decrease of 23% from the 13 cases reported in 2016.
The “dramatic increase” in restitution served as a key FINRA enforcement trend last year, followed by suitability and technology breakdowns.
There were nine “supersized” restitution orders, totaling nearly $55 million, of which three were “yuuuge” restitution orders, totalling $40.4 million, according to Rubin.
Restitution ordered related to fraudulent sales in high-risk oil and gas ventures, infractions against senior/retiree investors as well as mutual funds where firms were sanctioned for selling shares with front- or back-end sales charges to certain customers who were eligible to receive sales charge waivers.
“The increase in restitution may signal that FINRA intends to order more customer remediation rather than assess punitive sanctions against firms,” said Pollet.
FINRA still reported 98 suitability cases, with $3.6 million in fines, in 2017.
The number of cases increased 13% from the 87 cases brought in 2016, although the fines decreased 76% from the $15.3 million in fines reported in 2016.
However, FINRA ordered $30.3 million in restitution in the 2017 suitability cases, a dramatic increase from the $5.8 million in restitution ordered in 2016.
Last year, the suitability cases with the largest fines centered on the sale of multi-share class variable annuities, including L-share contracts.
Another trend that emerged in 2017 related to operational breakdowns in technological systems—an area identified in FINRA’s latest priorities letter.
One firm was fined $700,000 for failing to deliver numerous exchange-traded fund prospectuses over a six-year period in which the firm cleared more than 100 million relevant purchases because of flaws in its system, including the way in which it interfaced with a third-party vendor.
Another firm was fined $2.8 million for “systemic coding and design flaws” that resulted in the failure to properly segregate customers’ securities in accordance with the Customer Protection Rule.
“Given FINRA’s continued emphasis on cybersecurity and technological compliance issues, firms need to adequately supervise and monitor their systems and controls to prevent unintended collateral consequences that may negatively impact customers or the firm,” Rubin said.
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