Big BDs Could Face Heftier Fines Under New FINRA Rules

The Financial Industry Regulatory Authority’s National Adjudicatory Council has raised the fine ranges for mid- and large-size firms, created separate sanction guidelines for individuals and firms as well as separate fine ranges depending on a firms’ size.

“This is one of the most significant revisions to the Sanction Guidelines in decades,” Emily Gordy, former deputy head of FINRA enforcement who’s a partner at McGuireWoods in Washington, told ThinkAdvisor Thursday in an email.

For instance, large and midsize firms committing certain violations previously faced a maximum fine of $310,000. Fines for these nine types of violations laid out in the guidelines are now open-ended:

• Sales of unregistered securities (high volume of or recurring transactions in penny stocks);
• Failure to respond, or to respond truthfully, to requests made pursuant to FINRA Rule 8210;
• Best execution;
• Marking the open or marking the close;
• Churning, excessive trading or switching;
• Fraud, misrepresentations or material omissions of fact;
• Pricing — excessive markups/markdowns and excessive commissions;
• Research analysts and research reports (for example, potential conflicts of interest or flouting bans on personal trading); and
• Supervision — systemic supervisory failures.

Jessica Hopper, executive vice president and head of FINRA’s Department of Enforcement, said in a statement that the changes to the Sanction Guidelines “align the sanctions to where FINRA’s Enforcement program has evolved” and “also bolster FINRA’s mission of protecting investors by reflecting how grave violations of FINRA’s rule will result in serious sanctions.”

The guidelines also set $5,000 as the minimum for all firm fines. For small firms, the guidelines increase the minimum low end of the fine ranges to $5,000 for all guidelines.

Susan Schroeder, former head of FINRA Enforcement who’s now a partner at WilmerHale in New York and vice chair of the Securities & Financial Services Department, told ThinkAdvisor that the new Sanction Guidelines “differentiate between sanctions for large/mid-sized firms and small firms, and make it clear that large and mid-sized firms will pay higher penalties. They also give FINRA the flexibility to treat what are technically small firms as large firms, based on their financial resources. In other words — if you have significant business, you will pay a premium for any violation.”

The revisions also introduce six anti-money laundering guidelines: three for firms and three for individuals.

“AML compliance is an area of regulatory risk and thus a regulatory priority for FINRA,” the regulator states in Regulatory Notice 22-20.

“Because FINRA, the Securities and Exchange Commission and other regulators consistently settle with firms for AML violations well in excess of $310,000, the Sanction Guidelines have no upper limit on the fine range for mid-size and large-size firms for AML violations that involve the failure to reasonably monitor to report suspicious transactions.”

Schroeder added that the AML guidelines “show a hierarchy that may inform decision-making.”

The guidelines, she continued, “contemplate higher sanctions for failures to reasonably monitor transactions as opposed to [customer identification program] and customer due diligence deficiencies — and even lower sanction ranges for failures related to testing, training or designations. It will be interesting to see if FINRA Enforcement applies this hierarchy to settlements now that the NAC (or the FINRA staff??) has provided guidance about the relative weight it accords the violations.”

NAC

The NAC is FINRA’s appellate tribunal for disciplinary cases and is composed of a total of 15 industry and non-industry members. It has primary responsibility for considering policies regarding disciplinary sanctions and has periodically revised the Sanction Guidelines since 1993.

“The guidelines are intended to assist FINRA’s adjudicators — hearing panels and the NAC — in imposing a range of sanctions that are consistent and fair in disciplinary proceedings,” FINRA states, and provide firms and individuals with some of the typical securities rule violations and the ranges of disciplinary sanctions that may result from those violations.

They also serve as a framework for settlement negotiations between FINRA’s Department of Enforcement and member firms or individuals, the broker-dealer regulator said.

Schroeder stated that the revisions seem to come “from FINRA staff, not member firms.”

FINRA, Schroeder continued, “stated that these revisions ‘align the sanctions to where FINRA’s Enforcement program has evolved,’ and that the FINRA body that decides outcomes, the National Adjudicatory Council, approved these recommendations after receiving them from FINRA staff.”

In other words, Schroeder said, “the NAC is following the Enforcement staff’s lead, and not the other way around. But the NAC is supposed to be objective when Enforcement argues cases before it. Is it appropriate for these lines to get blurred in this way?”