FINRA Disciplinary Review

By Joseph Fede, CPA, GMA, Supervisor – WithumSmith+Brown, PC

Over the past several years, the Financial Industry Regulatory Authority (“FINRA”), the self-regulatory organization responsible for regulating every brokerage firm doing business in the US, brought between 1,300 and 1,600 disciplinary actions each year.  In 2015, it ordered $95 million in fines (2014- $134 million) and $96 million in restitution (2014 – $32.2 million).  During both years 2015 and 2014, it barred or suspended approximately 1,200 individuals, and expelled or suspended 56 firms in 2015 and 23 firms in 2014.   FINRA disciplinary actions can also mean automatic “statutory disqualifications” under Section 3(a)(39) of the Securities Exchange A ct and Article III, Section 4 of FINRA’s By-Laws. These disqualifications prohibit persons from associating with a broker-dealer or prohibit firms from acting as broker-dealers.

Keeping abreast of regulatory issues and areas of concern can keep FINRA members out of hot water and potentially save them from serious fines, which range from $1,000 dollars to over $290,000 per infraction.

The cases, which involved FINRA’s most significant sanctions against firms in 2015, were noted in the following areas:

  • Mutual fund fee waivers – $55 million in restitution
  • Excessive leverage and concentration of investments (certain investments) – $11 million in restitution and $7.5 million in fines
  • Unsuitable mutual fund transactions – $10 million in restitution and $3.75 million in fines
  • Failures related to complex securities (Non-traditional ETFs) – $10 million in fines $1.7 million in restitution
  • Selling unregistered penny stocks and related anti-money laundering deficiencies – $6 million in fines and $1.3 million in disgorgement

Other notable areas were related to:

  • Background checks
  • Blue sheet responses
  • Due diligence on private placements
  • Excessive markups and markdowns
  • Net Capital violations
  • Penny stock sales
  • Procedures to prevent theft and conversion by registered representatives
  • Inaccurate responses to regulatory requests

In a majority of the cases in 2015, FINRA charged the members or firms with the underlying violations but also the failure-to-supervise.  Factors that led to higher sanctions in many cases include the number of transactions involved, the length of time over which the violations occurred, customer harm, and the firm’s overall level of responsibility.

When regulatory issues arise, mitigation of damages will include self-reporting, timely corrective steps, remediation, and overall cooperation. All of which have been known to reduce the overall penalty handed down by FINRA.  However, monetary sanctions may be substantial even when some or all of these mitigating factors are present.

 The following is a full statistical review, updated by FINRA on a regular basis on the FINRA website.

Statistical Review 2011 to May 2016

FINRA 2011 2012 2013 2014 2015 MAY 2016
Member Firms 4,456 4,289 4,146 4,068 3,957 3,916
Branch Offices 160,483 161,264 160,573 161,644 162,655 161,821
Registered Reps 629,518 630,391 635,837 636,707 643,322 640,111

Statistical Review 2011 to May 2016

Regulatory Actions 2011 2012 2013 2014 2015
Investor Complaints Received
2,979
2,785
2,334
2,802
3,250
New Disciplinary Actions Filed
1,488
1,541
1,535
1,397
1,512
Formal Actions Resolved
1,287
1,370
1,307
1,110
1,252
Firms Expelled
21
30
24
18
31
Firms Suspended
0
0
38*
5
25
Individuals Barred
329
294
429
481
496
Individuals Suspended
475
549
670
705
736
Advertisements and Sales Communications Reviewed
105,329
101,181
108,534
113,646
99,776
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Categories: Uncategorized

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