Electronic Communications Sanctions by FINRA Spike
March 15, 2013
Electronic communications has emerged as a major enforcement issue for the Financial Industry Regulatory Authority, according to law firm Sutherland Asbill & Brennan.
In 2012, FINRA imposed $6.5 million in fines, an increase of 81 per cent over 2011 and almost twice the total amounts for both 2011 and 2010, according to a just-released analysis of FINRA sanctions from the securities industry legal firm.
Why the uptick? “One was the result of a firm that failed allegedly to retain a million emails, resulting in a $750,000 fine,” says Brian L. Rubin, a partner at Sutherland Asbill. “That was the result of a glitch-- the problem occurred during an upgrade of the firm’s email archiving system -- but these kinds of problems are becoming less and less common than they were a decade ago when email was new.”
The majority of electronic communications enforcement activity today has to do with texting, instant messaging and other forms of social media, Rubin says. “It’s not always easy for firms to monitor these kinds of communications. Some firms provide checks in their system and training for their clerks and reps so they knew the ground rules.”
And some firms go so far as to have clerks and reps sign attestation forms saying they know the rules for texting and the like and agree to abide by them. As result of these efforts, Rubin sees incidents of social media glitches and abuses diminishing in the near future.
Overall, in 2012, FINRA brought slightly more disciplinary actions but assessed a double-digit increase in fines. This was the fourth consecutive year of increase in the number of cases filed and the second straight year of growth in the amount of fines. The growth in fines last year easily surpassed the small uptick in the number of actions filed, with fines jumping from $68 million in 2011 to $78.2 million in 2012, an increase of nearly 15%.[
For the year FINRA reported 1, 541 disciplinary actions, an increase of 3.6% from the 1,488 cases the regulator initiated in 2011.
Suitability cases were the top enforcement issue in 2012. FINRA assessed fines totaling $19.4 million in cases involving suitability allegations, representing a 152% increase from the $7.7 million in fines reported in 2011. In 2012, there were 117 suitability cases, a 10% increase from the 106 cases reported in 2011. The surge in suitability fines was largely driven by the $7.5 million in fines assessed in four exchange-traded fund (ETF) cases, and “supersized” fines of $1+ million in cases involving complex products such as reverse convertible notes and unit investment trusts. Suitability cases have been a mainstay on Sutherland’s Top Enforcement Issues list in recent years, placing fourth in 2010 and 2011 and second in 2008 and 2009.
Due Diligence cases resulted in the second-highest amount of fines assessed by FINRA in 2012. FINRA brought 62 due diligence cases in 2012, resulting in fines of $12.8 million. These figures represent significant increases from 2011’s totals, when FINRA reported 44 cases involving due diligence allegations, which resulted in only $1.6 million in fines. This substantial increase was largely fueled by “supersized” fines of $1+ million assessed in due diligence cases involving complex products and alternative investments. In 2012, FINRA also ordered $19 million of restitution in cases involving due diligence allegations.