FINRA Enforcement Numbers on Track To Match 2012 Record, Chief Enforcer Says
By Yin Wilczek
The number of enforcement actions brought so far in 2013 by the Financial Industry Regulatory Authority are on pace to match the record numbers seen in 2012, FINRA Executive Vice President and Chief of Enforcement Brad Bennett said May 22.
Among other trends, FINRA’s home office continues to see a significant number of “single broker cases,” Bennett said. The FINRA official, describing the cases as isolated instances of “petty dishonesty,” added that the home office sees about 600 to 800 of these cases a year.
Moreover, FINRA’s whistleblower program continues to yield a large number of high-quality cases, Bennett said. “The hit ratio there is very good.” The official spoke on an enforcement panel at FINRA’s annual conference in Washington.
First Quarter Stats
According to statistics provided by a representative, FINRA as of March 31 saw 306 disciplinary actions, and imposed total fines of $8.5 million, and restitution of $1.9 million. The self-regulatory organization also expelled three, barred 59, and suspended 128 individuals and entities from the securities industry, FINRA said.
Meanwhile, a recent report by Sutherland Asbill & Brennan LLP found that FINRA has brought in record enforcement numbers over the past four years (45 SRLR 493, 3/18/13). According to the law firm, FINRA filed 1,541 disciplinary actions in 2012–an increase of 3.6 percent from 2011′s 1,488 cases–and imposed $78.2 million in fines–a nearly 15 percent increase from $68 million in 2011.
Sutherland also found that compared to 2008, the number of FINRA enforcement actions has increased by 44 percent and the amount of fines has increased by 179 percent.
At the panel, Bennett noted that FINRA resolves the “vast, vast majority” of its enforcement actions through settlements. “Last year, on the primary disciplinary panels, which is our first-level trial court, there were 30 opinions as against 1,300 or so cases,” he told the audience. Of the 30 cases, FINRA won 22 on all counts, lost about two to four on all counts, and won and lost some issues in the rest, he said. Bennett added that there are 22 cases on appeal to the Securities and Exchange Commission.
Enforcement Cases Development Team
Bennett also discussed FINRA’s Enforcement Cases Development Team. As opposed to FINRA’s broad industry sweeps, the unit generates cases through a more “targeted approach” by reviewing trends and investigating potential industry-wide misconduct, Bennett said. “That team is handling over 300 matters a year,” he added.
Bennett further observed that FINRA is “seeing the end” of 2008 financial crisis cases. “So while the number of our cases remain constant, I suspect things like fines and whatnot are tapering off a bit,” he said.
In the meantime, FINRA Deputy Chief of Enforcement Susan Schroeder said complex products remain one of the SRO’s enforcement priorities. Earlier in the conference, FINRA Chairman and Chief Executive Officer Richard Ketchum said broker-dealer firms need to do a better job of anticipating problems and ensuring that investors understand the risks associated with complex, speculative products.
Schroeder said FINRA enforcers also are focusing on:
- customer-specific suitability issues;
- the adequacy of information regarding complex products;
- “culture of compliance” cases; and
- anti-money laundering cases.
With respect to customer-specific suitability actions, Schroeder said FINRA in particular is witnessing “over-concentration problems” with respect to complex products and “firms that are not sufficiently set up to supervise over-concentration problems.”
“This really is a complicated area,” Schroeder observed, noting for example that many private placements have concentration requirements that some firms are not adequately set up to supervise.
As to cybersecurity, Schroeder said FINRA has more than 100 enforcement cases right now involving instances in which customer e-mails have been hacked, after which the hacker, posing as the customer, caused a broker to transfer money to him or her from the customer’s account. The actions against the brokers alleged that the individuals lied about why they circumvented their firms’ controls in transferring the funds, she said.
Schroeder added that FINRA is “seeing a lot of AML issues out there.” The more recent cases show the importance of tailoring firms’ AML policies to their business models and growth, and the significant consequences when they fail to do that, she said.
Targeting of Individuals?
In other discussions, Lisa Roth, president of consulting firm Monahan & Roth LLC, questioned whether FINRA is unfairly targeting individuals from small firms as opposed to the large brokerages.
Neal Sullivan, a Washington-based partner at Sidley Austin LLP, responded that his observation has been that large firms are “unfairly singled” out for multiple enforcement actions by FINRA, the SEC, and state securities regulators based on the same underlying conduct. He also noted that when things fail at large firms, it often involves a systemic issue rather than the failure of a single individual to “connect the dots.”
Agreeing, Schroeder observed that the challenge in enforcement actions against large firms is finding individual liability, “which is something Rick Ketchum has challenged us to do.”
“We are intent on investigating intentional individual liability in large firm cases, but very often we find that there is that vacuum of accountability, which kind of creates a problem,” she said. “There is no one body in this space we can point to and say, that’s the person who fell down on the job.”
On the issue of internal investigations, Elaine Mandelbaum, managing director and deputy general counsel at Citigroup Global Markets Inc., (C) said her first step is to “lock down the documents”–find out who has them and where they are stored–as quickly as possible.
Mandelbaum also noted that once a problem is brought to their attention, the legal and compliance departments must act promptly. There comes a point when the departments may have to self-report the problem to securities regulators, she said. However, she also warned, “You need to keep escalation to regulators in mind but you need to be accurate in what you tell them.”