WASHINGTON—A dramatic increase in the fines reported so far in 2016 has the Financial Industry Regulatory Authority (FINRA) set to shatter its recent record-setting year of 2014. During the first half of 2016, FINRA reported $79.4 million in fines in its monthly Disciplinary and Other FINRA Actions publications and in its News Releases. In comparison, FINRA reported fining broker-dealers and associated persons $37.5 million during the first half of 2015 and $94 million for the entire year. If FINRA continues to assess fines in 2016 at the current rate, the year-end fines would total approximately $159 million. This would represent a 69% increase from the total fines reported by FINRA in 2015 and a 19% increase from the record-setting year of 2014, when FINRA assessed $134 million in fines.
FINRA also ordered $13.8 million in restitution during the first six months of 2016. If FINRA continues to order restitution in 2016 at a similar pace, the year-end restitution amount would be nearly $28 million. This would represent a 71% decrease from the total restitution reported by FINRA in 2015 ($96 million) and a 12.5% decrease from 2014 ($32 million).
During the first six months of 2016, FINRA reported 11 “supersized” fines of $1 million or more, four of which were “ginormous” fines of $5 million or more, totalling $57.1 million. In comparison, during the first six months of 2015, FINRA reported six “supersized” fines, including one “ginormous” fine, totalling $17.8 million. The largest single fine against a firm this year was $20 million for making negligent material misrepresentations and omissions regarding costs and benefits on variable annuity replacement applications for tens of thousands of customers over a five-year period. The firm was also ordered to pay $5 million in restitution.1 In a separate matter, two other broker-dealer affiliates were fined $17 million collectively for failing to establish and implement adequate anti-money laundering procedures, resulting in the firms’ failure to properly prevent or detect, investigate, and report suspicious activity for several years.2
Despite the increase in fines during the first half of 2016, the number of disciplinary actions reported by FINRA actually decreased slightly compared with 2015.3 FINRA reported 547 disciplinary actions during the first six months of 2016, which is a 1% decline compared with the first six months of 2015 (553 disciplinary actions). The percentage of 2016 cases that involved firms (as opposed to just individuals) was nearly identical to that of the first six months of 2015 (approximately 36% for both years).
The Top Enforcement Issues for FINRA during the first half of 2016, in terms of the total fines reported in FINRA’s monthly Disciplinary and Other FINRA Actions reports and News Releases, were:
- Variable Annuities: $20.7 million in fines (7 cases);4
- Due Diligence: $19.7 million in fines (24 cases);
- Anti-Money Laundering: $18.6 million in fines (18 cases);5
- Trade Reporting: $12.6 million in fines (65 cases); and
- Notes / Bonds: $6.2 million in fines (14 cases).6
These topics demonstrate that FINRA is addressing a diverse array of issues this year. It also appears that FINRA is focusing on different issues than it focused on in 2015, such as variable annuities and due diligence. The chart below demonstrates how the Top Enforcement Issues from 2015 fared during the first half of 2016:
Brian L. Rubin, head of Sutherland’s Washington litigation practice group, said, “These statistics bear out what we’ve been hearing from FINRA Staff: we are in a whole new world. This isn’t your mother’s (or father’s) FINRA. Firms and individuals will need to adjust their mindsets regarding fine levels in disciplinary cases. To try to avoid being the subject of one of these actions, firms should consider focusing on ‘nuts and bolts’ issues like marketing and suitability of products, AML, trade reporting, and supervisory policies and procedures.”
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1 FINRA Letter of Acceptance, Waiver and Consent, No. 2014040870001, https://www.finra.org/sites/default/files/MSI_AWC_050316.pdf.
2 FINRA Letter of Acceptance, Waiver and Consent, No. 2014043592001, https://www.finra.org/sites/default/files/RJFS_AWC_051816_0.pdf.
3 FINRA defines disciplinary actions as Letters of Acceptance, Waivers and Consents; Complaints; Rule 9522 suspensions; and Minor Rule Violations.
4 One case generated a fine of $20 million.
5 One case against two affiliated broker-dealers and an individual generated fines of $17 million.
6 Many cases involve multiple allegations, making it impossible to attribute the exact amount of any particular fine to a specific allegation.