A 'kinder, gentler' FINRA — despite collecting $89M in fines

March 14, 2024 6:23 PM

FINRA's steady decline in enforcement actions in recent years suggests a "kinder, gentler" stance toward the industry the watchdog agency is charged with policing. Still, a corresponding increase in fines imposed on firms demonstrates that the consequences of running afoul of the law are still high.

Those are two key findings that Adam Pollet, a securities enforcement partner in the Washington, D.C. offices of Eversheds Sutherland, noted in his firm's latest study of FINRA sanctions.

In its report released on Wednesday, Eversheds Sutherland found that the Financial Industry Regulatory Authority took 453 disciplinary actions in 2023. That number was down 9% from 496 in 2022 and 13% from 569 in 2021.

Pollet said there has been a marked change in FINRA's approach to the industry since Robert Cook became CEO of the agency in 2016. Not long after taking over, Cook went on a "listening tour" during which he suggested the agency would pay more attention to industry complaints that FINRA had been practicing "regulation by enforcement."

Pollet said the agency has since shown a tendency to try to guide firms on ways to stay on the right side of the law rather than waiting for them to go astray before bringing the hammer down.

"Our working hypothesis is that after Robert Cook took over and committed to his 360-degree review of the agency and talking to folks in the industry, it has resulted in a kinder, gentler FINRA," Pollet said. "And you see that play out in enforcement."

A FINRA spokesman did not immediately respond to requests for comment.

Tino Lisella, a former FINRA enforcement attorney and a securities lawyer in the West Palm Beach, Florida, office of Carlton Fields, said he thinks there is a greater tendency these days to resolve low-level violations through informal actions that wouldn't necessarily show up in publicly reported data. That's particularly true for regulatory matters that don't harm investors or undermine the integrity of the markets, Lisella said.

FINRA in the past tended to be aggressive about pursuing even small regulatory matters, he said. Nowadays, though, it's "probably not passing over every little footfall to enforcement," Lisella said.

"There are probably a lot of minor violations that are perhaps getting addressed through corrective conferences or a cautionary letter or some other type of informal resolution," he said.

Meanwhile, Eversheds Sutherland's report showed a steep 63% increase in the fine amounts handed down by FINRA. The total rose to $89 million in 2023, from $54.5 million the year before.

Much of that increase was driven by a single charge. In November, FINRA hit Bank of America with a $24 million fine after finding that two traders in the bank's securities division had manipulated, or "spoofed," the U.S. Treasuries market.

But even without that fine, the number would be an increase over 2022 fines. Take out the $24 million charge against Bank of America, and FINRA's haul for 2023 would still have risen 19% to $65 million, Eversheds Sutherland's report notes.

"So there is less activity in terms of cases," Pollet said. "But when they do bring them, they're bringing to bear higher fines and penalties."

The Financial Industry Regulatory Authority operates under the Securities and Exchange Commission as the self-regulator of the broker-dealer industry. At its most recent count, it had 3,378 firms and 620,882 brokerage representatives in its jurisdiction.

Eversheds Sutherland tallied those figures by looking at FINRA's monthly disciplinary reports, press releases and similar online data. FINRA separately releases every year its own disciplinary statistics but has yet to do so for 2023.

For more takeaways from Eversheds Sutherland's report, scroll down.

Fine time

FINRA not only had a greater fine haul in 2023 but was also more likely to demand large amounts from errant firms.

FINRA handed down 14 fines of $1 million or more in 2023, up from 11 in 2022. It also had four charges of $5 million or more, double the number for the previous year.

Tiffany Magri, the senior regulatory compliance advisor at the consultant SMARSH, said watchdogs often charge higher fines when they want to send a message about some regulatory priority.

"I have heard regulators say, 'When you don't listen, we raise the fines,'" she said. "They feel they need to have this sticker shock in order to get people to do that."

Restitution solution?

The amount of FINRA-ordered restitution — money that firms have to pay as compensation to victims — meanwhile fell substantially last year. The agency called for brokerages to pay $7 million in restitution in 2023, a figure down 66% from $21 million in the previous year. Groups like the Public Investors Advocate Bar Association, whose lawyers represent brokerage clients, point out that cheated customers often struggle to collect these awards.

FINRA also tended to push for smaller restitution amounts last year. Only one of its orders in 2023 was for $1 million or more. The year before, it called for three firms to pay $1 million or more. The year before that, it was 10 firms.

Pollet noted in the report that FINRA has placed less emphasis on restitution as firms set more of a priority on regulatory compliance. He noted, "FINRA has suggested that as firms proactively remediate customer losses through a strong culture of compliance, the amount of restitution that FINRA needs to order would decrease."

Reg BI v. suitability

Eversheds Sutherland's 2023 report marks the first time Regulation Best Interest showed up in the firm's top five list of enforcement issues. Reg BI, as the conduct standard is known for short, generally calls on brokers to always do what's best for their clients and to eliminate all but the most unavoidable conflicts of interest.

Reg BI took effect in June 2020 and gave rise only to one case the following year. As expected, the pace of enforcement has picked up.

Eversheds Sutherland reported 15 FINRA Reg BI cases in 2023, producing $6 million in fines. A full $5.5 million of that came from a fine FINRA imposed on the independent broker-dealer LPL Financial in December over allegations that the firm had improperly logged business transactions.

Eversheds Sutherland's report meanwhile showed the rule Reg BI is meant to replace — the so-called suitability standard — still has some life left in it. Rather than calling on brokers to look out for clients' best interests, the suitability standard merely required them to make sure any investment they were recommending was appropriate given a particular investor's goals and tolerance for risk. Eversheds Sutherland recorded 33 suitability cases in 2023, bringing in $5 million in fines.

Pollet said it's significant that Reg BI made its first appearance as a top-five enforcement issue in the firm's report this year. He predicted the number of Reg BI-related cases would continue increasing, while those citing the suitability standard would steadily phase out.

"Reg BI, we would anticipate, will become the bread and butter of FINRA enforcement," Pollet said.

Other enforcement priorities

FINRA handed down its biggest fines in cases involving spoofing (as in the aforementioned $24 million Bank of America settlement), trade reporting and anti-money laundering measures.

Trade reporting disputes generally involve allegations that brokers failed to inform regulators of transactions they made on behalf of clients. Eversheds Sutherland found 14 such cases last year. Of those, the biggest was against Goldman Sachs, which agreed to pay FINRA and the Securities and Exchange Commission $6 million each for failing to report required information for at least 97 million transactions.

FINRA's anti-money laundering cases involve efforts to prevent criminals, terrorists or members of rogue groups from using the U.S. financial system to move their assets. The enforcement of anti-money laundering regulations and the related Banking Secrecy Act of 1970 have become priorities for regulators in recent years concerned about how Russia might be funding its war in Ukraine and China's attempts to undermine cybersecurity.

Eversheds Sutherland said anti-money laundering cases returned to FINRA's top five enforcement cases last year after dropping off in 2022. The agency logged 13 cases alleging violations related to money laundering.

Of the $8 million it collected from those actions, $6 million came from Merrill Lynch. The Bank of America subsidiary agreed in July to pay that amount over allegations that it had failed to fill out roughly 1,500 required suspicious activity reports.

Crypto

FINRA has also made the regulation of bitcoin and other digital assets a priority in recent years. The agency in November introduced a Crypto Assets key topics page listing ways brokers can inform regulators of their dealings with cryptocurrencies.

FINRA has also called on firms to take care with what they say about digital assets in public forums. Eversheds Sutherland's report noted that regulators reviewed 500 communications brokerages had sent about crypto-related matters.

The results, released early this year, found that 70% of the messages contained violations. These, according to the report, included "false statements or implications that crypto assets functioned like cash or cash equivalent and comparisons of crypto assets to other assets without providing a sound basis to compare varying features and risks."