WASHINGTON -- If industry regulators are taking action against your firm, is it worth it to fight the charges?
For a significant portion of brokers and advisors, litigating against the SEC or FINRA can pay off, according to a new analysis.
Law firm Sutherland Asbill & Brennan looked at cases brought in fiscal 2013 before the internal administrative review bodies at the two regulators, as well as the SEC actions that were challenged in a U.S. district court.
In cases heard by an SEC administrative law judge or a FINRA hearing panel, the law firm concluded, 46.7% of broker-dealers, advisors and registered reps succeeded in getting charges dismissed or lowering the sanctions imposed.
Firms fared better in federal court, with 60% of defendants convincing a judge or jury that the SEC had failed to establish at least some of its charges.
90% OF FIRMS SETTLE
With near even odds in administrative proceedings and even better results in the judiciary, firms facing charges might think twice before reflexively deciding to settle, suggests Brian Rubin, a partner at Sutherland and author of the report. (Of course, Sutherland, which often represents companies in disputes with regulators, could benefit if more firms fought the charges.)
Yet he estimates that more than 90% of cases brought by the SEC and FINRA are settled, with any number of factors deterring advisors and brokers from litigating. Cost, of course, is one concern; there's also the perception that those legal challenges are an uphill battle that defendants have little chance of winning.
Before joining Sutherland, Rubin served as a prosecutor at the National Association of Securities Dealers, FINRA's predecessor, and at the SEC. Now on the other side, he acknowledges that many firms are fearful to take on "well-funded" regulators "that often bring cases in 'friendly' forums where decisions are rendered by their own employees applying procedural rules designed by the regulators."
In administrative law judge proceedings at the SEC, the single judge is a commission employee. FINRA hearing panels are comprised of a hearing officer employed by the self-regulatory organization, as well as two current or former industry representatives. Within each of those venues, Rubin says, there are wide swings in the disposition of the presiding officials toward defendants, with some more likely to uphold the recommendations of enforcement staff than others.
"I think the general concern about not getting a fair shake is there," Rubin says. "I think some ALJs and some hearing officers are viewed as more oriented toward the staff than others."
Michelle Ong, a spokeswoman for FINRA, said that the organization's hearing officers are "responsible for overseeing the proceeding to ensure that it is conducted in a fair and efficient manner, much as a judge oversees cases in a court."
"The sole function of the Office of Hearing Officers is to serve as an adjudicator and it is entirely independent of the Department of Enforcement and the Department of Market Regulation," Ong wrote in an email.
A spokeswoman for the SEC did not immediately respond to requests for comment on Sutherland's study or the commission's administrative litigation procedures.
According to Sutherland's analysis, investment advisors succeeded in convincing an SEC administrative law judge to dismiss 43.5% of the charges brought against them for lack of proof. Broker-dealers didn't fare quite so well, convincing the SEC's administrative judges to toss 35.3% of the charges.
FINRA hearing panels were harder to convince. In cases before those bodies, brokers were able to get just 16.2% of the charges against them tossed out -- although brokers had better luck in their efforts to lower monetary penalties. In nearly 53% of cases, FINRA hearing panels reduced the penalties that enforcement staff had been seeking.
PENALTIES SHIFTED
Sutherland's analysis did find one downside in litigating against FINRA, however: In a little more than 29% of the cases, the penalties were actually increased. (Staff recommendations for penalties were left unchanged in the remaining cases.)
At the SEC, advisors appealing for a lower fine were successful in all eight of the challenges they brought in 2013. Brokers, on the other hand, only convinced an SEC judge to lower their penalties in one-quarter of the cases they brought. The fines were held unchanged in the remainder.
FINRA hearing panels also lowered the recommended suspensions in more than half of the cases they heard. Sutherland reported that SEC judges did not hear any suspension cases in 2013, but they did uphold all five of the industry or supervisory bars that were challenged last year.
"The big picture is to get firms and reps to think about the option of litigating. Because a lot of times it's perceived to be easier [to settle]," Rubin says. "But the decision should be a serious decision after you think about all the relevant issues, because there have been a number of success and success stories when firms and reps litigate."
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