WASHINGTON—Sutherland Asbill & Brennan LLP has completed its review of the disciplinary actions reported by the Financial Industry Regulatory Authority (FINRA) in 2013. By reviewing FINRA’s monthly disciplinary notices, Sutherland Partner Brian Rubin and Associate Andrew McCormick found that in 2013 FINRA’s fines dropped significantly but FINRA brought nearly the same number of disciplinary actions as it did in 2012. Sutherland also identified the top enforcement issues for FINRA in 2013, as well as emerging trends.
Fines and Disciplinary Actions
In 2013, FINRA imposed fines of $57 million, a decrease of 27% from the $78 million in fines it assessed in 2012. This was the lowest amount of fines imposed by FINRA since member firms and associated persons were fined $45 million by the regulator in 2010. The $57 million of 2013 fines is a far cry from the $184 million and $111 million in fines that were assessed by FINRA in 2005 and 2006, respectively. In addition to the $57 million in fines assessed by FINRA in 2013, the regulator also ordered firms and their representatives to pay nearly $24 million in restitution in 2012, a decrease of approximately 29% from 2013’s record-breaking $34 million.
The fines decreased considerably despite the number of cases being nearly equal to the prior year. According to FINRA’s “Statistical Review,” 1,535 disciplinary actions1 were filed in 2013, a decrease of less than 1% from the 1,541 cases the regulator initiated in 2012.2 According to those FINRA statistics, 2013 was the first time the number of disciplinary actions declined since 2008. Cumulatively, however, the number of cases initiated by FINRA has grown by 43% since that time, from 1,073 cases in 2008 to the 1,541 actions filed last year.3 The number of firms expelled by FINRA declined from 30 to 24 in 2013, a decrease of 20%.4 However, the number of individuals suspended or barred rose in 2013. The number of individuals suspended increased from 549 to 670 in 2013, an increase of 22%, and the number of individuals barred jumped from 294 to 429 in 2013, an increase of 46%.
According to Rubin, who heads Sutherland’s Securities Litigation and Enforcement Group, “The fines have likely fallen because FINRA has run through its inventory of cases stemming from the Financial Crisis of 2007 to 2008. To a large degree, FINRA is bringing more basic cases that don’t generate high fines.”
The chart below shows the fines and the number of disciplinary actions that FINRA has reported during each of the past nine years:
The chart below shows the restitution that FINRA has reported during each of the past five years:5
Top Enforcement Issues, Measured by Total Fines Assessed
Over each of the next three days, a Sutherland FINRA Focus report will be published about each of the following issues: electronic communications, trade reporting and short selling.6 Below are the top FINRA enforcement issues for 2013, measured by total fines assessed:
Electronic communication cases dominated FINRA’s headlines in 2013 and, unsurprisingly, this category of cases led to more fines than any other in 2013. FINRA fined firms and their representatives more than $15 million in 66 electronic communication cases in 2013. Although the increase in the number of cases was small—only a 5% increase from 2012’s 63 cases—the fines more than doubled. While FINRA assessed $6.5 million of fines in 2012, that number jumped to $15.1 million in 2013, an increase of 132%. This increase in electronic communication fines is consistent with what Sutherland predicted in its annual release a year ago.7 Electronic communication cases were highlighted as an emerging trend in March 2013 because there had been a significant uptick in activity in that area in 2012 after years of decline. The 81% increase in fines in 2012, from $3.6 million in 2011 to $6.5 million in 2012, was easily surpassed by the 132% increase in 2013 to $15.1 million. A significant reason for this increase was a $7.5 million fine, the greatest fine ordered by FINRA in 2013, that was assessed in an electronic communication case allegedly involving 35 significant email failures that prevented the firm from accessing hundreds of millions of emails.8 FINRA also alleged that the firm failed to review tens of millions of emails and that the firm made material misrepresentations to the regulator during this investigation. The firm also agreed to pay $1.5 million to a fund to compensate customer claimants who may have been impacted by these email retention and supervision issues. According to McCormick, “[f]irms need to focus on technology issues, like email retention and surveillance, because FINRA has been concentrating on this issue.”
Trade Reporting cases resulted in the second-highest amount of fines for FINRA in 2013. Although most of these cases led to relatively small fines, there were 198 trade reporting cases in 2013, totaling $12.1 million in fines. These statistics represent significant increases from the totals in prior years. For example, in 2012, FINRA brought 158 trade reporting cases that resulted in $7.7 million of fines. Thus, FINRA experienced a 25% increase in the number of trade reporting cases in 2013 and a 57% increase in the total fines in those cases. This is the first time that trade reporting has appeared on Sutherland’s Top Enforcement Issues list.
Short Selling cases led to $7.2 million in fines in 2013, the third-largest total for the year. This represented a 41% increase from the $5.1 million in fines that were assessed in 2012 short selling cases. Despite the significant jump in fines, the number of short selling cases increased from 38 in 2012 to 40 this past year, a move of only 5%. The significant increase in fines was largely driven by a $4 million fine in a case involving allegations that a firm executed numerous short sale orders without a reasonable belief that the security could be borrowed.9 Although short selling was not on Sutherland’s 2012 Top Enforcement Issue list, it has been a regular in recent years, placing second in 2011 and fifth in 2010.
Books and Records cases resulted in the fourth-largest amount of FINRA fines in 2013. There were 95 books and records cases in 2013 and $7.1 million in fines. This represented a 20% increase from the 79 books and records cases brought in 2012 and a 13% increase from the $6.3 million in fines imposed in 2012 books and records cases. The presence of books and records cases and trade reporting cases on Sutherland’s 2013 Top Enforcement Issues list demonstrates that FINRA takes very seriously issues that may appear to be administrative or technical.
Municipal Securities placed fifth on Sutherland’s Top Enforcement Issues list in 2013. FINRA brought 51 municipal securities cases in 2013, an increase of 21% from the 42 cases initiated in 2012. The fines in municipal securities cases jumped from $4.2 million in 2012 to $6 million in 2013, an increase of 43%. In 2012, Sutherland predicted that municipal securities would be an important issue for FINRA in the coming years.10 This has proven to be the case because the fines in municipal securities cases have increased over each of the past four years. For example, there were only $1.5 million in fines imposed in 2010 municipal securities cases. That number has grown by 300% since that time.
Suitability. This is the first year that suitability cases have not appeared on Sutherland’s Top Enforcement Issues list. Suitability cases ranked second in 2008 and 2009, fourth in 2010 and 2011, and first in 2012. The fines in suitability cases dropped from $19.4 million in 2012 to $5.1 million in 2013, a decrease of 74%. The number of suitability cases also dropped from 117 in 2012 to 73 in 2013, a decrease of 38%. These substantial decreases in suitability cases and fines may relate to the fact that FINRA has probably completed most of its cases relating to the financial crisis.
Advertising. There was also an incredible slowdown in the amount of fines imposed in advertising cases in 2013. Advertising was on Sutherland’s Top Enforcement Issues list for three straight years, including being the top issue for FINRA in 2010 and 2011 (including $21.1 million in fines in 2011). Advertising placed fourth in 2012 with $10.4 million in fines from 50 cases. Although the number of cases actually increased to 53 in 2013, fines plummeted to $2.8 million, a decrease of 73%. When products fail to perform as anticipated in the future, like Auction Rate Securities did during the financial crisis, advertising cases will likely become a higher priority for FINRA once again.
“Supersized” Fines. After back-to-back increases in fines of $1 million and above in 2011 and 2012, these large fines dropped significantly in 2013. There were only eight “supersized” fines in 2013, totaling $18.5 million. These are the lowest supersized totals since 2011, when FINRA assessed six such fines resulting in $14.2 million in fines. In contrast, FINRA reported 16 “supersized” fines in 2012, which totaled more than $43 million in fines. Despite this sharp decrease, six of the eight 2013 “supersized” fines were reported during the second half of the year, which could signal a trend that these large fines may be on the rebound after only two such cases were reported during the first six months of 2013.
Complex Products. This was also an area of significant slowdown for FINRA in 2013, which is likely related to the substantial decreases in the amount of fines in suitability, advertising, and due diligence cases. Although what constitutes a complex product is subjective, some of the following products might be considered to be complex for certain investors: collateralized mortgage obligations ($6.8 million in fines in 2012; decreased by 96% to $295,000 in fines in 2013), unit investment trusts ($4.3 million in fines in 2012; decreased by 97% to $120,000 in fines in 2013), and real estate investment trusts (REITs) ($3.1 million in fines in 2012; decreased by 99% to $40,000 in fines in 2013).
1. FINRA defines disciplinary actions as Letters of Acceptance, Waivers and Consents; Complaints; Rule 9522 suspensions; and Minor Rule Violations.
2. FINRA Statistics, available here.
5. The 2009–2012 data can be found in FINRA’s annual report. The total for 2013 comes from the amounts reported in FINRA’s monthly disciplinary reports between January and December 2013. FINRA had not released its 2013 annual report by the time this study was published.
6. Because cases may involve more than one alleged violation (e.g., trade reporting and short selling), a case may be included in more than one category in this analysis.
7. Deborah Heilizer, Brian Rubin, Andrew McCormick, Annual Sutherland Analysis of FINRA Sanctions Shows Number of Enforcement Actions Rises Slightly in 2012, Fines Jump by 15%, Sutherland Press Release, March 13, 2013, available here.
8. FINRA News Release, May 21, 2013, available here.
9. FINRA News Release, July 11, 2013, available here.
10. Deborah Heilizer, Brian Rubin, and Andrew McCormick, Annual Sutherland FINRA Sanctions Survey Shows a 51% Jump in Fines in 2011, Sutherland Legal Alert, March 16, 2012, available here.