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Sutherland Focus Report #1: FINRA Taking AIM at Advertising

March 13, 2012

WASHINGTON (March 13, 2012) – As reported yesterday in the Sutherland FINRA Sanctions Survey, an annual analysis of FINRA’s disciplinary actions conducted by Sutherland Asbill & Brennan LLP, advertising was the top sanction issue for the regulator in 2011.  FINRA reported $21 million in fines from 45 cases involving alleged advertising violations in 2011. Advertising was also first on Sutherland’s 2010 Top Enforcement Issues list, when $4.75 million in fines were reported in 22 cases. This Sutherland FINRA Focus dives deeper into FINRA’s recent enforcement actions and highlights some of the key 2011 advertising cases.

The chart below shows the total number of advertising enforcement actions and fines that FINRA has reported during each of the past six years. 

FINRA’s Advertising Sanctions Statistics, 2006 - 2011




Percentage Change

Percentage of Total FINRA Fines

Cases Reported

Percentage Change








$6.1 million






$1.2 million






$5.5 million






$4.75 million






$21.1 million





The number of cases involving advertising charges has increased nearly every year since 2006, growing from 8 actions reported in 2006 to 45 this past year (a 463% increase). These statistics also demonstrate that cases involving alleged advertising violations make up an increasing percentage of FINRA’s annual fines over time. While the amount of fines reported each year has fluctuated, 2011 saw a significant increase in the total amount of advertising fines, which Sutherland presaged in its 2010 Top Enforcement Issues analysis, noting that FINRA would “continue placing greater emphasis on regulating advertising materials."

In 2011, advertising cases involving Auction Rate Securities (ARS) played a prominent role. In fact, 45% of the 2011 advertising fines ($9.5 million) involved ARS. One of the largest sanctions imposed in an ARS advertising case was a $3 million fine against a firm for allegedly creating misleading marketing materials that were used when the securities were sold to retail customers.  FINRA charged that these advertisements did not adequately disclose the liquidity risks of ARS (including the possibility of auction failure) and that they improperly described these securities as “safe and liquid investments." Brad Bennett, FINRA’s Chief of Enforcement, indicated that the firm “was aware of facts that raised significant red flags about the ability of investors to obtain liquidity," but still “failed to revise their marketing brochures to disclose these risks." Bennett further noted that the firm’s alleged advertising violations “deprived investors of important information."   

Two firms were fined in excess of $1 million for providing potential investors with incorrect historical delinquency rates for residential subprime mortgage securitizations (RMBS).  One of those firms was fined $3 million for allegedly publishing incorrect rates on its website that were made available to investors considering purchasing RMBS. Potential investors used these materials to evaluate how similar mortgage loans had performed when deciding whether to make a RMBS investment. FINRA believed that these errors were “significant enough to affect an investor’s assessment of subsequent securitizations" and the fair market value and potential yields of these investments. Bennett noted that this “depriv[ed] investors of information essential to assessing the profitability of mortgage-backed investments." Another firm was fined $4.5 million for allegedly publishing inaccurate RMBS data on its website. Although there were only one-third as many reporting errors in this second case (21 vs. 61), FINRA alleged that the second firm knew of these inaccuracies, but did not sufficiently investigate the problem.

In another case relating to the recent financial crisis, a firm was fined $2.5 million for allegedly using misleading advertising materials when selling Principal-Protection Notes (PPNs) offered by Lehman Brothers.  These materials allegedly suggested that investors were guaranteed a return of principal if they held the note to maturity but failed to indicate that these investments were unsecured obligations of Lehman Brothers and could result in principal loss (which they did). According to FINRA, this case highlighted that financial advisors must understand the complex securities they sell and that firms “need[] to be clear and comprehensive in disclosing risks of the structured products it sells to retail investors." The firm was also required to pay $8.25 million in restitution to investors who were allegedly misled.

These examples, the increasing number of advertising cases, and the amount of resulting fines, demonstrate that FINRA is taking seriously perceived violations of its advertising rules and deficiencies in disclosures to investors. Firms may want to review the disclosures made in their advertising materials, especially those involving complex products for accuracy and completeness, both in materials provided to investors and internal marketing or training materials.

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