All information Quoted from the article
March 8, 2022
| Eversheds Sutherland has completed its annual study of the disciplinary actions reported by the Financial Industry Regulatory Authority (FINRA) in 2021. By reviewing FINRA’s monthly disciplinary reports, press releases and online database, Eversheds Sutherland (US) Partners Brian L. Rubin and Adam C. Pollet found that in 2021 the amount of fines and restitution spiked despite a decrease in the number of cases compared with 2020, driven in large part by a record-setting fine of approximately $57 million in one case. FINRA also continued its years-long emphasis on anti-money laundering violations and focused much of its efforts on protecting—and returning money to—retail investors. |
Fines, Restitution and Disciplinary Actions
The fines reported by FINRA in 2021 increased to $91 million from $57 million in 2020, a 60% increase.[1] This dramatic bump was assisted by a single, record-setting $57 million fine, which is discussed in more detail below, and represents the highest total in fines since 2016 when FINRA ordered $174 million in fines. Without that one large fine, FINRA’s fines in 2021 would have been $34 million, a decline of more than 40% compared with 2020.
Top Enforcement Issues Measured by Total Fines Assessed
Listed below are the top FINRA enforcement issues for 2021 measured by total fines assessed
No. 1 Anti-Money Laundering (AML)
cases resulted in the most fines assessed by FINRA in 2021. This is the sixth consecutive year that AML has been at the top of the Eversheds Sutherland Top Enforcement Issues list and the eighth consecutive year that AML has appeared on the list. FINRA reported 16 AML cases in 2021, resulting in $4.6 million in fines, compared with 14 cases, totaling $16.2 million in fines, in 2020. AML maintained the top spot due to three large, six-figure settlements.[6] In the largest case where AML was the primary focus, FINRA fined a firm $650,000 and found that the firm failed to reasonably surveil potentially suspicious activity relating to low-priced securities transactions.[7] FINRA found that the firm’s AML procedures failed to discuss significant red flags associated with low-priced securities trading, resulting in failures to file suspicious activity reports where appropriate. Significantly, an internal audit of the firm’s AML program resulted in recommendations that the firm make changes to its AML program, but the firm failed to do so for nearly two years
No. 3 Suitability
cases resulted in the third most fines for FINRA in 2021. Suitability cases last appeared on the Eversheds Sutherland Top Enforcement Issues list in 2019. FINRA reported 54 suitability cases, with $3.9 million in fines in 2021. The number of cases increased 29% from 42 cases brought in 2020, while fines increased 109% from $1.9 million. FINRA also ordered $7.3 million in restitution in suitability cases, a decrease from the $9.9 million ordered in 2020. In the largest stand-alone suitability case, FINRA fined a firm $750,000 for failing to establish, maintain and enforce a supervisory system reasonably designed to detect and prevent unsuitable short-term trading of mutual funds and municipal bonds in customer accounts and over-concentration of customer accounts in Puerto Rican bonds.[11] The findings stated that the firm’s automated surveillance system to identify and flag for review mutual fund share switches did not provide critical data to assist supervisors in evaluating the transactions for suitability. Some other suitability cases do not allege unsuitable transactions but rather allege the failure to have adequate procedures or supervisory systems to address or review suitability.[12]
Enforcement Trends
Record-Setting Financial Sanction – In June, FINRA ordered a FinTech firm to pay $57 million in fines and $12.6 million in restitution for alleged years-long systemic supervisory failures and significant harm suffered by millions of its customers.[15]
FINRA found that the firm, among other things,
- Negligently communicated false and misleading information to its customers relating to margin issues;
- Failed to exercise due diligence before approving customers for options trading;
- Failed to reasonably supervise its technology, resulting in a series of outages and critical systems failures, which prevented customers from accessing their accounts during times of extreme market volatility; and
- Failed to report to FINRA tens of thousands of written customer complaints that it was required to report.
Reg BI/Form CRS
While FINRA did not bring any cases related to Regulation Best Interest or Form CRS in 2021, it appears that the regulators are lacing up their gloves. To date, the SEC has brought 42 cases against firms for failing to timely provide customers with Form CRS, and in some instances, failing to provide certain required information.[17] But FINRA has signaled that it is ready to enter the ring.
For the past two years, FINRA has included Reg BI and Form CRS in its examination and risk monitoring report.
The 2022 report highlighted firms’ deficiencies regarding Reg BI and Form CRS, including, for example, insufficient written supervisory procedures, training and disclosures.[18] Therefore, firms may want to carefully review FINRA’s findings, as well as those cited by the North American Securities Administrators Association (NASAA),[19] or they may find themselves on the receiving end of a FINRA enforcement action.
