FINRA Sanctions and Fines on the Rise

by Beth cacciotti on May 10, 2012

Maybe it’s something in the water. Or perhaps it’s just increased scrutiny. For the third year in a row, the number of FINRA disciplinary actions against broker-dealers and investment adviser firms increased. In 2011, disciplinary actions increased to 1,488, compared to 1,310 in 2010. Fines also showed a substantial increase – jumping 51 percent to $68 million in 2011 vs. $45 million in 2010. All of this is clearly a good sign for investors, but what does it mean for a firm like yours?


Advertising penalties experience big jump

Advertising is an area where sanctions and fines increased substantially – from $4.75 million in 2010 to $21 million in 2011 (a whopping increase of 344 percent). The number of cases alleging advertising violations also doubled to 45. One factor that could contribute to these increases is that many smaller broker-dealer and investment adviser firms may “overlook” the fact that any website falls in the advertising category, even the independent websites of registered persons. The obligation to supervise and oversee these websites is huge, as is making certain the firm’s supervisory procedures accurately reflect the firm’s policy on their use.


Other areas of increased scrutiny in advertising were of Auction Rate Securities (ARS), annuities and review of internal communications.


Suitability ranks high on disciplinary list

Suitability cases ranked fourth on the list of top disciplinary actions, which resulted in $7.7 million in reported fines in 2011 from 106 cases involving alleged suitability violations by investment adviser firms. This equates to an 105 percent increase from 2010, which was $3.75 million. Inconsistency with investors’ objectives, lack of risk profile requirements, and failure to supervise and monitor suitability of investments were among the top deficiencies cited by FINRA. It is important to note that there was also a high rate of disciplinary actions filed against representatives for suitability issues, with almost 30 individuals barred from the industry for recommending allegedly unsuitable transactions.


Improper Form U4, U5 and customer complaint filings get attention

Ninety-one FINRA disciplinary actions were filed against broker-dealers for improper Form U4, U5 and customer complaint filings. The majority of the $6.6 million in fines for 2011 were fines of $5,000 to $10,000 for isolated problems in the filings. In four instances, however, broker-dealer firms were fined more than $600,000 for failing to report material information, including customer settlements and SEC investigations.


Greater examination scrutiny

With sanctions and fines on the rise, broker-dealer and investment adviser firms should continue to pay close attention to how their business is being transacted, being mindful at all times of the necessary supervisory steps. Firms could see regulators paying more attention to every detail during an exam, with the potential of more cases being referred to enforcement.


To learn more about maintaining compliance with federal securities laws, rules and regulations so you can be prepared for regulatory examinations and avoid disciplinary action or fines, visit

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