FINRA Fines, Sanctions, Enforcements and Expulsions…A Reminder To us All

by NCS Regulatory Compliance on October 4, 2012

gavelOf the thirty-five FINRA news releases issued between January 12 and September 10, 2012, fourteen were related to some type of fine, sanction, enforcement or expulsion. The list of infractions identified in these releases covered a smorgasbord of bad deeds, including supervisory issues, net capital and financial report misstatements, customer overcharges, inaccurate performance data, inappropriate product sales, pricing and mark-up issues, conflicts of interest and some plain old fraud.


In one case, a firm was expelled because it misstated financial statements by classifying previously paid compensation expenses as forgivable loans, and it did not record tax obligations on the compensation. The firm also classified some non-allowable assets as allowable. These assets were related to receivables for non-deal-related road shows. These misstatements, among others, had the effect of overstating net capital and hiding net capital violations over a two-year period.


Another example of a firm being expelled was related to fraudulent sales of oil and gas private placements and unregistered securities. The firm was found to have controlled a “boiler room” operation by utilizing brokers to solicit investments in oil and gas drilling joint ventures, which raised funds from more than 100 investors. The examination cited numerous misrepresentations and omissions in the private placement offerings, as well as grossly inflated estimated returns and cash flows. The firm’s president also used customer funds for personal expenditures and other expenses not related to customers’ investments.


News releases such as these are never welcome, but they do point out the necessity to be vigilant in all areas of compliance. They also serve to remind us that FINRA is one of the most visible and active of regulatory authorities and has an integrated presence within our industry. Not only is FINRA integrated, but it is getting better at uncovering activities that will lead examiners to fertile ground for infractions. Utilizing risk-based audit procedures, FINRA identifies areas that are prone to the highest risk of a firm’s operation and then correlates those risk areas to the major regulatory concerns within these areas. FINRA examination managers then direct their exam teams to focus on these areas.


The lesson is obvious but still bears repeating. Firms need to know what business lines or processes represent their high risk areas, so they can ensure they have designed and are scrupulously adhering to procedures to cover the regulatory requirements within those areas.


If you have questions about assessing the risk in your firm or would like to discuss your ongoing compliance obligations, please contact a compliance specialists at or call 603-434-3594.


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