The size of fines for suitability violations levied in 2013 by the Financial Industry Regulatory Authority (FINRA) decreased substantially over the previous year, according to a major Washington law firm. So did the number of suitability cases.
The total fines in suitability cases dropped by 74 percent from $19.4 million in 2012 to $5.1 million in 2013.
In addition, the number of suitability cases that FINRA reported dropped 38 percent from 117 in 2012 to 73 in 2013, according to Sutherland Asbill & Brennan.
FINRA is a self-regulatory organization for securities brokers/dealers in the United States. The Sutherland findings will be of strong interest to dual-licensed reps that sell variable life insurance and variable annuity products, since they and their broker/dealers are held to the suitability standard of care.
The decline doesn’t mean that FINRA is no longer looking into suitability compliance matters or that the regulatory authority is giving the topic short shrift. In fact, the Washington watchdog named suitability as a business conduct priority on its list of regulatory concerns for 2014.
But 2013 is the first year that suitability cases have not appeared on the top enforcements issues list that Sutherland creates annually after reviewing FINRA’s enforcement activities.
The Sutherland review
The list is derived from the law firm’s review of FINRA’s monthly disciplinary notices. The 2013 review was based on notices tracked by Sutherland partner Brian Rubin and associate Andrew McCormick.
“Suitability cases ranked second in 2008 and 2009, fourth in 2010 and 2011, and first in 2012,” the firm reported. But for 2013, such cases are not on the top issues list.
The Sutherland attorneys tallied “substantial decreases” in both suitability cases and suitability fines for 2013. The declines “may relate to the fact that FINRA has probably completed most of its cases relating to the financial crisis,” the law firm said.
Sutherland’s report covers FINRA enforcement actions involving many other issue categories in addition to suitability.
In general, the annual review found a “significant” drop in FINRA fines involving a variety of issues in 2013. Even so, FINRA brought nearly the same number of disciplinary actions in 2013 as it did in 2012.
In 2013, FINRA imposed fines totaling $57 million, according to Sutherland. That’s a 27 percent decrease from the $78 million 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” and “a far cry” from the $184 million and $111 million in fines assessed by FINRA in 2005 and 2006, respectively, the firm said.
“The fines have likely fallen because FINRA has run through its inventory of cases stemming from the financial crisis of 2007 to 2008,” said Rubin, who heads Sutherland’s Securities Litigation and Enforcement Group. “To a large degree, FINRA is bringing more basic cases that don’t generate high fines.”
The top enforcement issue for FINRA in 2013 was electronic communication, said Sutherland, noting that the total fines in this category came to $15 million for 66 such cases during the year.
The electronic enforcement case count was up by only 5 percent from 2012, but the size of the fines more than doubled year-over-year, Sutherland said. Such cases typically involve failure to follow email review, retention and access rules. Representatives as well as B/D firms may be fined.
Suitability still a priority
In January, FINRA placed “suitability” on its annual list of its regulatory and examination priorities for 2014. The risks identified on that list have become “primary drivers of our regulatory programs,” the authority said.
A FINRA letter to broker/dealer members noted that its concerns in this area include “the suitability of recommendations to retail investors for complex products whose risk-return profiles, including their sensitivity to interest rate changes, underlying product or index volatility, fee structures or complexity may be challenging for investors to understand.”
The concerns are “magnified,” FINRA wrote, "when there is a strong incentive for the firm or registered representative to recommend the product because of its fee or compensation structure.”
FINRA urged its member firms to “review Regulatory Notice 13-31 for practices that may enhance the effectiveness of their suitability determinations.”
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