Analysis of FINRA disciplinary actions shows decrease in sanctions and cases
WASHINGTON—March 8, 2023—Eversheds Sutherland has completed its annual study of the disciplinary actions reported by the Financial Industry Regulatory Authority (FINRA) in 2022. By reviewing FINRA’s monthly disciplinary reports, press releases and online database, Partners Brian L. Rubin and Adam C. Pollet found that in 2022 fines and restitution decreased significantly compared with 2021, in large part because of one record-breaking fine FINRA ordered in 2021 against an online brokerage firm. Additionally, the number of disciplinary actions declined for the third year in a row.
The Results
Fines, Restitution and Disciplinary Actions
The fines reported by FINRA in 2022 decreased to $45 million from $103 million in 2021, a 56% decrease. However, the fines in 2021 included a single, record-setting $57 million fine against one firm. Without that one large fine, FINRA’s fines in 2021 would have been $46 million, which would have resulted in only a 2% decrease from 2021 to 2022.
In contrast, the number of cases with very large fines increased in 2022. FINRA assessed 11 fines of $1 million or more (what we call “supersized” fines) in 2022, compared with eight such fines in 2021. In 2022, FINRA assessed two fines of $5 million or more (what we call “mega” fines). In 2021, FINRA assessed one mega fine (the record-setting $57 million case).
In contrast, the number of cases with very large fines increased in 2022. FINRA assessed 11 fines of $1 million or more (what we call “supersized” fines) in 2022, compared with eight such fines in 2021. In 2022, FINRA assessed two fines of $5 million or more (what we call “mega” fines). In 2021, FINRA assessed one mega fine (the record-setting $57 million case).
In 2022, the amount of restitution ordered by FINRA also decreased substantially. FINRA ordered restitution of approximately $21 million, which was down 55% from the $47 million in restitution ordered in 2021. A main driver in this decline in restitution was the reduction of “supersized” restitution orders ($1 million or more). In 2022, FINRA ordered only three supersized restitution orders, totaling approximately $17 million, while in 2021, there were ten supersized restitution orders, totaling approximately $42 million.
As a result, the total monetary sanctions ordered by FINRA (fines, restitution and disgorgement) in 2022 were $72 million. This represents a 52% decrease from the $150 million in total sanctions ordered in 2021.
Finally, the number of cases reported by FINRA decreased last year. FINRA reported 463 disciplinary actions in 2022, a 13% decrease from the 534 disciplinary actions in 2021 and a 17% decrease from the 560 disciplinary actions in 2020.
Top Enforcement Issues Measured by Total Fines Assessed
Listed below are the top FINRA enforcement issues for 2022 measured by total fines assessed:
- FINRA Sanctions Guidelines – The National Adjudicatory Council (NAC), which is FINRA’s appellate tribunal for disciplinary actions and disciplinary policy, developed revised Sanction Guidelines published in September 2022.The Guidelines are used by FINRA’s Department of Enforcement and FINRA’s adjudicators in imposing sanctions. Among other things, these latest guidelines created different fine ranges for individuals and for firms, as well as different ranges for firms based on their size. Additionally, the revisions removed the upper limit of fines for certain violations against mid-size and large-size firms. Adam Pollet, a partner with Eversheds Sutherland, said, “While assessing fines is often viewed more of an art than a science, these revisions provide a common sense approach to this analysis.”
- Chief Compliance Officer (CCO) Liability – On March 17, 2022, FINRA issued Regulatory Notice 22-10 regarding CCO liability.FINRA emphasized that the CCO role is advisory, not supervisory, by helping to design and implement compliance programs, while educating and training firm personnel, and also working “in tandem with senior business management and legal departments to foster compliance with regulatory requirements.” As such, FINRA stated that it would not bring a disciplinary against a CCO for failure to supervise except when “the firm conferred upon the CCO supervisory responsibilities and the CCO then failed to discharge those responsibilities in a reasonable manner.” “CCOs should view this as encouraging news,” said Eversheds Sutherland partner Brian Rubin. “It may help dispel the widely held belief that CCOs have targets on their backs.”
- Reg BI – In 2022, FINRA brought its first Regulation Best Interest enforcement action.In that case, FINRA found that a registered representative failed to act in his customer’s best interest when he recommended a series of transactions, including in-and-out trading that generated more than $54,000 in commissions in less than a year and a half, which FINRA determined was excessive in light of the customer’s investment profile. FINRA suspended the representative for six months and fined him $5,000. “We anticipate that this is the first of many Reg BI cases we will see in the coming months and years,” said Mr. Pollet. “We wouldn’t be surprised if Reg BI cases are soon ranked in the Eversheds Sutherland Top Enforcement Issues list.”
- Off-Channel Communications Cases – In 2022, FINRA brought 14 cases dealing with off-channel communications, resulting in fines totaling $2.1 million. In the largest case, FINRA fined one firm $1.5 million. These cases pale in comparison to the cases that the U.S. Securities and Exchange Commission has brought, which resulted in monetary penalties ranging from $10 million to $125 million. “We expect FINRA to ramp up the number of cases it brings in this area,” said Mr. Rubin. “While it is doubtful that FINRA will bring the ‘eye-popping’ cases that we have seen from the SEC, it is likely that FINRA will bring significant cases where reps have communicated about securities business matters on their personal devices, using text messages, WhatsApp, Signal, WeChat, and other applications, as well as personal email accounts. The next issue the securities regulators may be addressing is how firms surveil these messages when they retain them.”
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