Analysis of FINRA disciplinary actions shows decrease in sanctions and cases

By Press Release

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 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:

No. 1 Books and Records cases resulted in the most fines assessed by FINRA in 2022. Books and records cases last appeared on the Eversheds Sutherland Top Enforcement Issues list in 2020. FINRA reported 50 such cases in 2022, resulting in more than $14.8 million in fines. In the largest case where books and records was the primary focus, FINRA fined a firm $2.8 million, finding that the firm failed to correct inaccuracies in trade confirmations it sent to customers over multiple years and after three warnings from FINRA. As a result, the firm incorrectly disclosed, among other things, its execution capacity and the price. Additionally, this category includes several cases where firms and individuals failed to preserve business-related communications. One firm, for example, was fined $1.5 million due to its failure to supervise the use and preservation of business-related emails and text messages.

No. 2 Research/Analyst cases resulted in the second most fines for FINRA in 2022—making the Top Enforcement Issues list for the first time since 2017. There were three such cases in 2022, with fines totaling $9.3 million. In one case where FINRA ordered a $325,000 fine, the firm published research reports that had inaccurate price charts and stock ratings due to a typographical error in its software program. Even after the firm identified the error, however, it continued to issue reports with inaccurate price charts until the issue was resolved.

No. 3 Consumer Protection Rule issues resulted in the third most fines for FINRA in 2022, although that ranking is based on one case. FINRA reported a single case involving, among other things, the customer protection rule, resulting in a $9 million fine. In that case, the firm failed to maintain possession or control of billions of dollars of fully-paid and excess margin securities it carried for customers, and it failed to accurately calculate its required customer reserve.

No. 4 Trade Reporting cases resulted in the fourth most fines for FINRA in 2022. This marks the third consecutive year that trade reporting cases have been on the Eversheds Sutherland Top Enforcement Issues list. FINRA reported 14 trade reporting cases in 2022, resulting in a total of $7.9 million in fines. In the largest trade reporting case, FINRA fined a firm $5 million for failing to report over-the-counter options positions to the Large Options Positions Reporting System.FINRA found that the firm failed to report these options positions in more than 7.4 million instances.

No. 5 Best Execution cases resulted in the fifth most fines for FINRA in 2022, reaching the Top Enforcement Issues list for the first time since 2014. FINRA reported two such cases totaling $4 million in fines. In both cases, each of which resulted in a fine of $2 million, the firms’ alternative trading systems failed to comply with their best execution requirements, including, for example, by creating delays in the routing of customer orders, leading to lower fill rates and failing to conduct reasonable reviews of its order execution despite data showing their fill rates were inferior to competing venues.

Enforcement Initiatives in 2022 and Possible Trends for 2023

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.”