Anti-Money Laundering Cases Top List Of FINRA Enforcements For The 6th Year

By reviewing FINRA’s monthly disciplinary reports, press releases and online database, Eversheds Sutherland (US) Partners Brian L. Rubin and Adam C. Pollet found that in 2021 the amount of fines and restitution spiked despite a decrease in the number of cases compared with 2020, driven in large part by a record-setting fine of approximately $57 million in one case. FINRA also continued its years-long emphasis on anti-money laundering violations and focused much of its efforts on protecting—and returning money to—retail investors.

The Results

Fines, Restitution and Disciplinary Actions

The fines reported by FINRA in 2021 increased to $91 million from $57 million in 2020, a 60% increase. This dramatic bump was assisted by a single, record-setting $57 million fine, which is discussed in more detail below, and represents the highest total in fines since 2016 when FINRA ordered $174 million in fines. Without that one large fine, FINRA’s fines in 2021 would have been $34 million, a decline of more than 40% compared with 2020.

Despite the significant increase in fines, the number of cases with very large fines decreased slightly in 2021. FINRA assessed eight fines of $1 million or more (what we call “supersized” fines), totaling $71 million. In contrast, in 2020, FINRA assessed 10 “supersized” fines, though the total was “only” $39 million. Similarly, in 2021, FINRA assessed one fine of $5 million or more (what we call a “mega” fine)—the record-setting $57 million fine. In 2020, two cases resulted in mega fines (totaling $22 million).

In 2021, restitution ordered by FINRA also increased substantially. FINRA ordered restitution of approximately $49 million in 2021, with the total driven in large part by one case with restitution of approximately $12.6 million. That total is up 96% from the $25 million in restitution ordered in 2020. Without that one case, restitution was still up significantly, more than 45%. “Supersized” restitution orders ($1 million or more) helped to propel this growth. There were 10, totaling nearly $42 million.

As a result of these figures, the total monetary sanctions ordered by FINRA (fines, restitution and disgorgement) in 2021 were $144 million. This represents a 53% increase from the $94 million in total sanctions ordered in 2020 and the highest total sanctions ordered since 2017.

The number of cases reported by FINRA remained mostly flat last year. FINRA reported 569 disciplinary actions in 2021, a 6% decrease from the 602 disciplinary actions in 2020 and a 4% decrease from the 591 disciplinary actions in 2019. Cases against only firms (as opposed to cases against individuals or jointly against both firms and individuals) were 20%, decreasing from 23% during 2020.

“Last year, the amount of fines and restitution increased significantly from the previous year, indicating that FINRA’s enforcement program is as robust as ever,” said Mr. Rubin. “Looking beyond the record-setting case, FINRA continued its nearly decade-long focus on anti-money laundering in 2021, while also pursuing more ‘nuts and bolts’ issues like suitability and trade reporting.”

The chart below displays FINRA’s fines and the number of disciplinary actions during each of the past 10 years:

The chart below displays the restitution FINRA reported during each of the past 10 years:

Top Enforcement Issues Measured by Total Fines Assessed

Listed below are the top FINRA enforcement issues for 2021 measured by total fines assessed:

No. 1      Anti-Money Laundering (AML) cases resulted in the most fines assessed by FINRA in 2021. This is the sixth consecutive year that AML has been at the top of the Eversheds Sutherland Top Enforcement Issues list and the eighth consecutive year that AML has appeared on the list. FINRA reported 16 AML cases in 2021, resulting in $4.6 million in fines, compared with 14 cases, totaling $16.2 million in fines, in 2020. AML maintained the top spot due to three large, six-figure settlements. In the largest case where AML was the primary focus, FINRA fined a firm $650,000 and found that the firm failed to reasonably surveil potentially suspicious activity relating to low-priced securities transactions. FINRA found that the firm’s AML procedures failed to discuss significant red flags associated with low-priced securities trading, resulting in failures to file suspicious activity reports where appropriate. Significantly, an internal audit of the firm’s AML program resulted in recommendations that the firm make changes to its AML program, but the firm failed to do so for nearly two years.

No. 2      Unit Investment Trust (UIT) cases resulted in the second most fines for FINRA in 2021, catapulting this type of case into the Eversheds Sutherland Top Enforcement Issues list for the first time. FINRA reported five UIT cases in 2021, with $3.9 million in fines and $10.9 million in restitution. The number of cases decreased slightly from the six cases brought in 2020, while fines and restitution increased significantly from $325,000 and $1.3 million, respectively. UIT cases were driven largely by one case in which FINRA fined a firm $3.25 million. In that case, FINRA found the firm failed to reasonably supervise early UIT rollovers, causing customers to incur potentially excessive sales charges and raising potential suitability concerns. The firm’s supervisory system was not reasonably designed to identify early rollovers. FINRA also ordered the firm to pay more than $8.4 million in restitution to more than 3,000 impacted customers. In December, FINRA announced the final results of its targeted examination of UIT early rollovers: from 2019 through 2021, FINRA issued six settlements requiring firms to pay a total of $6.6 million in fines and $16.8 million in restitution to approximately 10,000 investors.

No. 3      Suitability cases resulted in the third most fines for FINRA in 2021. Suitability cases last appeared on the Eversheds Sutherland Top Enforcement Issues list in 2019. FINRA reported 54 suitability cases, with $3.9 million in fines in 2021. The number of cases increased 29% from 42 cases brought in 2020, while fines increased 109% from $1.9 million. FINRA also ordered $7.3 million in restitution in suitability cases, a decrease from the $9.9 million ordered in 2020. In the largest stand-alone suitability case, FINRA fined a firm $750,000 for failing to establish, maintain and enforce a supervisory system reasonably designed to detect and prevent unsuitable short-term trading of mutual funds and municipal bonds in customer accounts and over-concentration of customer accounts in Puerto Rican bonds. The findings stated that the firm’s automated surveillance system to identify and flag for review mutual fund share switches did not provide critical data to assist supervisors in evaluating the transactions for suitability. Some other suitability cases do not allege unsuitable transactions but rather allege the failure to have adequate procedures or supervisory systems to address or review suitability.

No. 4      Trade Reporting cases resulted in the fourth most fines for FINRA in 2020. This marks the second consecutive year that trade reporting cases have been on the Eversheds Sutherland Top Enforcement Issues list. FINRA reported nine trade reporting cases, with $3.4 million in fines in 2021. The number of cases decreased 74% from the 34 cases brought in 2020, and the fines decreased 51% from $7 million reported in 2020. In the largest trade reporting case, FINRA fined a firm $2.6 million for failing to report, and for inaccurately reporting, over-the-counter options positions to the Large Options Positions Reporting System. The findings stated that these violations were caused by errors in the reporting logic of the firm’s internal risk system that remained undetected for years.

No. 5      Municipal Securities cases resulted in the fifth most fines for FINRA in 2021. Municipal securities have not appeared on the Eversheds Sutherland Top Enforcement Issues list since 2019. FINRA reported seven municipal securities cases, with $3 million in fines in 2021. The number of cases remained flat compared with 2020, while fines increased significantly from $355,000. Municipal securities cases were thrust into the top five largely by one case for which FINRA fined a firm $1.5 million for failing to establish and maintain a supervisory system reasonably designed to achieve compliance with Municipal Securities Rulemaking Board and Exchange Act rules or prevent the consequences of short positions in municipal securities. The findings stated that the firm’s failure to implement supervisory systems and procedures designed to detect and resolve short positions in municipal securities was not reasonable. The firm also did not provide customers with express notice that certain interest paid to them on the municipal securities was taxable.

Enforcement Trends

• Record-Setting Financial Sanction – In June, FINRA ordered a FinTech firm to pay $57 million in fines and $12.6 million in restitution for alleged years-long systemic supervisory failures and significant harm suffered by millions of its customers. FINRA found that the firm, among other things, (1) negligently communicated false and misleading information to its customers relating to margin issues; (2) failed to exercise due diligence before approving customers for options trading; (3) failed to reasonably supervise its technology, resulting in a series of outages and critical systems failures, which prevented customers from accessing their accounts during times of extreme market volatility; and (4) failed to report to FINRA tens of thousands of written customer complaints that it was required to report.
• SEC Overturns NAC Decisions – In 2021, the US Securities and Exchange Commission (SEC) issued four opinions on appeals from FINRA’s National Adjudicatory Council (NAC) and, in atypical fashion, set aside the findings in two. In one of the rare reversals, after nine years of litigation, the SEC found that FINRA had not shown a registered representative (RR) acted in bad faith after a customer complained about investment recommendations. In 2012, FINRA filed its disciplinary complaint alleging two causes of action, one related to recordkeeping and the other related to discovery failures at the customer’s subsequent arbitration. Two years later, a hearing panel suspended the RR for three months and fined him $50,000. After the RR appealed, the NAC increased the sanctions two years later, suspending him for one year and fining him $50,000. At the next level of appeal, the SEC in 2017 sent the case back to FINRA for clarification of its findings. In 2019, the NAC affirmed its prior findings and sanctions. Last year, the SEC found that the record did not show any violations, completely setting aside FINRA’s findings of liability. Mr. Pollet stated, “The SEC’s setting aside one-half of the NAC’s cases in 2021 demonstrates the potential value in appealing NAC decisions. The SEC has made clear that it isn’t rubber-stamping FINRA’s findings, but rather giving them a hard look.”
• Reg BI/Form CRS – While FINRA did not bring any cases related to Regulation Best Interest or Form CRS in 2021, it appears that the regulators are lacing up their gloves. To date, the SEC has brought 42 cases against firms for failing to timely provide customers with Form CRS, and in some instances, failing to provide certain required information. But FINRA has signaled that it is ready to enter the ring. For the past two years, FINRA has included Reg BI and Form CRS in its examination and risk monitoring report. The 2022 report highlighted firms’ deficiencies regarding Reg BI and Form CRS, including, for example, insufficient written supervisory procedures, training and disclosures. Therefore, firms may want to carefully review FINRA’s findings, as well as those cited by the North American Securities Administrators Association (NASAA), or they may find themselves on the receiving end of a FINRA enforcement action.