BD Corner: Increased Fines and Harsher Penalties Imposed on Brokers and Principals by FINRA in 2011

In 2011, FINRA reported 1,488 disciplinary actions, up from 1,310 in 2010. Also significant, fines in 2011 jumped 51% in 2011, up from $45 million in 2010 to $68 million last year. 2011 fines, however, were far lower than the recent high water marks of $184 and $1111 fined by FINRA in 2005 and 2006, respectively. The number of individuals barred by FINRA also increased significantly in 2011, from 288 in 2010 to 329 in 2011, constituting an increase of more than 14%.

The top areas of enforcement actions by FINRA in 2011 included:

  • Advertising. Sanctions jumped from $4.74 million in 2010 to $21.1. million last year, with the number of cases involving alleged advertising violations doubling in 2011. In addition to review of communication with investors directly, FINRA has also cracked down on inaccurate or fraudulent internal communications, i.e. inaccurate internal representations about product risk to representatives.
  • Short selling. These cases generated $16.8 million in fines, driven by a $12 million fine against UBS for violating Regulation SHO and failing to properly supervise short sales.
  • Auction rate securities was another active area, with seven cases and close to $10 million in fines in 2011.
  • Suitability. In 2011 this area saw a whopping 106 cases involving suitability allegations, up from just 53 cases in each of the previous two years. Fines in this area rose from $3.75 million in 2010 to $7.1. million in 2011.
  • Finally, 2011 saw 91 FINRA disciplinary actions and $6.6 million in reported fines concerning improper U4, U5 forms and Rule 3070; up from 67 cases and $1.45 million the prior year.

The 2011 increases evidence the more aggressive tone at FINRA, which continues to tackle  issues arising out of the 2008 financial crisis and recent high profile enforcement failures such as the Bernie Madoff and R. Allen Stanford schemes. Another contributing fact to the increased focus on enforcement may be internal pressure within the SRO to prove itself in the eyes of the SEC, Congress, and the public to reach in order to become the regulatory body for investment advisers.

For additional information about FINRA or any other compliance concern, please contact sarah.weber@jackolg.com or by phone at (619)298-2880.

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