It’s Here: FINRA’s Top Five “Fine” Categories from 2018

Eversheds Sutherland has completed its annual review of the disciplinary actions reported by the Financial Industry Regulatory Authority (FINRA) in 2018 and they found that the amount of fines increased compared to 2017, although the number of cases and amount of restitution were down.

More Fines, Less “Yuuuge” Fines

The fines reported by FINRA in 2018 increased slightly to $68 million from $65 million in 2017, a five percent jump, yet down significantly (61 percent) from the record-setting fines of $176 million in 2016. The fines in 2018 were also 28 percent lower than the $94 million in fines reported in 2015. Despite this decrease, fines have increased by 143 percent in the ten years since 2008, when FINRA assessed fines of $28 million.

Although the amount of fines increased, the number of very large fines, which is defined by fines surpassing $1 million, declined in 2018 to 13 fines. In contrast, in 2017, FINRA assessed 15 of these “supersized” fines. Similarly, in 2018, FINRA assessed five fines of $5 million or more. In contrast, in 2017, two cases resulted in these large fines.

Restitution Drops 54 Percent  

In 2018, restitution ordered by FINRA was down significantly. FINRA reported restitution of approximately $31 million in 2018, a decrease of 54 percent from the $67 million in restitution reported in 2017 and well below the record of $96 million reported in 2015. When you analyze FINRA’s overall monetary sanctions (fines, restitution, and disgorgement), this number gets put in perspective. In 2018, the total monetary sanctions ordered by FINRA were $124 million. The total sanctions ordered in prior years were as follows: $150 million in 2017; $207 million in 2016; and, $193 million in 2015.

Cases Concerning Expulsion/Suspension Down

The number of cases reported by FINRA also decreased last year. FINRA reported 638 disciplinary actions in 2018, a decrease of about 37 percent from the 1,007 cases FINRA reported in 2017. The number of individuals barred or suspended and firms expelled also decreased in 2018 compared to 2017. FINRA barred 211 individuals in 2018, remaining fairly constant from the 214 individuals in 2017.

Listed below are the top FINRA enforcement issues for 2018 measured by total fines assessed:

Anti-money laundering (AML)

No real surprise here – for the third consecutive year, AML has been at the top of the Eversheds Sutherland Top Enforcement Issues list and the fifth year in a row that AML has appeared on the list. FINRA reported 17 AML cases in 2018, which resulted in $27.3 million in fines.

While the number of cases is almost the same as last year (16 in 2017), the fines reported increased by $12.7 million in 2018, an increase of 87%. AML maintained the top spot due in part to the largest single fine FINRA assessed in any case in 2018 ($10 million). In that case, the firm’s AML surveillance system allegedly did not receive data from several systems, undermining its surveillance of wire and foreign currency transfers.

Suitability

For the first time since 2015, suitability cases landed itself on Eversheds Sutherland Top Enforcement Issues list, securing the number two spot.

FINRA reported 91 suitability cases, with $11.8 million in fines in 2018. The number of cases decreased 7% from the 98 cases brought in 2017, although the fines increased 228% from the $3.6 million in fines reported in 2017.

FINRA also ordered $11.6 million in restitution in suitability cases, compared with $30.3 million in 2017. There were three large suitability cases this year related to variable annuities, which resulted in fines of $6.7 million and $8 million in restitution.

Variable Annuities

Variable annuity cases resulted in the third most fines for FINRA in 2018, pushing its way back onto the Eversheds Sutherland Top Enforcement Issues list for the first time since 2016. FINRA reported 28 variable annuity cases for a total of $8.1 million in fines. The number of cases increased 22% from the 23 cases brought in 2017, and the amount of fines increased 305% from the $2 million in fines reported in 2017.

FINRA also ordered $8.7 million in restitution in variable annuity cases last year, compared with $428,000 in 2017. In one matter, FINRA fined a firm $4 million and ordered $2 million in restitution for failing to supervise the sale of variable annuity exchanges. In another variable annuity matter, FINRA fined four affiliated firms a total of $1.69 million and ordered restitution of $6 million for failing to establish and implement adequate supervisory procedures regarding the sale of multi-share class variable annuities, especially L-shares.

Short Selling

Short selling cases resulted in the fourth most fines for FINRA in 2018. This is the first year that short selling has appeared on this list since 2013. In 2018, FINRA reported seven short selling cases for a total of $7.8 million in fines. The number of cases decreased 70% from the 23 cases brought in 2017, but the amount of fines increased 387% from the $1.6 million in fines reported in 2017.

Short selling’s appearance on this list was primarily the result of a single matter where a firm was fined $5.5 million for failing, despite numerous red flags and warnings, to establish supervisory procedures that were reasonably designed to achieve compliance with the requirements of Reg SHO. These requirements included failing to close-out fails-to-deliver, accepting short orders without first borrowing (or arranging to borrow) the security, and permitting the execution or display of short sales at prices less than or equal to the current national best bid.

Additional Trends

FINRA continues to pursue firms for failing to provide sales charge waivers for retirement plans and charitable organizations. In 2018, FINRA brought six enforcement actions against firms for failing to provide these sale charge waivers when applicable. FINRA levied fines in only two of the matters totaling $150,000, but ordered restitution of $3.1 million. This practice is consistent with a continuing trend of FINRA focusing on making harmed customers whole through restitution rather than fines.

In a couple notable cases in 2018, FINRA cited firms for failing to commit sufficient resources to their regulatory obligations. These two matters resulted in sanctions of $10.8 million. In the first matter, FINRA alleged that the firm relied on three individuals to manually review suitability for over 600 representatives in over 250 branches. In the second matter, FINRA alleged that a firm failed to devote sufficient resources to review AML alerts, resulting in AML analysts carrying a large workload and failing to conduct sufficient investigations of potentially suspicious activity.