More broker-dealers were prosecuted last year for disciplinary actions by FINRA, but the total amount of fines declined, according to a recent Sutherland Asbill & Brennan survey of sanctions against broker-dealers and their associates.
Overall, disciplinary actions grew by 13% in 2010, to 1,310 from 1,158, according to Sutherland's annual FINRA Sanction Study.
The rise brings the number of actions nearly back up to 2005 levels of 1,412 actions, after a dip between 2006 and 2008. But, FINRA's fines totaled only about $45 million in 2010, a 10% drop from $50 million in 2009, and an even sharper decline from $184 million in 2005.
The rise in the number of actions could be related to increased regulatory pressure, following the Madoff and Stanford scandals, or the market crisis, says Brian Rubin, a partner with the Washington, D.C.-based law firm which defends firms and individuals in FINRA actions.
Ad Fines Top the List
Advertising violations earned the biggest share of fines in the survey, totaling $4.75 million in 24 disciplinary actions. That dropped from $5.5 million in advertising fines in 2009. Internal ad violations fell most sharply, down to $300,000 for two cases versus $1.45 million for seven cases in 2009.
One reason for the continuing large share of advertising cases, Rubin says, may be that FINRA does not have to prove bad intent, unlike in fraud cases. "It's easier for FINRA to prove and allege violations of their advertising rules," he explains.
Credit default swap cases brought in the second largest share of fines last year, with $4.5 million in six cases. That was a $1.35 million increase over the 2009 total of $3.15 million for two violations.
Electronic communication violations ranked third with about $4 million in fines. The biggest source of trouble was failure to adequately maintain and preserve company emails, which resulted in $2.1 million in fines in more than 23 cases.
The study also noted two other trends. First, super-sized fines ($1 million-plus) dropped to a total of six from 10 in 2009. Second, mutual fund enforcement actions fell sharply, down to $2.4 million in 20 disciplinary actions compared to $12 million in 2009. That continues the category's steep slide from $95 million in 2006.
Sutherland's study did not cite reasons for the sharp drop in mutual fund fines over the past few years. "My guess is that it's an aberration," Rubin says.
The steep rise and fall in certain categories was no surprise to one compliance attorney. "Disciplinary actions tend to be kind of a whack-a-mole type thing," says Alan Foxman, an attorney and consultant with National Compliance Services in Delray Beach, Fla., and a regular contributor to On Wall Street. "They smack these areas here and then a year or two later, another area seems to flare up," he says.
It's hard to tell whether the number reflects problems in the industry or simply reflects where FINRA happened to focus, Foxman says. Sometimes, it may reflect FINRA's resources. Foxman notes that when he worked for FINRA, arbitration regulators tended to be short-staffed compared to other sections that made more money for the agency.
Don't 'Friend' FINRA
One area to watch this year is social media, such as Twitter or Facebook. There were no social media actions brought in 2010, but industry observers say that social media will be on FINRA's radar. Regulators are just trying to understand social media now, Rubin says, while firms are also anticipating the regulator's next move by trying to clarify social media legal issues and supervision. "I anticipate that in the next year or two we will see some cases," Rubin says.
As a result, broker-dealers need to be careful about comments that could be interpreted as professional advice, as well as personal posts that could become evidence during a FINRA prosecution, Foxman says.
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