Slideshow Five Top Fines Brokers Face

Published
  • March 01 2011, 12:00am EST
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What Are the Five Top Fines Brokers Face?

1. Misleading Advertising


Advertising made its debut on Sutherland’s list of top enforcement issues in 2009. Although the value of the total fines was lower in 2010 than the previous year, penalties involved in making false claims still generated the highest value among total fines overall in 2010. “FINRA will continue to place greater emphasis on regulating advertising materials distributed to investors as well as materials distributed to and used by internal sales forces,” says Rubin. The reason for the large number of advertising cases: FINRA only has to prove the information was misleading; unlike cases involving fraud, the agency doesn’t have to show the firm acted with bad intent.


What Are the Five Top Fines Brokers Face?

2. Bad Communications


Six cases specifically involving credit default swaps generated $4.5 million in fines last year The cause: inappropriate communications between interdealer brokers about the fees which their customers should pay.


Sutherland did not identify any of the cases but on June 30, FINRA announced it fined interdealer broker ICAP $2.8 million and prohibited a former manager of its CDS desk Jennifer Joan James for working in the financial industry for six months. FINRA said that James tried to influence other interdealer brokers on how they should negotiate their brokerage fees with their customers. Interdealer brokers, such as ICAP receive fees, for successfully introducing buying and selling counterparties to the CDS contracts. “These communications generally occurred after individual customer firms sought to renegotiate their CDS brokerage fees, sending schedules of proposed rate reductions separately to a number of individual interdealer brokers,” said FINRA.

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What Are the Five Top Fines Brokers Face?

3. E-Mail Management


Four disciplinary actions involving electronic communications such as e-mail yielded about $4 million in fines last year. Of the $4 million, more than $2.1 million in 23 cases were the result of failures to adequately maintain and preserve company e-mails. The total value of the fines is constant from 2009 but much less than the $30.6 million in 2005 and $15.8 million in 2008. That means more firms are installing systems to effectively manage and supervise electronic communications. But watch out, says Rubin, cases involving social media are just around the corner. FINRA issued guidance to brokers last year on the use of social networking sites to communicate with the public. However, the watchdog is already preparing to reexamine the issue. A new task force will convene this month and issue guidance later this year, according to Joseph Price, senior vice president for corporate financing and advertising regulation at FINRA.


What Are the Five Top Fines Brokers Face?

4. Investment Suitability


The failure to ensure that investments were suitable for clients generated about $3.75 million in fees in 53 cases. Some of the more significant ones: five cases involving the sale of collateralized mortgage obligations generated $760,0000 in total fines; three cases involving the sale of closed end funds generated $1 million in total fines and two cases involving reverse convertible notes generated $710,000 in total fines.


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What Are the Five Top Fines Brokers Face?

Five Top Fines Brokers Face


According to a study of FINRA enforcement actions conducted by the law firm of Sutherland Asbill & Brennan, brokers collectively paid 1,310 fines valued at $45 million in 2010, or roughly $35,000 a fine. That compares to 1,158 fines in 2009 valued at $50 million, or about $45,000 a fine.


But what activities should advisors avoid to avert the wrath of regulators?


“We are seeing more aggressive enforcement from FINRA,” says Brian Rubin, a partner at Sutherland in Washington, D.C. “Procedurally, this aggressiveness has been illustrated by the types of information requested and the deadlines being imposed. Broker-dealers need to be aware of FINRA’s high priority issues, as well as how to navigate through investigations in the most efficient and effective way possible.


Here is a gallery of the top five categories of fines faced brokers in 2010.


Chris Kentouris