Wall Street’s regulatory watchdog, the Financial Industry Regulatory Authority, is off to a slow start in the amount of fines and restitution ordered from broker/dealers and financial firms during the first six months of 2015.
FINRA has issued $37.5 million since January, down from the $42.4 million levied against firms and advisors in the first half of 2014, according to data released by securities attorneys with Sutherland Asbill & Brennan on Monday. If FINRA continues at its current pace, the report’s authors expect the regulator to issue $75 million in fines for the entire year, compared to the $135 million levied in 2014.
But despite the predicted 44 percent decrease in the total amount of fines from last year, the agency's estimated collection would still be the second-highest dollar amount FINRA has levied against firms and related individuals since the financial crisis.
“Despite significant decreases in certain areas that appear to have been priorities in 2014, the first six months of 2015 indicate that FINRA will assess substantial fines this year, even if FINRA does not match 2014’s total fines,” says Brian Rubin, head of Sutherland’s Washington litigation practice group. The Sutherland report is drawn from the regulator’s news releases and monthly disciplinary action notices.
The report also calculated that the restitution paid by firms is expected to be less than 2014. The restitution FINRA has ordered as a result of enforcement actions is at $8.3 million for the year and the report’s authors predict that restitution fees for 2015 will likely add up to $17 million. In comparison, FINRA ordered $52 million in restitution during 2014, but only $5.9 million was assessed during the first half of last year.
Yet despite the predicted decreases in fines and restitution, the number of disciplinary actions opened by FINRA remained steady. The regulator reported 553 cases since January; down 1 percent form the 558 cases reported during the first half of 2014.
To avoid being sanctioned, Rubin says firms should continue to focus on “nuts and bolts issues, such as disclosure, suitability, AML and trade execution.” In fact, trade reporting was one of the most common reasons for a disciplinary action so far this year, with 72 cases falling into this category and $7.6 million in fines levied for infections in this area. Rounding out the top five issues involved in enforcement cases were short selling, anti-money laundering and suitability issues.
Anti-money laundering cases, in particular, are on FINRA’s radar more and more these days. Last year, the regulator issued $13.2 million in fines in this area, compared to the just $1.8 million in 2008, Sutherland reported earlier this year.
“AML is now one of the basic issues that FINRA is focusing on, so the number of cases is on an upward trend,” Rubin says, noting last year the $8 million fine against Brown Brothers Harriman & Co. that may have skewed the fine total for last year but that the topic is one of focus for many firms.
For the most part, when firms are fined on AML issues, that violation is one of several issues, Rubin says. There are outliers, of course, but usually these fines are part of a “laundry list” of issues. “I think the trend [of fining firms for AML issues] will continue for a while as firms get up to compliance because FINRA is more focused on it now than they have been in the past.”
In addition to AML issues, Rubin said another area that could see heightened regulatory scrutiny is L-Share variable annuities, which generally have shorter surrender periods (such as three or four years) and higher mortality and expense charges. Rubin also expects to see an increase in enforcement actions around firms’ cybersecurity policies and procedures. “By the end of the year, we’ll see some enforcement actions in that space,” he says.