by Deborah G. Heilizer, Brian L. Rubin
and Shanyn L. Gillespie
Sutherland Asbill & Brennan LLP has completed its annual
review of disciplinary actions brought by the Financial Industry Regulatory
Authority (FINRA) in 2009. On June 22, 2010, FINRA issued its "2009 Year
in Review." By reviewing FINRA's notices and releases, Sutherland Partners
Deborah G. Heilizer and Brian L. Rubin and Associate Shanyn L. Gillespie found
that FINRA reported modest increases in fines and disciplinary actions in 2009,
as compared to 2008, but was less active than in 2005, 2006 and 2007.
Sutherland also identified the top enforcement issues for FINRA in 2009, as
well as disciplinary trends.
The Results
Fines and Disciplinary Actions
FINRA fined firms and individuals approximately $50 million
in 2009, almost twice as much as in 2008 (approximately $28 million). While
that increase is noteworthy, FINRA's fines in 2009 were still significantly
smaller than the fines obtained by FINRA and its predecessors (NASD and the New
York Stock Exchange) in 2005, 2006, and 2007 ($184 million, $111 million, and
$77 million, respectively). In addition, FINRA resolved more disciplinary
actions in 2009 (1,090) than in 2008 (1,007), but fewer than were resolved in
prior years (1,344 in 2005; 1,147 in 2006; and 1,107 in 2007).
Top Enforcement Issues
#1. Mutual Funds, which generated the most total
fines in 2008, once again produced the highest aggregate fines (approximately
$12 million), narrowly edging out Suitability. Mutual fund cases accounted for
nearly one-fourth of FINRA's total fines in 2009. More than one-half of the
mutual fund cases (representing approximately $6.6 million in fines) also
included suitability allegations (e.g., share class cases, discussed
below). FINRA also levied significant fines in cases involving mutual fund
specific issues, e.g., $2.1 million in fines levied against 25 firms for
failing to comply with NASD's breakpoint self-assessment. It should also be
noted that the $12 million in mutual fund fines, while significant, represents
a small fraction of the fines in mutual fund cases in 2005 and 2006 ($104
million and $95 million, respectively).
#2. Suitability cases finished a close second in
total fines (approximately $11.9 million). Fines were imposed for excessive
trading and unsuitable sales of various products, including collateralized
mortgage obligations (CMOs), hedge funds, unit investment trusts, installment
plan contracts, and variable products. Not surprisingly, the biggest fines were
in mutual fund suitability cases, including "supersized" fines (defined as over
$1 million) in the following cases: (a) $4.41 million fine of a firm for, among
other things, unsuitable sales of Class B and Class C mutual funds; and (b)
$3.05 million fine of a firm for, among other things, failing to supervise two
registered representatives who persuaded customers to take early retirement and
executed unsuitable mutual fund transactions in those customers' accounts. Also
notable is the $1.65 million in total fines assessed against five bank
broker-dealers for failing to have adequate systems and procedures to supervise
the suitability of variable annuity, mutual fund and unit investment trust
transactions.
#3. Variable Products cases generated approximately
$6.45 million in fines in 2009. "Supersized" fines were imposed in the
following cases: (a) $1.75 million fine of a firm for executing 250 unsuitable
variable annuity sales and exchanges, which included transactions that were
part of an alleged "mass switch" campaign by a particular registered
representative; and (b) $1.5 million fine of another firm for alleged "complete
meltdown" of supervisory systems and procedures for the review of variable
annuity sales.
#4. Licensing violations (including failures related
to registration, testing and continuing education) were found in 50
disciplinary actions in 2009, in which more than $5.6 million in fines were
imposed. The largest fines were levied against firms that violated licensing-related
regulations, while also committing other unrelated violations. For example, one
firm was fined $1.75 million for permitting at least 22 Series 6 registered
representatives to execute equity and bond transactions and for allowing an
individual to park his securities license, while the firm was also charged for
unsuitable variable annuity sales and exchanges. In another example, a firm was
fined $1 million for allowing an unregistered person who had been barred by the
SEC to perform stock loan functions requiring registration; that firm was also
charged for failing to supervise stock loan activities.
#5. Advertising came in fifth place with $5.5 million
in total fines. Of those fines, approximately $3.5 million or 64% were imposed
in auction rate securities (ARS) cases. In those cases, FINRA found, among
other things, that the firms used advertisements, sales literature and/or
internal use only communications that: (1) were not fair and balanced; (2) did
not provide a sound basis for evaluating the facts regarding ARS purchases; and
(3) failed to adequately disclose the risks of investing in ARS. The cases
involving internal use only pieces may suggest that FINRA is pursuing a new
standard, establishing the same risk disclosure requirements for internal use
only pieces for trained professionals registered with FINRA and materials used
by the investing public (even though investors are presumed to be less informed
than securities professionals).
Trends
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"Supersized" fines. In 2009, FINRA
imposed 10 "supersized" fines (greater than $1 million), representing a
significant increase compared to 2008 (which had only three "supersized"
fines). However, the number of "supersized" fines in 2009 was far less than
those imposed in 2006 and 2007 (19 in each year).
-
Advertising and AML. While the top
enforcement issues in 2009 included several of the "usual suspects" (e.g.,
mutual funds and suitability), Advertising and Anti-Money Laundering, came in
fifth place and sixth place, respectively, after not making the prior years'
lists. Advertising resulted in $5.5 million in fines, while AML (which has been
touted as an enforcement and examination priority for the past several years)
generated approximately $4.9 million in fines. In addition, as explained above,
FINRA may bring more advertising cases involving internal use only pieces.
-
Electronic Communications. During the
past several years, cases involving electronic communications have generated
significant aggregate fines, but in 2009 they did not, generating only $4
million in aggregate fines. One explanation for this trend is that most firms
have probably adopted email retention systems. Instead, FINRA has been
primarily focusing on narrower issues, like retention of instant messages and
the use of external email accounts, which tend to generate lower fines. The
results may differ in 2010 as FINRA has been examining firms' failures to
follow up on "glitches" or "hiccups" in email retention. For example, in May
2010, one broker-dealer was fined $700,000 for failing to retain approximately
4.3 million emails, and for failing to inform FINRA of its email retention and
retrieval "glitches," which impacted the firm's ability to comply with
production requests from FINRA. These types of issues may cause electronic
communications to climb back to the top five in 2010.
-
Past Priorities. Purported FINRA
enforcement priorities like sales to seniors and retirees, alternative
investments, private placements, and Ponzi schemes did not make the list of top
fine-generating enforcement issues in 2009. However, this trend may reverse in
2010. In February 2010, FINRA fined a firm $200,000 for failing to supervise
sales of reverse convertible notes and for making unsuitable sales of reverse
convertible notes to a retired couple. In addition, in March 2010, FINRA
expelled a firm for facilitating fraudulent private placement sales that were
marketed as income-producing investments, but in reality, the firm's affiliate
engaged in a classic Ponzi scheme.
* * *
If you have any questions regarding this Legal Alert,
please feel free to contact Brian Rubin (brian.rubin@sutherland.com),
Deb Heilizer (deb.heilizer@sutherland.com), any of the attorneys listed
below or the Sutherland attorney with whom you regularly work.
Peter J. Anderson 404.853.8414 peter.anderson@sutherland.com
Eric A. Arnold 202.383.0741 eric.arnold@sutherland.com
Keith J. Barnett 404.853.8384 keith.barnett@sutherland.com
Bruce Bettigole 202.383.0165 bruce.bettigole@sutherland.com
Cheryl L.
Haas-Goldstein 404.853.8521 cheryl.haas-goldstein@sutherland.com
Deborah G.
Heilizer 202.383.0858 deborah.heilizer@sutherland.com
Clifford E.
Kirsch 212.389.5052 clifford.kirsch@sutherland.com
Michael B.
Koffler 212.389.5014 michael.koffler@sutherland.com
Susan S. Krawczyk 202.383.0197 susan.krawczyk@sutherland.com
Neil S. Lang 202.383.0277 neil.lang@sutherland.com
Stephen E. Roth 202.383.0158
steve.roth@sutherland.com
Brian L. Rubin 202.383.0124
brian.rubin@sutherland.com
Holly H. Smith 202.383.0245
holly.smith@sutherland.com
W. Scott Sorrels 404.853.8087
scott.sorrels@sutherland.com
©
2010 Sutherland Asbill & Brennan LLP. All Rights Reserved. This article is
for informational purposes and is not intended to constitute legal advice.