FINRA Enforcement Trends: Webinar Highlights

By Global Relay on August 3, 2020
GLobal relay



Here’s a question for you… Are advisers and brokers becoming more disciplined—or are regulators becoming a softer touch? 

Why do we ask? Well, FINRA enforcement fines fell 35% in 2019 to $39.5 million, the lowest amount since 2008 and the third year in a row that fines have decreased.

According to Brian Rubin, head of global law firm Eversheds Sutherland’s securities enforcement practice, that is partly down to FINRA’s goal of becoming a “kinder and gentler” regulator. 

But another factor might have been at play: the booming US stock market. 

Before the coronavirus pandemic hit, US equities had been enjoying a decade-long bull run. Investors watched as their assets soared in value; few people had reason to complain to regulators. Now, as the COVID-19 crisis causes markets to gyrate, firms should be braced for a renewed surge in enforcement actions as client complaints inevitably creep up.

“When you see the market doing well that means there won’t be as many enforcement cases as when the market does poorly, so we expect that with the downturn in the market there will be an increase in enforcement actions—maybe not this year, because it takes a year or two to do the investigations, but certainly down the road,” said Rubin, speaking on Global Relay’s recent Top FINRA Enforcement Issues and Trends of 2019 webinar.

So what should firms be on the lookout for to remain in FINRA’s good books? The top enforcement issue in 2019 was, yet again, anti-money laundering—the fourth year in a row that AML issues accounted for the largest proportion of fines. BNP Paribas, for instance, was slapped with a huge $15 million fine for allegedly failing to develop an effective AML program at two of its brokerage units, to monitor suspicious activity related to penny stocks and wire transfers.

“FINRA and other regulators are aggressively pursuing how firms comply with AML regulations, and though the number of cases decreased in 2019, the largest case was $5 million more than the largest AML case in 2018,” said Adam Pollet, a counsel in Eversheds Sutherland’s securities and litigation practice. “So it seems that FINRA may likely hit firms even harder in the future for failing to ensure that their AML program are adequate and reasonably tailored to their business, simply because this message really ought to be loud and clear now.”

Another area where firms need to ramp up their surveillance programs is with exchange-traded products and funds. Last year, FINRA fined RBC Capital Markets $2.9 million for allegedly failing to establish and maintain a reasonable supervisory system for delivering prospectuses for ETFs and ETPs.

Given the rapid growth of this asset class, Rubin says firms need adequate systems in place for complex products such as leveraged or inverse ETFs to ensure recommendations are suitable. The regulator recently published guidance on sales practice obligations for such products after an oil-linked ETP suffered substantial losses amid a collapse in oil prices, suggesting that FINRA might be looking more closely for cases involving misrepresentations, omissions and suitability.

“After a market crisis the SEC and FINRA often bring cases involving misleading descriptions of investment risk,” said Rubin. “First, were products with this level of risk suitable for these customers? And second, did the investments perform worse than expected?”

FINRA will also likely scrutinize how firms informed their clients about the potential impact of the pandemic, which means email communications with clients could provide critical evidence that brokers and advisers gave appropriate warnings.

Rubin says firms should look to the 2008 financial crisis for clues on how FINRA might approach any post COVID-19 investigations. Back then, regulators found that investments often carried substantially more risk than had been disclosed when they were initially sold. The battle lines this time, then, will likely be drawn over whether firms should have foreseen the crisis, and whether they took reasonable steps to alert investors of the risks.

Watch the webinar replay

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