Fines Up But Restitution Down

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FINRA fines up and restitution down in the first half of 2018

The Financial Industry Regulatory Authority (FINRA) has been busy in 2018, according to a new study by the law firm Eversheds Sutherland (US) LLP. But according to the review of FINRA’s monthly Disciplinary and Other FINRA Actions publications and press releases, during the first six months of 2018, fines increased slightly, but restitution during the time period declined significantly from 2017. Meanwhile, FINRA continued to emphasize certain program areas from 2017.

FINRA fines by the numbers

According to the Eversheds Sutherland study, FINRA issued $25.9 million in fines through June 2018. This represented an increase of $2.4 million in fines from January 2018 through June 2018 compared to the $23.5 million collected in 2017. This number normally would be expected to increase further assuming FINRA continues its historical trend of increased enforcement and fines in the second half of the year.

However, year-end fines are expected to reach approximately $51.8 million in 2018, compared to $65 million recorded in 2017. This is a 20% decrease in fines and would be the lowest total recorded since 2010, when FINRA ordered $42 million in fines.

Why the 2018 decrease in FINRA fines?

It’s not so much the number of actions FINRA is taking, but the size of those actions. Big hits recorded early in the year are unlikely to be replicated in the last quarter. During the first half of 2018, FINRA reported five “supersized” fines of $1 million or more, one of which was an exceptionally large fine totaling $13.9 million.

In comparison, during the first six months of 2017, FINRA reported three “supersized,” albeit much smaller (under $5 million) fines, totaling $6.4 million. The largest single fine against a firm this year was $5.3 million for allegedly having systemic anti-money laundering (AML) compliance failures, including failing to have a reasonable AML program in place to monitor and detect suspicious transactions, as well as other violations, including financial, recordkeeping, and operational violations. The Securities and Exchange Commission separately assessed an $860,000 civil penalty against the same firm for the same conduct.

In a separate litigated matter, a firm was fined $1.7 million for allegedly violating Regulation SHO by short-selling several penny stock securities without first borrowing them, improperly relying on the bona-fide market maker exemption.

Why the decline in FINRA restitution orders?

Again, it’s a matter of big “hits” versus smaller orders. This year, FINRA ordered $4.9 million in restitution during the first six months of 2018. This is well below the $38.1 million FINRA ordered during the same period in 2017.

Nearly half of the restitution reported in the first six months of 2018 came from one settlement – an order for $2 million in restitution. This order was against a firm that allegedly failed to appropriately consider and accurately describe the costs and benefits of variable annuity exchanges and recommended exchanges without a reasonable basis to believe the exchanges were suitable. In addition to the $2 million restitution order, FINRA also fined the firm $4 million.

In FINRA’s second-largest restitution order ($1.3 million), the firm in question allegedly failed to establish a supervisory system regarding its registered representatives’ excessive trading and churning of customer accounts. To that $1.3 million order, FINRA added a $713,000 fine.

As with fines, restitution generally increases during the second half of the year. However, if FINRA continues to order restitution at its current pace, expectations are that by year-end, restitutions would total only $9.8 million –an 85% decrease from the total restitution of $67 million reported by FINRA in 2017; and a 65% decrease from the $28 million reported for 2016.

Disciplinary actions also slowed

Despite the slight increase in fines during the first half of 2018, the number of FINRA’s disciplinary have also decreased compared to 2017. For the first six months of 2018, FINRA reported 342 disciplinary actions, a 25% slide compared to the first six months of 2017, when FINRA filed 459 disciplinary actions.

If FINRA continues to report cases in 2018 at the current pace, the year-end total would reach only 684 cases, compared to 1,369 cases in 2017.

What generated the largest FINRA fines?

FINRA’s top five enforcement Issues during the first half of 2018 in terms of total fines were:

  1. Anti-Money Laundering: $9.4 million in fines (11 cases);
  2. Trade Reporting: $8.4 million in fines (37 cases);
  3. Suitability: $5.6 million in fines (54 cases);
  4. Variable Annuities: $4.6 million in fines (14 cases); and
  5. Books and Records: $3.5 million (33 cases).

These topics demonstrate that FINRA is addressing a diverse array of issues this year. Anti-Money Laundering and Trade Reporting were on the “Top 5” list last year. Suitability and Variable Annuities are new trends that emerged this year.

FIRST HALF YEAR COMPARISONS 2017/2018

RANK/CATEGORY JANUARY-JUNE 2017 CASES/FINES JANUARY-JUNE 2018 CASES/FINES
Anti-Money Laundering Cases: 6 / Fines: $433,000 Cases: 11 / Fines: $9.5 million
Trade Reporting Cases: 59 / Fines: $8 million Cases: 37 / Fines: $8.4 million
Electronic Communications Cases: 16 / Fines: $4.3 million Cases: 16 / Fines: $1.8 million
Books and Records Cases: 38 / Fines: $2.2 million Cases: 33 / Fines: $3.5 million
Research Analyst and Reports Cases: 7 / Fines: $205,000 Cases: 2 / Fines: $135,000
First Half Year Totals for the Top 5 Enforcement Issues Cases: 126 / Fines: $14, 953,500 Cases: 99 / Fines: $23,335,000

According to Eversheds Sutherland Partner Brian Rubin, “Despite a small increase in fines and a decrease in restitution, we expect those figures will more than double by year end. Regardless of how 2018 finishes, however, FINRA’s emphasis on certain areas shows that firms should still concentrate on nuts-and-bolts issues like AML, trade reporting, suitability, and supervisory policies and procedures.”

What does this study mean for compliance?

That FINRA still will be watching and you must be ready and compliant? That’s where Patrina can help. We’ve built a business on helping organizations stay on the “straight and narrow” efficiently and cost-effectively. So, let’s talk. Call 212-233-1155 to ask about Patrina’s cost-effective and comprehensive, 8-module compliance solution, and compliant data capture, file storage, records archiving, and designated third-party services specifically designed for the financial services community. Be smart. Be covered.

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