Sanctions to promote change

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FINRA says the goal of financial sanctions is…change

Speaking earlier this week at the Securities Industry and Financial Markets Association (SIFMA) Anti-Money Laundering (AML) conference in New York City, Susan Schroeder, the Financial Industry Regulatory Authority’s (FINRA) Executive Vice President, Enforcement told attendees that the Authority’s first goal when levying sanctions is: Restitution. Restitution to harmed investors to, whenever possible, make them whole.

But what really warms the cockles of FINRA’s heart?

Stopping bad actors cold. And sanctions…that big money stick which FINRA uses to “beat sense into the foolish” is designed to address the root of the financial crime space by hitting bad actors in the pocketbook and/or kicking them out of the game, period.

Key to being effective, says Schroeder, is matching the sanction to fit the case and the offender. Options include fines, restitution, disgorgement, expulsions, bars, plenary and principal suspensions, undertakings (such as the undertaking to hire an independent consultant), rescission, requirements to requalify, business restrictions, supervision requirements, pre-approval requirements.

What’s your FINRA sanction pain point?

What moves your members and keeps your compliance team up at night? Schroeder says FINRA carefully considers all its sanctioning options. “For example,” she says, “in some cases, the most effective sanction might be requiring a member firm to hire an independent consultant to review the firm’s systems and recommend enhancements that the firm is required to implement.

“In other cases,” she adds, “where a firm has demonstrated through repeated actions that it knows what it’s doing is wrong and it doesn’t intend to fix it (it becomes clear that an independent consultant’s advice is not likely to improve the firm’s conduct). In that case, [FINRA looks] to other forms of incentives or disincentives. Are increasing fines the best way to make the firm’s conduct so cost-prohibitive that it will finally choose to change? Are suspensions and bars against the firm’s supervisors the best way to change the firm’s approach to supervision? Should the firm be restricted from conducting certain types of business that it has repeatedly failed to supervise appropriately? Key, she continues, is keeping “in mind that a sanction should be proportionate to the harm or risk of harm posed. It should be remedial, and an effective deterrent, but it should not be excessive to the point of being vindictive.”

What is the line between FINRA deterrent and vindictiveness?

Determining where the line falls between deterring bad actors and eviscerating them is a challenge Schroeder says FINRA faces every day because “members range from two-person firms working out of a home office to enormous, multi-national firms with vast resources. Determining a sanction for a specific respondent in light of that firm or broker’s facts and circumstances is one of the hardest parts of our job. There is no simple algorithm or formula we can use.”

FINRA wants to answer the question, “Why?”

FINRA enforcement discussions about sanctions continually return to the Regulator’s fundamental question: “What are we trying to accomplish in this Enforcement action? How do we most effectively use sanctions as a tool to help us accomplish our goals in this case?

“We don’t want to just address the side effects of misconduct,” Schroeder says. Rather, FINRA wants “to remediate any systemic deficiencies contributing to the misconduct. It’s not about just asking what went wrong here, but also asking why. If there was a trade reporting violation, why was there a trade reporting violation? What happened? What was broken? And was it fixed?”

According to Schroeder, FINRA increasingly has granted credit for extraordinary cooperation—with an emphasis on a respondent’s efforts on restitution and remediation—in a number of matters. The Authority gave substantial credit, for example, to two firms last year that each had different but significant supervisory issues. Each of the firms spent significant time and resources analyzing the effects of its supervisory failure on customers, establishing a restitution plan early in the process and sharing its methodology with us. Each firm ultimately paid restitution, and they were assessed substantially reduced fines in recognition of their extraordinary cooperation.

FINRA, she says, is mindful of not only other regulatory actions but also discipline imposed by member firms. If an individual has already been suspended from her member firm for three months, we will consider that when weighing a regulatory suspension and factor it in as appropriate.

So, what is FINRA looking at when it considers sanctions?

Schroeder says when FINRA levies sanctions it is looking for sanctions that:

  1. Deliver restitution for harmed customers;
  2. Address the root cause of the inappropriate activity;
  3. Are proportionate;
  4. Encourage remediation of endemic problems; and
  5. Reflect credit for cooperation and discipline by other regulators or member firms.

So…are you doing the compliant thing?

FINRA’s goal is compliance. Just ask Schroeder, who says: Compliance is our ultimate goal, and individuals and firms that do the right thing and make the effort should have a clear and meaningful advantage over those that do not.

So, are you? Doing the right thing, that is? That’s FINRA’s goal and that’s Patrina’s goal too! Let’s talk about how you can keep your organization on the “straight and narrow” (no matter what FINRA throws at you) 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, and records archiving specifically designed for the financial services community. Be smart. Be covered.

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