Finra files more cases, levies more fines in ’11

Enforcement actions and fines by the Financial Industry Regulatory Authority Inc. jumped sharply last year, with the latter rising to $68 million, from $45 million in 2010, a new study shows.

Much of that surge came from penalties for improper advertising.

Finra filed 1,488 disciplinary actions last year, up from 1,310 cases in 2010, according to the Finra sanctions survey released last Monday by Sutherland Asbill & Brennan LLP. The number of brokers barred by Finra rose to 329 last year, from 288 in 2010.

Last year was the third in a row in which Finra substantially boosted enforcement activity, according to the report.

The crackdown reflected Finra’s effort to ensure that investor rip-offs, such as the multibillion-dollar Ponzi schemes perpetrated by Bernard Madoff and R. Allen Stanford, don’t happen again, according to one of the study’s authors.

“It’s not surprising,” said Brian Rubin, a Sutherland partner and former deputy chief counsel of enforcement at NASD, Finra’s predecessor.

“Finra is still dealing with issues related to the [2008] market crisis. Since Madoff and Stanford, all the regulators have tried to be more aggressive,” Mr. Rubin said.

J. Bradley Bennett, Finra’s executive vice president and chief enforcement officer, said that the numbers show that the regulator is achieving good production from its staff.

The 1,488 cases were pursued by about 320 enforcement professionals.

“What makes me most proud of it is that we’re getting through that caseload,” Mr. Bennett said. “We’re bringing a lot of cases where the market meets the investor.”

The biggest enforcement increase was registered in advertising, according to the Sutherland report, with sanctions surging to $21.1 million last year, from $4.75 million in 2010. Within that area, Finra has been zeroing in on inaccurate or fraudulent internal communications.

“If, for example, firms are telling their representatives internally that products are not risky, [Finra is concerned that] representatives will turn around and make these claims to investors,” Mr. Rubin said.

Fines also were increased substantially for short selling and auction-rate-securities violations. In both areas, however, the pipeline may start to slow down.

Fines more than doubled from 2010 to 2011 — $3.75 million to $7.7 million — for suitability violations. The number of cases filed also doubled — to 106, from 53.

A new suitability rule, which is due to be finalized this summer, will help Finra maintain pressure on brokers to offer only products that fit a customer’s investment needs, timeline and risk appetite.

“We anticipate this will continue to be a hot area for Finra,” Mr. Rubin said. “The new rule gives Finra additional ammunition.”

Finra is looking not just at whether complex structured investments are suitable for a customer but also whether they are reasonably suited for the market.

“If you see products being sold by people who don’t understand them to people who don’t understand them, that’s a supervision and suitability problem,” Mr. Bennett said. “That is a common theme that will underline product cases coming out this year.”

The regulator also is placing an emphasis on microcap and private-placement offerings, as well as ensuring that firms do the basics — such as internal compliance — the right way.

“The cost of doing business incorrectly has to be greater than the cost of doing business correctly, or you give a competitive advantage to a noncompliant firm,” Mr. Bennett said.

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