Finra toughens its sanctions on suitability violations

Finra toughens its sanctions on suitability violations
The self-regulator suggest barring offenders, expelling more firms, upping suspensions to two years.
MAY 11, 2015
The Financial Industry Regulatory Authority Inc. is tightening the screws on its disciplinary responses to violations of the suitability standard by brokers. As part of its Sanction Guidelines, which provide suggestions for the National Adjudicatory Council, the committee that oversees disciplinary proceedings, the self-regulator has increased its suggested suspensions from one year to two for brokers making unsuitable recommendations. It also strongly advises possible barring of brokers and expelling of firms for fraudulent activity. The guidelines are set in place to protect investors from a broker's failure to comply with the suitability rule, under which brokers may sell products in which they have an interest, as long as they are aligned with the investors' goals. But some advisers still think it isn't enough. “Why would you allow someone who stole money from a client to even come back?” said Ross Gerber, chief executive of Gerber Kawasaki Wealth and Investment Management. “It should be one and done. “The fact that they're adding a year suspension is just a band-aid for a bigger issue,” he said. But the increase may encourage some change — though not necessarily positive. Defendants before hearing panels may choose alternate paths in an attempt to avoid the tougher consequences. “Individuals facing two-year suspensions will be more apt to fight cases than settle,” said Bill Singer, an attorney who focuses on cases within the financial services industry. “If you face a two-year suspension, you may be more apt to cover up misconduct and try to engage in under-the-counter settlements.” Mr. Singer said the guidelines revision looks like a response to the pressures the industry is facing with the the Labor's Department's proposal for a fiduciary standard. “That sort of raises questions in my mind,” Mr. Singer said. “How much of this is sincere?” “This has absolutely nothing to do with [the DOL proposal],” said Nancy Condon, a Finra spokeswoman. “One does not have anything to do with the other.” Though the DOL proposal is receiving pushback from critics, if put through, it would establish a contractual obligation for brokers working with retirement accounts to act always in their clients' best interests, disclosing any conflicts that may arise. While the suitability rule and fiduciary standard seem similar, the suitability rule provides brokers the flexibility of reasonably recommending investments that could benefit both the client and broker. The revision is just the latest in a sweep of strict movements by politicians and regulators to protect investors from potential misconduct in the financial services industry. In April, the Securities and Exchange Commission's Investor Advisory Committee suggested regulators join together to build a database that would run background checks on advisers and brokers.

Latest News

The 2025 InvestmentNews Awards Excellence Awardees revealed
The 2025 InvestmentNews Awards Excellence Awardees revealed

From outstanding individuals to innovative organizations, find out who made the final shortlist for top honors at the IN awards, now in its second year.

Top RIA Cresset warns of 'inevitable' recession amid tariff uncertainty
Top RIA Cresset warns of 'inevitable' recession amid tariff uncertainty

Cresset's Susie Cranston is expecting an economic recession, but says her $65 billion RIA sees "great opportunity" to keep investing in a down market.

Edward Jones joins the crowd to sell more alternative investments
Edward Jones joins the crowd to sell more alternative investments

“There’s a big pull to alternative investments right now because of volatility of the stock market,” Kevin Gannon, CEO of Robert A. Stanger & Co., said.

Record RIA M&A activity marks strong start to 2025
Record RIA M&A activity marks strong start to 2025

Sellers shift focus: It's not about succession anymore.

IB+ Data Hub offers strategic edge for U.S. wealth advisors and RIAs advising business clients
IB+ Data Hub offers strategic edge for U.S. wealth advisors and RIAs advising business clients

Platform being adopted by independent-minded advisors who see insurance as a core pillar of their business.

SPONSORED Compliance in real time: Technology's expanding role in RIA oversight

RIAs face rising regulatory pressure in 2025. Forward-looking firms are responding with embedded technology, not more paperwork.

SPONSORED Advisory firms confront crossroads amid historic wealth transfer

As inheritances are set to reshape client portfolios and next-gen heirs demand digital-first experiences, firms are retooling their wealth tech stacks and succession models in real time.