A handful of large penalties assessed by Finra in 2016 are putting the group on pace for a record year of fines, eclipsing last year's total by nearly 70% and breaking the previous record set in 2014, according to an analysis by law firm Sutherland Asbill & Brennan.
The first half of this year saw a cumulative $79.4 million in fines assessed by the
Financial Industry Regulatory Authority Inc. against broker-dealers and their representatives, compared with $37.5 million for the first half of 2015.
That rate puts the broker-dealer watchdog on pace to hit a year-end total of $159 million in fines, which would be a 69% increase on 2015's total $94 million, and 19% growth on the $134 million total two years ago, according to Sutherland estimates published Oct. 4 as part of a semiannual
study.
Interestingly, the record-setting pace of fines in the first half of the year coincides with a slight drop in the number of disciplinary actions. However, the number of “supersized” fines, or those over $1 million, swelled to 11, up from six in the first half of last year, according to Sutherland.
“The number of cases is actually not on track compared to last year, so the main driver of the increased fines are the large number of supersized fines,” Brian Rubin, partner and head of Sutherland's Washington litigation practice group, said.
This year has seen a few whoppers. Indeed, four fines have been greater than $5 million.
MetLife Inc., for example,
agreed in May to pay a $20 million fine tied to variable-annuity sales abuses, along with $5 million in restitution. That was the highest-ever penalty for VA products.
Regulators indicated this year that variable annuities
are a “sweet spot” of scrutiny, because they're complex products marketed to seniors.
“It is real area of focus, and from what I know there will be several large variable-annuity cases this year,” said Mr. Rubin, former deputy chief counsel of enforcement at Finra and senior enforcement counsel at the Securities and Exchange Commission. He declined to provide specific details of the cases.
Finra also
fined units of Raymond James Financial Inc. $17 million in May for compliance failures tied to anti-money laundering programs, the largest-ever Finra penalty related to anti-money laundering.
Sharron Ash, chief litigation counsel at MarketCounsel, a regulatory compliance consulting firm, said that while such stand-out fines certainly play into the increase, the amounts of smaller fines Finra assesses have been growing as well.
“I think the more important piece is the smaller fines that have a cumulative effect,” Ms. Ash said. “What that should tell you is, yes, you have this standout of super-fines, but the vast majority of their fine growth is going to be attributable to laying it on the backs of the brokers, where they're paying more.”
Mr. Rubin agreed smaller fines have been getting larger, too.
“A number of Finra attorneys have said we're in a whole new world here, meaning the level of fines have increased and their expectations of what cases are worth has increased,” he said.
Finra published the latest version of its sanction guidelines, which provides general principles about the group's sanction considerations and determinations, in 2015. Ms. Ash believes Finra has taken the sanction guideline “to really a whole new level.”
“They're taking a very aggressive stance, generally, and they're trying to send a message,” she said. “In the past, with earlier versions of sanction guidelines, it's been effective to look at past precedent, but I think this new sanction guideline represents an effort on their part to cut off the anchor.”
Finra is also on pace to order approximately $28 million in restitution this year, which would be a 71% decrease from a total $96 million in 2015, according to Sutherland.
“That's a surprising result,” Mr. Rubin said. “The data may change in the second half of the year, because Finra has said they're focused on restitution more than on fines.”
