The Financial Industry Regulatory Authority Inc. went back to carrying a big stick last year as the fines it imposed on brokerage firms reached $89 million, a 63 percent increase compared to $54.5 million in 2022, according to a new report by the law firm Eversheds Sutherland.
The top five enforcement issues as measured by total fines were: spoofing, which made its first appearance ever on this annual list; trade reporting; anti-money laundering; Regulation Best Interest; and suitability, according to the report, which was co-written by firm partners Brian L. Rubin and Adam C. Pollet.
The increase in the dollar amount of fines came as both the number of disciplinary actions and orders of restitution again declined compared to the previous year, according to the report.
2016 was a record year for fines at Finra, topping out at $175 million, causing executives in the retail securities industry to gnash their teeth in despair. But 2016 was the same year that Robert Cook took over as Finra's CEO, and he immediately struck a more conciliatory tone with Finra's constituency of broker-dealers, whose ranks have been decreasing for more than a decade and currently number more than 3,300.
Under the Cook regime, fine have leveled off to between $40 million and $70 million per year, noted Pollet, one of the authors of the report.
"Last year saw bigger Finra fines per case," Pollet said in an interview Wednesday morning. "Supersized fines, or those of $1 million or more, were up, and mega-sized fines, or those of $5 million and more, increased too."
The 2023 fines included a single $24 million fine against one firm, as BofA Securities Inc. was penalized for more than 700 instances of spoofing,
Two former employees of the bank were responsible for the 717 instances of spoofing, or fraudulent trading that is meant to deceive other market participants into trading at a time, price, or quantity that they otherwise would not have followed through with.
Without that one large fine, last year's total would have been $65 million, only a 19% increase from 2022, according to the report.
"The last spike in Finra fines was in 2021, with fines hitting $103 million," Pollet added. "But that was the same year Finra fined Robinhood $57 million."
In June 2021, Robinhood Financial agreed to settle allegations that the online brokerage had caused significant harm to millions of customers as a result of false or misleading information, system outages and approval of trade options when it was not appropriate. It was the largest Finra penalty ever.
"As to the Reg BI issues, the initial fines were due to lack of compliance and technicalities of the rules themselves," said Sander Ressler, managing director of Essential Edge Compliance Outsourcing Services. "This really hasn't been a restitution-to-clients issue, at least so far."
Not only did the total amount of fines increase, but the number of cases with very large fines also increased in 2023, according to the report.
Finra ordered 14 fines of $1 million or more in 2023, compared with 11 such fines in 2022. In 2023, Finra assessed four fines of $5 million or more, which was double the number of mega-fines that the self-regulatory agency assessed in 2022.
However, in 2023, the amount of restitution ordered by Finra decreased substantially, according to the report. The self-regulator ordered restitution of approximately $7 million, which was down 66% from the $21 million in restitution ordered in 2022.
As a result, the total monetary sanctions ordered by Finra, including fines, restitution and disgorgement, came to $101 million in 2023. That represents a 25% increase from the $81 million in total sanctions ordered in 2022.
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