FINRA’s Revised Sanction Guidelines

Last April, FINRA announced that it had revised the sanction guidelines that apply when there has been a violation of a FINRA rule. Professionals in the industry whose activities are regulated by FINRA need to be aware of the scope and impact of these changes.

The Sanction Guidelines do not directly prescribe specific penalties or punishments for each particular violation. In essence, their role is to assist FINRA adjudicators to impose sanctions in a fairer and more consistent manner.

They are meant to establish a range of potential sanctions for each type of violation, and they also introduce the concept of aggravating and mitigating factors, which FINRA’s hearing panels and the NAC are expected to consider throughout disciplinary proceedings.

The new Sanction Guidelines introduce the following changes:

• Establish a new factor requiring that the exercise of undue influence over a customer be considered for all violations addressed by the Sanction Guidelines;
• Introduce three new Sanction Guidelines: Systemic Supervisory Failures, Short Interest Reporting, and Borrowing From or Lending to Customers;
• Present a new factor related to the mitigative effect of regulator or firm-imposed sanctions and corrective action;
• Amend 12 sections of the Sanction Guidelines to revise sanctions for more serious FINRA rule violations; and
• Harmonize the Sanction Guidelines to the relevant precedent, prior amendments to the Sanction Guidelines and FINRA’s rulebook consolidation process.

The revised sanction guidelines can be found in full at: finra.org/Industry/Enforcement/SanctionGuidelines.

US regulators have lately been extremely concerned with the issue of broker-dealer employees exercising undue influence over vulnerable customers. The new revision of the Sanction Guidelines directly addresses this problem, in line with FINRA’s recent move to protect senior investors through a series of specific rule changes.

On the other hand, the introduction of Short Interest Reporting addresses a type of violation which was earlier treated in the same way as Short Sales. FINRA regulators have concluded that Short Interest Reporting should be in a category of its own, and this will likely make disciplinary processes fairer and more consistent.

Another salient revision introduced by the new Sanction Guidelines involves unauthorized transactions. In the past, individuals who engaged in churning or unauthorized transactions could face a suspension of a minimum of 10 business days. Now, the minimum duration of such a suspension has increased to a month.

The high end of the suspension range for this type of violation has doubled, from one year to two years.

Moreover, adjudicators are now advised to consider barring the individual respondents from the industry if there is evidence that they acted intentionally or recklessly.

As of June, 2017, FINRA is also preparing to strengthen controls on high-risk brokers, who have incurred different types of misconduct in the past. FINRA is expected to issue a new Regulatory Notice and a new revision of the Sanction Guidelines, which will, among other things, require firms to adopt heightened supervisory procedures to keep high-risk brokers on a short leash.

While FINRA tightens its rules and establishes a range of aggravating and mitigating circumstances to be considered when adjudicating violations, assistance from a legal advisor becomes indispensable to avoid unwanted probes and disciplinary actions.

If you or your firm are facing FINRA disciplinary action or inquiry, you should act quickly to preserve your rights as by the time you are notified FINRA investigators are already preparing a case against you. Call an experienced Herskovits PLLC securities industry defense lawyer to learn your rights and best defense: 212.897.5410 or EMAIL US