At a recent event hosted by the American Bar Association's Securities Litigation Committee, three Chief Counsel from the Financial Industry Regulatory Authority's Enforcement division discussed the agency's current priorities.
Chief Counsel Sue Light, Gina Petrocelli, and Lara Thyagarajan shed light on the areas that FINRA will be scrutinizing more closely through the second half of 2017.
As per FINRA's 2017 Priorities Letter, the Regulatory Authority is shifting its focus from a “culture of compliance” to a “blocking and tackling” model, emphasizing on watching brokers with a track record of disciplinary actions.
FINRA Sanction Guidelines Updates and Rule 2165
During the panel presentation, Ms. Petrocelli called attention to the exploitation of senior clients as a special concern area, an issue I have addressed in detail in a previous blog. Besides FINRA Rule 2165, which specifically addresses the handling of senior citizen accounts, FINRA has just updated its Sanction Guidelines to include the “undue influence” consideration.
While Rule 2165 will be effective in February 2018, the amendment to the Sanction Guidelines is effective immediately.
FINRA enforcers also referred to complex and new products as a special area of attention for the Regulatory Authority, mentioning mutual funds share classes, variable annuities, and UITs as particularly interesting areas for enforcement actions.
One of the most interesting topics discussed during the panel was the question of how to best interact with enforcement teams.
Chief Counsel Light said that FINRA is very keen on having meetings with firm representatives at the onset of an investigation and that their active involvement in such probes is much appreciated.
Many securities industry professionals often feel that a phone call to provide valuable information to FINRA might “awaken” an otherwise dormant case.
Regarding this matter, Ms. Light explained that FINRA does not forget cases simply because it is not taking action at a certain point in time, and that these type of calls would always be welcome. Of course, calling FINRA about an investigation without prior legal advice may be a mistake, but that is what professionals like myself and my team are here for.
Does FINRA Cooperation Help w/Fines? Perhaps.
FINRA enforcers also referred to the equation between the degree of cooperation and the dollar amount of fines. In other words, can cooperation help reduce potential fines?
To this question, Ms. Light responded that there are many factors to influence that kind of decision, but signaled cooperation that helps reach a speedy resolution and remedial actions for distressed customers as two of the most potentially influential elements.
FINRA rules and their interpretation can be complex. Hearing from enforcers about focus areas and common practices at the Regulatory Authority can help broker-dealers stay on the right side of the law.
There is no question that FINRA has been, in later years, scrutinizing more and more aspects of the industry's activities, and firms need to be prepared to respond to inquiries in the most efficient and legally appropriate manner possible.
If you are a FINRA enforcement or inquiry target, or just believe you might become one – call or email us right away to learn your options and preserve your rights. Herskovits PLLC focuses exclusively on securities law.