In 2015 alone, the Financial Industry Regulatory Authority (FINRA) brought more than 1,510 disciplinary actions, charged $95.1 million in fines and ordered $96.6 million in restitution payments.
Those violations resulting in the largest fines and monetary sanctions imposed in 2015 provide a good indication of the deficiencies FINRA takes most seriously and plans to target in the future. FINRA members will want to pay particular attention to these areas in 2016.
FINRA imposed its top five fine and restitution amounts in 2015 for (1) failing to waive mutual fund sales charges, (2) supervisory failures in Puerto Rico securities, (3) engaging in unsuitable mutual fund transactions, (4) supervisory failures related to trade surveillance, trade confirmations delivery and complex product sales, and (5) selling unregistered microcap shares and related AML violations.
1. Failure to Waive Mutual Fund Sales Charges
Specifically, the mutual funds claimed to offer certain sales charge waivers but the firms failed to provide the waivers. In addition, FINRA stated that the firms “unreasonably relied on financial advisors to waive charges for retirement and eligible charitable organization accounts, without providing them with critical information and training.”
In October 2015, FINRA ordered an additional five firms to pay $18 million in restitution to charities and retirement accounts for similar conduct. Collectively, $55 million in restitution was paid to more than 75,000 eligible retirement accounts and charitable organizations as a result of these violations.
2. Supervisory Failures in Puerto Rico Securities
In September 2015, UBS Wealth Management Americas agreed to pay $18.5 million for supervisory failures related to sales of Puerto Rico municipal bond funds. FINRA’s fine included $11 million in restitution to 165 customers who were sold too many shares of the high-risk funds, causing issue when the accounts were then used as collateral for loans.
FINRA also imposed a $7.5 million fine for failure to monitor leverage and concentration levels in customer accounts to ensure suitability. In addition, UBS agreed to pay $15 million in disgorgement, interest, and penalties to settle related SEC charges.
3. Unsuitable Mutual Fund Transactions
In December 2015, FINRA sanctioned Barclays Capital, Inc. $13.75 million for unsuitable mutual fund transactions and related supervisory failures. FINRA ordered Barclays to pay over $10 million in restitution and a $3.75 million fine for engaging in thousands of unsuitable mutual fund transactions, particularly unsuitable mutual fund switches.
FINRA requires that any recommendation to switch mutual funds be evaluated with regard to the net investment advantage to the investor. “Switching among certain fund types may be difficult to justify if the financial gain or investment objective to be achieved by the switch is undermined by the transaction fees associated with the switch,” FINRA states.
Between January 2010 and June 2015, Barclays failed to act on thousands of automated system generated switch alerts after incorrectly defining a mutual fund switch to require three separate mutual fund transactions within a certain period. In addition, disclosure letters failed to disclose transaction costs.
Of the total restitution, $8.63 million was for 6,100 unsuitable recommendations to switch mutual funds.
4. Supervisory Failures Involving Complex Product Sales, Trade Surveillance, and Trade Confirmations Delivery
In May 2015, FINRA sanctioned LPL Financial LLC $11.7 for supervisory failures involving complex products sales, trade surveillance and trade confirmations delivery. FINRA censured and fined LPL $10 million for supervisory failures involving sales of non-traditional exchange-traded funds (ETFs), variable annuity contracts, non-traded real estate investment trusts (REITs) and other complex products, and for failure to monitor and report trades and deliver more than 14 million trade confirmations to customers.
In addition to the $10 million fine, FINRA ordered LPL to pay $1.7 million in restitution to certain customers who purchased non-traditional ETFs.
5. Selling Unregistered Microcap Shares and Related AML Violations
In December 2015, FINRA sanctioned Cantor Fitzgerald & Company $7.3 million for selling unregistered microcap shares and related AML violations. FINRA fined the firm $6 million and ordered disgorgement of $1.3 million in commissions plus interest for selling billions of microcap shares and failing to have adequate supervisory or anti-money laundering (AML) programs in place to detect red flags around its microcap activity. FINRA also fined and suspended Cantor’s executive managing director of equity capital markets and an equity trader.
FINRA reports that the firm’s supervisory system failed to:
- Determine whether shares were registered with the SEC or subject to exemption from registration,
- Provide adequate guidance and training on how to inquire into whether a sale was exempt,
- Provide adequate tools for supervisors to identify red flags associated with illegal, unregistered distributions, and
- Implement an AML program tailored to detect red flags and patterns of potentially suspicious money laundering activity related to microcap securities transactions
FINRA’s top five most significant sanctions against firms in 2015 warrant FINRA members’ consideration going into 2016. Many of FINRA’s high-dollar sanctions can be attributed to the length of time a violation continues, the number of transactions involved and the level of customer harm.
If you are a broker or brokerage firm and have questions involving FINRA compliance, I suggest you contact an experienced securities litigation attorney to discuss your concerns and learn your options. Herskovits PLLC focuses exclusively on securities law. Connect with us at: 212.897.5410 or Report Online