The Financial Industry and Regulatory Authority is focusing its enforcement on recidivist and high-risk brokers and firms, with an eye toward increasing penalties and restitution, Finra enforcement chief Bill St. Louis said in a new blog today.

To enhance the impact of enforcement, the self-regulatory organization plans to use targeted examinations, coordinate more closely with other regulators, shorten case time and enhance transparency, said St. Louis, the executive vice president and head of Finra enforcement.

"Combating the efforts of bad actors who have a history of misconduct and repeat violations is also a major priority for our department. Plain and clear, sanctions imposed on recidivists should be more severe because a recidivist has already failed to comply with Finra's rules or securities laws,” St. Louis said.

Finra is making enforcement against firms and brokers with a history of misconduct a priority, he said. “Finra confronts firms and brokers with a history of misconduct to prevent them from harming investors and compromising the integrity of the financial markets,” he said. That will also mean barring brokers who engage in “egregious misconduct,” he added.

St. Louis said that cases that involve direct harm to customers “are among the most impactful actions we can bring, with very real consequences for those investors affected."

Research data, however, shows that clients have been seeing less restitution even as enforcement actions have gone up.

An Eversheds Sutherland analysis of Finra’s 2023 penalties and restitution found that while the regulator's penalties increased quite significantly, customer restitution dipped not only last year, but over a number of years.

Finra fines and penalties jumped 63% to $89 million in 2023 from $54.5 million in 2022. In contrast, Finra-ordered restitution dropped 66% from 2022, from $21 million to $7 million. Eversheds Sutherland also noted that while only one firm had to pay $1 million in 2023, three firms were required to pay restitution totaling $17 million in 2022 and in 2021, 10 firms paid a total of $42 million.

Finra will also continue to focus enforcement on Regulation Best Interest, best execution and consolidated audit trail violations, St. Louis said.

“Our department’s Reg BI-related disciplinary actions have been increasing, with the expulsion of two firms for misconduct that included Reg BI violations. We have brought cases involving the Customer Relationship Summary form (Form CRS), excessive trading, complex products and variable annuities, with more in the pipeline,” he added.

Reg BI-related cases brought in the fourth-highest amount of fines in 2023, with the SRO reporting that 15 Reg BI cases in 2023, totaling $6 million in fines, including one $5.5 million penalty against LPL Financial, Eversheds Sutherland said.

On the best execution front, Finra’s rules require reps and firms to use reasonable diligence to ascertain the best market for securities and to buy or sell so customer prices are as favorable as possible under prevailing market conditions.

“Our department has pursued cases focused on routing practices and execution quality, such as when firms route to their own alternative trading system, and firms receiving payment for order flow and not conducting reasonable regulator and rigorous reviews of execution quality,” St. Louis said.

As regulatory investigations are prioritized, Finra will continue to use more targeted or sweep examinations to find issues, St. Louis added. “For instance, we recently brought the first settlement in a case that resulted from the sweep on social media influencers and customer acquisition. This is of specific importance since so much of the public receives investing advice from social media,” he added.

On March 18, Finra fined M1 Finance LLC, which paid $850,000 to settle charges its social media posts made by influencers on the firm’s behalf “were not fair or balanced, or contained exaggerated, unwarranted, promissory or misleading claims,” Finra reported.

St. Louis also warned that Finra will continue to use enforcement against firms that fail to meet their consolidated audit trail (CAT) obligations. “[T]here are still some CAT cases in our pipeline, including instances of millions if not billions of late or inaccurately reported order events, situations where firms are aware of CAT problems and do not reasonably respond to red flags, failure to implement a reasonable CAT system for several years, or when firms limit their supervisory reviews to data fields rejected by CAT,” he said.