The Financial Industry Regulatory Authority eased up on the number of penalties it doled out last year, as fines, restitution and disciplinary actions all saw double-digit declines, according to a report by Eversheds Sutherland partners Brian Rubin and Adam Pollet.
The number of disciplinary actions reported by Finra last year was 463, a 13% decrease from the 534 cases in 2021 and a 17% decrease from the 560 disciplinary actions in 2020, according to the report, which annually analyzes Finra’s disciplinary actions. It also noted that the number of disciplinary actions declined for the third year in a row.
Restitutions, which totaled about $21 million in 2022, represented a 55% dip from the $47 million ordered in 2021. The report noted that the decline was mainly due to fewer “supersized” restitution orders of $1 million or more. In 2022, Finra doled out three supersized restitution orders of about $17 million; there were 10 in 2021, totaling about $42 million.
Fines reported by Finra in 2022 dipped 56% to $45 million from $103 million in 2021. But the report explained that was in part due to the record-breaking $57 million fine imposed on Robinhood Financial LLC in 2021. The firm also was fined $12.6 million in restitution for alleged years-long systemic supervisory failures and significant harm suffered by millions of its customers.
The report noted that minus that one fine, the total fines for 2021 would have been $46 million, which would have resulted in only a 2% decrease from 2021 to 2022.
The monetary sanctions in fines, restitution, and disgorgement in 2022 were $72 million, a 52% decrease from the $150 million in total sanctions ordered in 2021, the report said.
The top enforcement issue in 2022 was cases involving books and records, which Eversheds Sutherland said last appeared on its list in 2020. There were 50 such cases last year with a purse of $14.8 million in fines, the report noted. The biggest fine was $2.8 million to a firm for “failing to correct inaccuracies in trade confirmations it sent to customers over multiple years and after three warnings from Finra.” This category also includes violations such as the failure of firms and individuals to preserve business-related communications.
Cases involving research or analysts resulted in the second most fines by Finra in 2022. This category had not appeared on the Eversheds Sutherland list since 2017, the report said. But last year, there were three such cases with fines totaling $9.3 million. The report cited one case where a firm was fined $325,000 for publishing “research reports that had inaccurate price charts and stock ratings due to a typographical error in its software program.”
The third most enforced issue involved consumer protection rules. Eversheds Sutherland said the ranking was based on a single case, which involved, among other things, the customer protection rule, and resulted in a $9 million fine. “The firm failed to maintain possession or control of billions of dollars of fully paid and excess margin securities it carried for customers, and it failed to accurately calculate its required customer reserve.”
The issue of trade and reporting, which has appeared on the list for three consecutive years, showed up once again with the fourth most fines. There were 14 trade reporting cases in 2022, resulting in a total of $7.9 million in fines, the largest of which was a $5 million fine to a firm that failed to report over-the-counter options positions to the Large Options Positions Reporting System in more than 7.4 million instances, the report said.
And rounding out the top five issues that resulted in the most fines were best execution cases, which for the first time since 2014 appeared on the list. There were two cases each totaling $2 million in fines. The report noted that in both cases “the firms’ alternative trading systems failed to comply with their best execution requirements, including, for example, by creating delays in the routing of customer orders, leading to lower fill rates and failing to conduct reasonable reviews of its order execution despite data showing their fill rates were inferior to competing venues.”
Among the enforcement and trends Evershed Sutherland are watching for this year include cases involving Regulation Best Interest. “We wouldn’t be surprised if Reg BI cases are soon ranked in the Eversheds Sutherland Top Enforcement Issues list,” Pollet said.
Also being scrutinized are cases involving “off-channel communications” where personal devices are used to communicate. “While it is doubtful that Finra will bring the ‘eye-popping’ cases that we have seen from the SEC, it is likely that Finra will bring significant cases where reps have communicated about securities business matters on their personal devices, using text messages, WhatsApp, Signal, WeChat, and other applications, as well as personal email accounts. The next issue the securities regulators may be addressing is how firms surveil these messages when they retain them,” Rubin said.