Top FINRA Enforcement Issues and Trends of 2019 Brian Rubin Adam Pollet Donald McElligott Partner Counsel VP, Compliance Supervision Eversheds Sutherland Eversheds Sutherland Global Relay
Speakers Brian Rubin Adam Pollet Donald McElligott Partner Counsel VP, Compliance Supervision Global Relay Eversheds Sutherland Eversheds Sutherland
2019 FINRA Actions The Stats
2019 FINRA Actions Fines $ 39.5m $ 61m 35 % in fines reported in 2019 in fines reported in 2018 decrease from 2018 2011 2012 2013 2014 2015 2016 2017 2018 2019 Fines Assessed $72M $69M $60M $133M $94M $174M $65M $61M $39.5M Change From Prior Year -- -4% -13% 122% -29% 85% -63% -6% -35%
2019 FINRA Actions Cases 854 921 7 % Number of cases brought cases brought in 2018 decrease from 2018 (Fewest number of cases since before 2008) 2011 2012 2013 2014 2015 2016 2017 2018 2019 Number of Cases 1,488 1,541 1,535 1,397 1,512 1,434 1,369 921 854 Change From Prior Year -- 3% -0.4% -9% 8% -5% -5% -33% -7%
2019 FINRA Actions Restitution $ 28m $ 26m 8 % in restitution reported in 2019 in restitution reported in 2018 increase from 2018 2011 2012 2013 2014 2015 2016 2017 2018 2019 Restitution $19M $34M $10M $32M $97M $28M $67M $26M $28M Change From Prior Year -- 79% -71% 220% 203% -71% 139% -61% 8%
2019 FINRA Actions Total Sanctions (fines + restitution + disgorgement) $ 70m 44 % in total sanctions reported in 2019 decrease from 2018 (Lowest total since 2013) 2011 2012 2013 2014 2015 2016 2017 2018 2019 Total Sanctions $87M $112M $67M $168M $193M $207M $150M $124M $70M Change From Prior Year -- 29% -40% 151% 15% 7% -28% -17% -44%
2019 FINRA Actions “Supersized” Fines of $1M+ $ 27.9m $ 47m $ 43m $ 137m $ 52.2m in total fines in total fines in total fines in total fines in total fines 9 supersized fines 13 supersized fines 15 supersized fines 34 supersized fines 18 supersized fines 2019 2018 2017 2016 2015
2019 FINRA Actions “Yuuuge” Fines of $5M+ $ 15m $ 31.3m $ 18.5m $ 89m $ 23.6m in total fines in total fines in total fines in total fines in total fines 1 yuuuge fine 5 yuuuge fine 2 yuuuge fine 8 yuuuge fine 3 yuuuge fine 2019 2018 2017 2016 2015
2019 FINRA Actions The Top Enforcement Issues
• 12 AML cases reported in 2019 - 29% decrease from 17 in 2018 Top Enforcement • $17.4 million in fines - 36% decrease from $27.3 million in 2018 Issues • Produced the single largest fine in 2019 ($15M) • Fourth year in a row on top of the Top Enforcement Issues list #1: Anti-money Laundering • $15M – For more than four years, two affiliated firms allegedly failed to develop and implement a written AML program to reasonably monitor penny stocks for suspicious activity and failed to review wire transfers conducted in foreign currencies or involving high-risk entities or jurisdictions.
• 13 ETF/ETP cases reported in 2019 Top Enforcement - 30% increase from 10 in 2018 Issues • $3.5 million in fines - 218% increase from $1.1 million in 2018 • First time on the Top Enforcement Issues list #2: Exchange-traded since 2012 Funds/Products • $2.9M – Firm allegedly failed to establish and maintain a reasonable supervisory system governing the delivery of prospectuses for ETFs and ETPs.
• 28 misleading or inaccurate information cases Top Enforcement reported in 2019 - 18% decrease from 34 in 2018 Issues • $3.3 million in fines - 83% increase from $1.8 million in 2018 • First time on the Top Enforcement Issues list #3: Misleading Or Inaccurate Information • $800K – Firm and its owner allegedly made unbalanced and misleading communications with the public regarding a biotechnology company the owner founded, among other things.
• 8 municipal securities cases reported in 2019 - 11% increase from 9 in 2018 Top Enforcement • $2.7 million in fines - 50% increase from $1.8 million in 2018 Issues • First time on the Top Enforcement Issues list since 2013 #4: Municipal Securities • $2M – Firm allegedly repeatedly failed to timely address municipal short positions and did not accurately represent the tax status of thousands of interest payments to customers, incorrectly identifying them as tax-exempt when, in fact, they were taxable.
• 45 suitability cases reported in 2019 - 51% decrease from 91 in 2018 Top Enforcement • $2.7 million in fines Issues - 77% decrease from $11.8 million in 2017 • $17.2 million in restitution ordered #5: Suitability • $800K – Firm allegedly failed to reasonably supervise early UIT rollovers, causing its customers to incur sales charges that they would not have incurred had they held the UITs until their maturity dates. Firm was also required to pay $3.8 million in restitution.
2019 FINRA Actions Key Issues
Key Issues Top of the Top Enforcement Issues list for 4 consecutive years and top 5 for 6 consecutive years. Number of cases decreased in 2019, but single Still AML largest AML case ($5 million) was more than the largest AML case in 2018 (which was the largest single fine in 2018). FINRA will likely sanction firms more severely in the future for AML violations (failing to ensure AML programs are adequate and reasonably tailored to business operations).
Key Issues In January 2019, FINRA launched a new self- reporting initiative focused on 529 plan share classes. FINRA was concerned that some firms may not 529 Plan Share Class Initiative adequately supervise their representatives in considering the various share classes when making 529 plan recommendations to customers. FINRA has noted that approximately 100 firms self- reported through this initiative, although not all of them will be sanctioned, depending upon the facts of each case.
Key Issues FINRA (in coordination with various exchanges) brought a string of 7 market access cases in 2019. Market Access Cases While FINRA fined those firms approximately $850,000, exchanges fined them nearly $9 million. In 2018, there were 3 cases with approximately $340,000 in fines by FINRA and $2.8 million in fines ordered by exchanges.
Trends for 2020
123 cases (26 cases against firms) $7.4 million in fines $70,000 in restitution First Quarter Increases compared to same period in 2019 $1M – Firm allegedly disseminated inaccurate expense ratio information and historical performance information for numerous investment options in retirement plans and provided inaccurate third-party ratings for those investment options
COVID-19 issues and scams Cybersecurity and technology What Will Insider trading 2020 Bring? Misrepresentations/omissions/suitability Product failures
Questions?
Thank you Global Relay info@globalrelay.net Brian Rubin Adam Pollet Partner Counsel (202) 383-0124 (202) 383-0812 brianrubin@eversheds-sutherland.com adampollet@eversheds-sutherland.com
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