This is an overview of a the recorded webinar: Top FINRA Enforcement Issues and Trends of 2018 with Eversheds Sutherland.
Eversheds Sutherland is a global law practice that provides legal services to the world’s largest corporate firms and has extensive data on past FINRA regulatory actions.
In a recent webinar, Eversheds Sutherland’s Partner, Brian Rubin, and Counsel, Adam Pollet, spoke with Marianna Shafir, Corporate Counsel for Smarsh, to look back on 2018 and learn the most common regulatory actions and what firms can do avoid making the same penalties in 2019 and beyond.
The Top FINRA Regulatory Actions of 2018
While disciplinary actions have been declining in recent years (down 33% from 2017), FINRA still fined firms $65 million (down only 6% from 2017).
“One of the things that immediately jumped out is that while the number of cases was down significantly, the actual fines per case appears to be packing more of a punch,” says Adam Pollet.
In 2018, the top violation categories in order of fine amount issued were:
- Anti-money laundering (AML): $27.3 million
- Unregistered securities: $16.8 million
- Suitability: $11.8 million
- Variable annuities: $8.01 million
- Short selling: $7.8 million
- Insider trading: $5.5 million
- Books and records: $4.9 million
- Trade reporting: $4.6 million
- U4/U5: $3.7 million
- Registration issues: $3.1 million
“Some cases fall into multiple categories,” says Brian Rubin. “But you can compare the categories, which gives an indication of what FINRA considers important.”
Poor supervisory procedures and poor records retention were common themes in some of the largest fines:
The single largest fine in 2018 was an AML case at $10 million. One of the firm’s AML program’s failures was not devoting the necessary resources to review alerts generated by the automated surveillance system. Firm analysts were closing alerts without sufficiently conducting or documenting investigations of potentially suspicious transfers.
The largest suitability case of 2018 resulted in a $4 million fine and an order to pay $2 million in restitution. FINRA alleged that the firm failed to supervise—or have a reasonable basis to recommend and approve—variable annuity exchanges for most of the exchanges reviewed.
A single firm was fined $5.5 million (of the $7.8 million short selling fines issued in 2018) by failing to establish supervisory procedures.
Other notable 2018 cases found firms failing to adequately train staff or use appropriate technology to meet regulatory obligations.
“FINRA is focused on what firms are doing in order to comply with their regulatory obligations,” says Pollet.
More firms and advisors are being fined for improper use or improper records keeping of electronic communication. At the start of 2018, an advisor was fined $20,000 for using personal devices and accounts to engage in business related communications with a customer.
“It’s not just text or emailing from personal accounts,” says Marianna Shafir. “Some firms are under the wrong impression that internal communications don’t apply to the rule. It isn’t about the actual device. It’s about the actual communication.”
What Can Firms Do in 2019?
According to Rubin and Pollet, recent enforcement actions show that firms need to put more emphasis on reviewing existing policies, procedures, and technology to find any weaknesses in meeting regulatory obligations.
While technology doesn’t replace supervisory or review policies, technology is crucial to the firm’s bottom line as it allows written procedures to be automated.
“Using technology to meet regulatory obligations should be viewed as best practice,” says Pollet. “This is something that FINRA focused on last year and will continue to emphasize in 2019.”
With the increasing number of communication platforms and channels that can be used to engage with clients and internal staff, firms need to use content archiving tools that allow supervisors to review messages natively.
“Regulators aren’t just looking at email for communication cases now,” says Shafir. “They’re also looking at tweets, social media direct messaging, texts, webinars, internal instant messages, and more. The regulatory landscape has increased, and firms need to embrace content archiving technology that can capture the context of conversations.”
This means that if it is business related, firms need to capture and archive all communication and make it available for e-discovery during reviews and audits, especially when both the SEC and FINRA are increasing their focus on record keeping obligations.
This article is based on the recent webinar: Top FINRA Enforcement Issues and Trends of 2018 with Eversheds Sutherland. You can watch the full webinar here.
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