Finra's Top Enforcement Actions

In an article from InvestmentNews.com, we learn that enforcement actions and fines by the Financial Industry Regulatory Authority Inc., or Finra,  jumped sharply in 2011, with the latter rising to $68 million, from $45 million in 2010, a new study shows. Much of that surge came from penalties for improper advertising.
Finra filed 1,488 disciplinary actions in 2011, up from 1,310 cases in 2010, according to the annual Finra sanctions survey released on Monday. The number of brokers barred by Finra rose to 329 in 2011, from 288 in 2010. Here are eight top areas of enforcement, ranked by total fines.

1. Advertising

Finra Fines: $21.Million
Details: Sanctions involving advertising jumped from $4.75 million in 2010 to $21.1 million in 2011. The number of cases doubled in number to 45 in 2011. As in 2009 and 2010, a significant amount of the 2011 advertising fines ($9.5 million) related to the sale of ARS. In addition, nearly $8 million in fines stemmed from nine cases involving the use of allegedly misleading advertising materials on firm websites available to investors. This included advertisements for complex products and more traditional investments like annuities.

2. Short selling

Finra Fines: $16.8 million
Details: Short-selling cases generated $16.8 million in fines in 2011. In contrast, short selling was fifth on Sutherland’s list last year. The $16,8 million was a more than fourfold increase compared with the fines reported in 2010. This large increase was largely driven by a single $12 million fine imposed on a firm that allegedly violated Regulation SHO by failing to properly supervise millions of short sale orders that were mismarked and placed to the market without reasonable grounds to believe that the securities could be borrowed.

3. Auction rate securities

Finra Fines: $10 million
Details: ARS continued to be an important focus for Finra in 2011, as seven ARS cases resulted in nearly $10 million in fines. This was a substantial increase from 2010 when two ARS cases were reported that resulted in $1.75 million in total fines. Most of the 2011 cases concerned the alleged failure to disclose material facts to investors, often in advertising materials

4. Suitability

Finra Fines: $7.7 million
Details: Such cases led to $7.7 million in reported fines in 2011. The 106 cases that involved suitability in 2011 doubled the cases reported in 2009 and 2010. Similarly, the fines reported in suitability cases jumped from $3.75 million in 2010 to $7.7 million in 2011. Suitability has repeatedly landed on Sutherland’s list, placing fourth in 2010 and 2011 and second in 2008 and 2009.

5. Improper forms

Finra Fines: $6.6 million
Details:U4, U5, and Rule 3070 filings resulted in 91 Finra disciplinary actions and more than $6.6 million in reported fines in 2011 (compared to 67 cases and fines of $1.45 million in 2010). Although allegations concerning isolated problems with these regulatory filings often led to fines of $5,000 to $10,000, there were four 2011 cases where each firm was fined more than $600,000 for failing to report material information on Forms U4 and U5, including SEC investigations and customer settlements.

6. Mutual funds

Finra Fines: $5.1 million
Details: After yielding the most fines in both 2008 and 2009, fines involving mutual funds dropped dramatically in 2010. There were only 12 such cases in 2010, and only $1.3 million in fines. In comparison, mutual fund cases generated more than $104 million and $95 million in fines in 2005 and 2006. Although the $5.1 million in 2011 fines is only a fraction of these earlier numbers, it is a big increase from 2010’s figures. The number of mutual fund cases (55) and total amount of fines more than quadrupled during the past year compared to 2010.

7. Municipal securities

Finra Fines: $3.7 million
Details: In Finra’s Feb. 8, 2011 Regulatory and Examination Priorities Letter, it emphasized that member firms need to understand the municipal securities they sell and corresponding regulatory requirements. The SRO’s Jan. 31, 2012 edition of this letter reminded firms that they must ensure that any muni bonds sold are suitable for customers. Finra’s 2011 enforcement reflected a growing concern about munis, as the number of cases reported jumped 81% in 2011. The amount of fines reported in 2011 ($3.7 million) more than doubled the $1.5 million imposed in 2010.

8. Electronic communications

Finra Fines: $3.6 million
Details:The total amount of fines stemming from alleged violations concerning electronic communications has now decreased for three consecutive years. After yielding about $4 million in fines in both 2009 and 2010, these cases resulted in only $3.6 million in fines in 2011. Still, the number of cases actually grew from 34 reported in 2010 to 57 in 2011.