FINRA's fines against brokerages are on pace to fall this year, after doubling in 2009, though the Wall Street cops say the decline reflects the nature of its cases and not any slowdown in policing efforts.
When the Financial Industry Regulatory Authority announced a $1.4 million fine against SunTrust Investment Services last week, total fines this year reached $21.1 million. At that pace, levies would reach $30 million for 2010.
By comparison, fines last year surged to $50 million from $28 million during the crash year of 2008, according to law firm Sutherland Asbill & Brennan, which tracks FINRA enforcement activity for its securities industry clients. Fines are down significantly from 2005, when FINRA collected $184 million.
FINRA acting enforcement chief James Shorris told Reuters the volume of fines imposed is not a true reflection of FINRA enforcement activity. Rather, investors should look at the numbers of cases brought each year, the types of misconduct under scrutiny and the size of the brokerages involved.
"This industry and the problems we see come in ebbs and flows and they change over time," Shorris said. "That's not to say we aren't very busy going after wrongful conduct. We go after it wherever it is, but not all those cases are going to generate huge fines."
Shorris said a better measuring stick is the number of cases FINRA files and how successful it is squeezing out bad conduct.
Disciplinary actions filed rose last year to 1,158 from 1,073 in 2008. By comparison, FINRA data shows it filed 1,399 actions in 2005.
The number of formal actions resolved by FINRA rose by 83 to 1,090 last year. Completed actions during the past two years were both down slightly from 2007 and significantly below the 1,344 actions brought in 2005, according to FINRA.
To some degree, the level of fines also is driven by the wherewithal of the brokerages involved.
FINRA generally does not seek large fines from small firms, which likely cannot afford the penalty and would simply fold, Shorris said. The scope of a fine, he said, is shaped by the view that it is better victims receive restitution than for FINRA to collect a fine.
Federal and state regulators generated bigger fines earlier in this decade when they attacked analyst research conflicts and mutual fund trading violations among Wall Street's biggest names.
"Those were the big firms, and they were dealing with conduct that was enormous in terms of the number of affected customers and the potential dollars involved. As a result there were very large fines levied," Shorris told Reuters.
The regulatory body ordered restitution of $8.2 million to investors last year.
FINRA says its actions related to auction rate securities — involving a range of different firms — in recent years has resulted in more than $1 billion returned to customers.
Brian Rubin, a Washington-based Sutherland lawyer who coauthored a recent report on FINRA enforcement activity, concurred that fines reflect the types of cases. The timing of fines is a function of the natural pace of investigations.
"Generally it takes a year or more to wrap up investigations," Rubin said. "So this year and this next year, we'll probably see actions related to the market meltdown." Sutherland's review of FINRA activity revealed some enforcement trends, he said.
Last year mutual fund cases, with an emphasis on suitability complaints, generated the most fines. FINRA also cracked down on unsuitable sales of hedge funds, structured debt products and other investments, as well as unsuitable sales of variable annuities.
Other active areas included broker licensing violations and misleading advertising for auction rate securities sales. Rubin says it appears FINRA is imposing the same risk disclosure requirements for internal-use marketing as for public materials.
Shorris says FINRA is aggressively pursuing fraud involving private placements, as well as an increase in Ponzi schemes by scammers promising high-yield investments.
In the coming year, Rubin said Sutherland expects to see more advertising cases that seize on misleading internal communication, a departure from the usual focus on public marketing material. Also, he sees a closer examination of firms that do not follow up on email retention glitches.
Another hot spot: the sale of inappropriate and complex investments such as reverse convertible notes, to retirees and the elderly.
"FINRA is digging a lot harder than it used to," he said.
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