Study: Top AML/CFT Enforcement Measures by Total Fines

9th March 2018, Bachir El Nakib (CAMS) Senior Consultant

Eversheds Sutherland (US) LLP has completed its annual study of the disciplinary actions reported by the Financial Industry Regulatory Authority (FINRA) in 2017. By reviewing FINRA’s monthly disciplinary reports, press releases, and online database, Eversheds Sutherland (US) Partner Brian L. Rubin and Associate Adam C. Pollet found that in 2017 restitution more than doubled from the prior year, resulting in the fourth highest total sanctions assessed by FINRA over the past 10 years. Eversheds Sutherland has also identified FINRA’s top enforcement issues and emerging trends.

Anti-money laundering infractions cost U.S. brokerage firms the most in enforcement settlements in 2017, a year of overall declines in penalties at the Financial Industry Regulatory Authority, according to a law-firm's analysis. For the first time, email-related cases in 2017 joined the top ranks in an annual report on FINRA actions.

Total sanctions declined to $150 million in 2017 from the record $207 million levied in 2016 by FINRA, the brokerage industry's self-regulatory agency. 

The 2017 enforcement wrap-up by the law firm Eversheds Sutherland LLP showed declines in nearly every category of enforcement in the first full year following the departure of long-serving FINRA enforcement chief Brad Bennett and arrival of new chief executive Robert Cook. 

It also marked the first year of President Donald Trump's administration, which has sought to free banks and brokers from onerous regulation and favored a shift away from the aggressive enforcement against firms and to a stronger focus on Main Street fraudsters. FINRA is regulated by the U.S. Securities and Exchange Commission, whose influence over the self-regulator comes from both direct oversight and coordinated enforcement. 

“We may be seeing ‘kinder and gentler’ regulators,” said Brian Rubin, who heads Eversheds’ Washington office litigation and regulatory practice, in comments to Regulatory Intelligence.

Top Items: Year past and year ahead

The shift is unlikely to be dramatic, said Rubin, a former deputy counsel for enforcement at FINRA and the SEC. Although both securities regulators “have signaled a more cooperative approach in dealing with member firms, they are still trying to root out bad actors in the industry and protect Main Street investors.” FINRA has shown no indication it will relax its pursuit of violations, he added. The 2017 decline came from a record level in 2016. More cases may be seen this year based on a number of factors.

The biggest areas of enforcement in the 2017 Eversheds Report were, in descending order:

  • Anti-money laundering (AML)
  • Trade reporting
  • Electronic communications
  • Books and records
  • Research reports

The Results 

Restitution, Fines, and Disciplinary Actions
In 2017, restitution ordered by FINRA skyrocketed. FINRA reported restitution of approximately $66 million in 2017, an increase of 136% from the $28 million in restitution reported in 2016.1 However, this significant amount of restitution is still below the record of $96 million reported in 2015.

The fines reported by FINRA in 2017 decreased significantly to $73 million from the record-setting fines of $176 million in 2016, a 58% decrease. The 2017 fines were also 22% less than the $94 million in fines reported in 2015. Despite this shortfall, fines have increased by 161% since 2008, when FINRA assessed fines of $28 million.

The number of very large fines also declined in 2017. FINRA assessed 15 fines of $1 million or more (what we call “supersized” fines). In contrast, in 2016, FINRA assessed 34 “supersized” fines. Similarly, in 2017, FINRA assessed two fines of $5 million or more (what we call “yuuuge” fines). In contrast, in 2016, eight cases resulted in “yuuuge” fines.

The decrease in fines is less pronounced when FINRA’s overall monetary sanctions are analyzed. The total sanctions ordered by FINRA in 2017 (i.e., fines, restitution, and disgorgement) were $150 million. The total sanctions ordered in prior years were as follows: $207 million in 2016; $193 million in 2015; and $168 million in 2014. Although the overall sanctions in 2017 were down compared to the recent record-setting years, they were still higher than any of the previous years from 2008 through 2013.

The number of cases reported by FINRA also decreased last year. FINRA reported 1,008 disciplinary actions in 2017, a decrease of about 16% from the 1,201 cases FINRA reported in 2016.2 Still, the number of cases filed by FINRA has grown from 903 in 2008, an increase of 12%.

The number of individuals barred or suspended and firms expelled decreased in 2017 compared to 2016. The number of individuals barred decreased from 517 in 2016 to 214 in 2017, a 59% decrease. The number of firms expelled by FINRA decreased from 24 in 2016 to 6 in 2017, a decrease of 75%. The number of individuals suspended decreased from 727 in 2016 to 413 in 2017, a decrease of about 43%.

“Last year, FINRA’s fines predictably decreased after 2016’s record-setting year, but the amount of restitution ordered increased, demonstrating that FINRA is interested in getting money back into the pockets of investors,” said Mr. Rubin. “FINRA addressed an array of topics in 2017, continuing its focus on anti-money laundering, while also pursuing more ‘nuts and bolts’ issues like trade reporting, record retention, and supervisory policies and procedures.”

The chart below displays FINRA’s fines and the number of disciplinary actions during each of the past 10 years:

The chart below displays the restitution FINRA reported during each of the past 10 years:

Top Enforcement Issues Measured by Total Fines Assessed
Listed below are the top FINRA enforcement issues for 2017 measured by total fines assessed:7

  1. Anti-money laundering (AML) cases resulted in the most fines for FINRA in 2017. This is the second year in a row that AML has been at the top of the Eversheds Sutherland Top Enforcement Issues list and the fourth year in a row that it has appeared on it. FINRA reported 16 AML cases in 2017, which resulted in $14.6 million in fines. While the number of cases decreased by 50% from 32 in 2016, the fines reported also dropped from $45.9 million in 2016, a decrease of 68%. AML maintained the top spot due to the largest single fine in 2017 ($13 million). In that case, the firm allegedly failed to establish and implement adequate AML procedures, resulting in the failure to properly prevent, investigate, and report more than 1,000 alerts of potentially suspicious activity.8 The firm’s automated monitoring system also failed to review millions of accounts and failed to link related accounts for high-risk customers. Mr. Pollet noted that “AML’s presence at the top of this list for the second year in a row confirms that both FINRA and the SEC are concerned with how firms are handling their AML compliance obligations.”
  2. Trade reporting cases resulted in the second most fines for FINRA in 2017, up from its number three spot last year on Eversheds Sutherland’s Top Enforcement Issues list. This is the fifth year in a row that trade reporting has appeared on this list. In 2017, FINRA reported $14.3 million in fines in 112 trade reporting cases. Compared to 2016, fines decreased 41% from $24.4 million, and the number of cases decreased 23% from the 146 cases reported in 2016. In the largest trade reporting case, a firm was fined $3.25 million for failing to report all of its reportable conventional options positions, failing to have written supervisory procedures regarding relevant reviews, and failing to implement appropriate remediation.9
  3. Electronic communications cases resulted in the third largest amount of fines assessed by FINRA. This is the first time that electronic communications cases have been on Eversheds Sutherland’s Top Enforcement Issues list since its first-place finish in 2013. In 2017, FINRA reported $8.3 million in fines for 44 electronic communications cases. Compared to 2016, these figures represent a 39% decrease in fines from $13.6 million and a 36% decrease from the 69 cases reported in 2016. In the largest electronic communications case, a firm was fined $2 million for failing to implement a reasonable supervisory system to review emails.10 The firm’s “lexicon” was not reasonably designed to detect certain potential misconduct that the firm knew or should have anticipated would recur, and the firm failed to devote adequate personnel and resources to its review team, even as the number of emails increased over time.
  4. Books and records cases resulted in the fourth most fines for FINRA in 2017. This is the second year in a row that this issue has appeared on Eversheds Sutherland’s Top Enforcement Issues list. FINRA reported 81 books and records cases in 2017, which resulted in $6.2 million in fines. Compared to 2016, these figures represent a 72% decrease in fines from $22.5 million and an 18% decrease from the 99 cases reported in 2016. The continued presence of books and records cases on this list was driven largely by enforcement actions against three firms primarily for failing to preserve records in a “write once, read many” (WORM) format. FINRA fined these three firms a total of $1.9 million.11 In another case, a firm was fined $1.4 million for failing to maintain accurate books and records related to its accounting for extended settlement transactions.12 
  5. Research analyst and research report cases resulted in the fifth most fines for FINRA in 2017. This is the first time that this issue has been on Eversheds Sutherland’s Top Enforcement Issues list since its first-place finish in 2014. FINRA reported 10 research analyst and research report cases in 2017, which resulted in a total of $6 million in fines. This was a decrease of 57% in fines from $13.8 million in fines reported in 2016 and a decrease of 23% from the 13 cases reported in 2016. In the largest research analyst and research report case, a firm was fined $5.5 million for displaying inaccurate research ratings for more than one-third of its covered equity securities to its brokers, retail customers, and supervisors (e.g., rating a stock a “buy” instead of a “sell”).13 The inaccuracies in the research ratings caused the firm’s brokers to solicit thousands of transactions that were inconsistent with the firm’s actual ratings and negligently make inaccurate statements to customers about those ratings. The firm was also ordered to pay $6 million in restitution to affected customers.

Enforcement Trends

 

  • Restitution – The dramatic increase in restitution was one of the key FINRA enforcement trends in 2017. There were nine “supersized” restitution orders, totaling nearly $55 million, of which three were “yuuuge” restitution orders, totaling $40.4 million. One litigated case was responsible for a large percentage of the total restitution amount of $66 million. A FINRA hearing panel ordered a firm to pay $24.6 million in restitution to customers for fraudulent sales in high-risk oil and gas ventures over a four-year period.14 Other areas with significant restitution orders in 2017 included senior/retiree investors (consistent with FINRA’s past three Priorities Letters, which indicated an increasing focus on senior investors and retirement accounts),15 and mutual funds where firms were sanctioned for selling shares with front- or back-end sales charges to certain customers who were eligible to receive sales charge waivers.16 Mr. Pollet noted that “the increase in restitution may signal that FINRA intends to order more customer remediation rather than assess punitive sanctions against firms.”
  • Suitability – Although suitability failed to land on Eversheds Sutherland’s Top Enforcement Issues list in 2017, FINRA still reported 98 suitability cases, with $3.6 million in fines. The number of cases increased 13% from the 87 cases brought in 2016, although the fines decreased 76% from the $15.3 million in fines reported in 2016. However, FINRA ordered $30.3 million in restitution in the 2017 suitability cases, a dramatic increase from the $5.8 million in restitution ordered in 2016. Last year, the suitability cases with the largest fines dealt with the sale of multi-share class variable annuities, including L-share contracts.17 This was the second year in a row that suitability did not crack Eversheds Sutherland’s Top Enforcement Issues list after previously being a mainstay.
  • Technological Issues – Another trend that emerged in 2017 related to operational breakdowns in technological systems—an area identified in FINRA’s latest Priorities Letter.18 In addition to the case discussed above involving inaccurate research ratings, one firm was fined $700,000 for failing to deliver numerous exchange-traded fund prospectuses over a six-year period in which the firm cleared more than 100 million relevant purchases because of flaws in its system, including the way in which it interfaced with a third-party vendor.19 Another firm was fined $2.8 million for systemic coding and design flaws that resulted in the failure to properly segregate customers’ securities in accordance with the Customer Protection Rule.20 Mr. Rubin said, “Given FINRA’s continued emphasis on cybersecurity and technological compliance issues, firms need to adequately supervise and monitor their systems and controls to prevent unintended collateral consequences that may negatively impact customers or the firm.”

Sources

https://us.eversheds-sutherland.com/NewsCommentary/Press-Releases/209060/Annual-Eversheds-Sutherland-Analysis-of-FINRA-Cases-Shows-Restitution-on-the-Rise-in-2017

1 The 2017 data comes from FINRA’s monthly disciplinary reports, its Disciplinary Actions Online database, press releases, and other major news sources.

2 The number of disciplinary actions has been identified by searching FINRA’s Disciplinary Actions Online database because FINRA has not yet published its annual report or updated its “Statistics” webpage.

3 The 2009-2016 data can be found in FINRA’s annual reports and FINRA’s “Statistics” webpage. See, e.g., FINRA 2015 Year in Review and Annual Financial Report, FINRA, available athttp://www.finra.org/sites/default/files/2015_YIR_AFR.pdf, and Statistics, FINRA, https://www.finra.org/newsroom/statistics.

The figure identified in the left column is the number of disciplinary actions reported in FINRA’s annual reports or “Statistics” webpage (see supra note 3), while the figure in the right column is the number of actions listed on FINRA’s Disciplinary Actions Online database. FINRA has not yet released its official data for 2017.

The percentage change is calculated using the number of actions listed on FINRA’s Disciplinary Actions Online database.

6 See supra note 3.

7 Because cases may involve more than one alleged violation (e.g., trade reporting and books and records), a case may be included in more than one category in this analysis.

8 FINRA Letter of Acceptance, Waiver and Consent (AWC) No. 2012035224301 (Dec. 21, 2017).

AWC No. 2014040326101 (June 21, 2017).

10 AWC No. 2013036343601 (Dec. 21, 2017).

11 See AWC No. 2016051512501 (Oct. 2, 2017); AWC No. 2016051821601 (July 11, 2017); AWC No. 2016052098301 (July 11, 2107).

12 AWC No. 2014041808101 (Dec. 19, 2017).

13 AWC No. 2016048931101 (Dec. 28, 2017).

14 FINRA Disciplinary Proceeding, No. 2013035344201 (Feb. 9, 2017).

15 See, e.g., id.; see also FINRA 2017 Examination Priorities Letter (Jan. 2017), available athttp://www.finra.org/sites/default/files/ 2017-regulatory-and-examination-priorities-letter.pdf; FINRA 2016 Examination Priorities Letter (Jan. 2016), available at http://www.finra.org/sites /default/ files/2016-regulatory-and-examination-priorities-letter.pdf; FINRA 2015 Examination Priorities Letter (Jan. 2015), available athttp://www.finra.org/sites/default/files/p602239.pdf.

16 See, e.g., AWC No. 2016050259801 (Apr. 4, 2017).

17 See, e.g., AWC No. 2015043159201 (May 1, 2017); AWC No. 2015043387001 (Nov. 14, 2017); AWC No. 2015043319901 (Dec. 6, 2017).

18 See 2018 Regulatory and Examination Priorities Letter (Jan. 8, 2018), http://www.finra.org/industry/2018-regulatory-and-examination-priorities-letter. 

19 AWC No. 2014042582101 (Dec. 1, 2017).

20 AWC No. 2015047091401 (Dec. 27, 2017)

 

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