The Financial Industry Regulatory Authority (FINRA) has undergone some pretty significant changes to its leadership team in recent months, portending new enforcement priorities and new initiatives for the group in 2017.
FINRA’s Board of Governors last year appointed Robert Cook as president and chief executive officer, and John Brennan as chairman, following the retirement of Richard Ketchum, who served as chairman and CEO since 2009. Then, in February 2017, Bradley Bennett stepped down after six years as FINRA’s chief of enforcement to return to private practice. Until FINRA appoints a new enforcement chief, Bennett’s position is being filled by Deputy Head of Enforcement Susan Schroeder.
What changes will result from a new chief of enforcement remains to be seen. In recent remarks, however, Cook himself has been very vocal about the importance of transparency, “so I think whoever FINRA hires to permanently replace Brad Bennett will likely be someone who will toe the line on transparency and process, as opposed to rulemaking by enforcement, for example,” says Amy Greer, a partner at law firm Morgan Lewis.
The changes of FINRA’s leadership follow another busy enforcement year for FINRA, which reported a record high of $176 million in fines in 2016—nearly double the $94 million it reported in 2015. The spike in fines, in part, is mainly attributed to the significant rise in the size and number of “supersized” fines of $1 million or greater, according to a recent analysis of FINRA cases by law firm Eversheds Sutherland.
In 2016, FINRA issued 34 “supersized” fines, totaling more than $137 million—nearly double the 18 supersized fines assessed in 2015, totaling $52.2 million. Moreover, eight cases in 2016 resulted in supersized fines of $5 million or greater, totaling nearly $89 million, according to Eversheds Sutherland’s analysis.
“Last year FINRA continued its trend of ordering significant fines, shattering its previous record set in 2014,” says Brian Rubin, a partner at Eversheds Sutherland, who co-authored the report. “If firms and their representatives weren’t paying attention to this trend, they should be now.”
“Although some have speculated a reduction in the Securities and Exchange Commission’s Enforcement program with the new administration, FINRA shows no signs of slowing down,” Rubin adds.
Metlife Securities, for example, in May 2016 agreed to pay a record $20 million fine and $5 million in restitution for making negligent material misrepresentations and omissions on variable annuity (VA) replacement applications for tens of thousands of customers. Each misrepresentation and omission made the replacement appear more beneficial to the customer, even though the recommended VAs were typically more expensive than customers’ existing VAs. In settling the matter, MSI neither admitted nor denied the charges, but consented to the entry of FINRA’s findings.
In comparison to fine amounts, the number of cases reported by FINRA in 2016 fell slightly. Last year, FINRA filed 1,434 new disciplinary actions, compared to 1,512 initiated in 2015. Additionally, formal actions declined from 1,252 in 2015 to 1,093 last year.
FINRA also referred slightly fewer fraud and insider-trading cases to the SEC and other agencies for investigation or prosecution in 2016—785 compared to the 800 such referrals made by FINRA in 2015, according to a recent analysis of FINRA cases by law firm Morgan Lewis.
The number of individuals barred increased for the fourth year in a row—from 492 in 2015 to 517 in 2016, while the number of individual suspensions decreased for the first time since 2012, from 736 in 2015 to 727 in 2016. The number of firms suspended stayed about steady, from 25 to 26, whereas the number of expelled firms fell from 31 in 2015 to 24 in 2016.
Examination priorities. In addition to paying attention to enforcement numbers, compliance professionals in the financial services industry will also want to take a look at FINRA’s annual Regulatory and Examination and Priorities Letter, published in January. “Firms have told us they find the annual Priorities Letter useful in reviewing their compliance and supervisory programs and framing issues to address in their internal training and communications,” Cook said in the cover letter.
“A common thread running throughout the Priorities Letter is a focus on core blocking and tackling issues of compliance, supervision, and risk management,” Cook said. “Most of the topics addressed in this year’s letter have been highlighted in prior years, but specific areas of emphasis have been updated or modified based on recent observations and experience.” As in previous years, FINRA will focus on sales practices, financial risks, operational risks, and market integrity.
“Although some have speculated a reduction in the Securities and Exchange Commission’s Enforcement program with the new administration, FINRA shows no signs of slowing down.”
Brian Rubin, Partner, Eversheds Sutherland
New in this year’s priorities letter is an enhanced focus on firms’ hiring and monitoring of high-risk and recidivist brokers, including whether firms establish appropriate supervisory and compliance controls for such persons.
Specifically, FINRA said it intends to strengthen its approach to high-risk and recidivist brokers in three areas:
A newly established, dedicated examination unit will identify and examine brokers who may pose a high risk to investors;
Firms’ supervisory procedures will be reviewed for hiring or retaining statutorily disqualified and recidivist brokers; and
Firms’ branch-office inspection programs will continue to be evaluated, as well as their supervisory systems for branch and non-branch office locations, including independent contractor branches.
Another one of FINRA’s priorities this year focuses on cyber-security, specifically firms that fail to fulfill their obligations under the Securities Exchange Act (SEA) Rule 17a-4(f) which requires firms to preserve certain records in a non-rewriteable, non-erasable format, commonly known as “write once read many” (WORM) format. In fact, FINRA in December 2016 announced enforcement actions against 12 firms for a total of $14.4 million—including Wells Fargo, RBC Capital Markets, RBS Securities, LPL Financial, and more—for failure to preserve broker-dealer and customer records in WORM format. “We believe there are more on the way,” Greer of Morgan Lewis says.
Compliance officer liability. FINRA’s continued focus on firms’ anti-money laundering programs is especially top-of-mind for compliance professionals right now, particularly since a number of AML enforcement actions were brought against compliance professionals and their firms in 2016 for oversight failures resulting in AML violations, “so that’s an area of focus that all firms should be looking at,” Rubin says.
According to Eversheds Sutherland’s analysis, 27 FINRA cases involved some type of sanction against a firm’s compliance officer. Some of these compliance officers, however, wore multiple hats, such as serving as firm president or chief executive officer.
For example, FINRA fined Raymond James & Associates (RJA) and Raymond James Financial Services (RJFS) a total of $17 million for failing to establish and implement adequate AML procedures. RJA’s former AML compliance officer, Linda Busby, was also fined $25,000 and suspended for three months
“RJA and RJFS’ significant growth between 2006 and 2014 was not matched by commensurate growth in their AML compliance systems and processes,” FINRA stated. During its investigation, FINRA found that the firms failed to conduct required due diligence and periodic risk reviews for foreign financial institutions and that Busby failed to ensure that RJA conducted its reviews.
As a result, the firms failed to properly detect, investigate, and report suspicious activity for several years. These failures were made even more egregious by the fact that RJFS was previously sanctioned for inadequate AML procedures and, as part of that settlement, had agreed to review its program and procedures and certify that they were reasonably designed to achieve compliance, FINRA stated.
In remarks at last year’s SIFMA Anti-Money Laundering and Financial Crimes Conference, Bradley Bennett, FINRA’s then-chief of enforcement, sought to reassure compliance professionals that the decision to suspend Busby was an exception, not the norm. “We’re looking for reasons not to name the compliance officers,” he said. “It’s not something we do lightly; it’s something we wish we never did at all.”
The good news is that firms now have some guidance. In January, FINRA published a video discussing what the staff looks for when assessing a firm’s money-laundering risk. “Our surveillance team is actively assessing each firm’s ability to mitigate money-laundering risk through quantitative and qualitative measures,” Susan Axelrod, executive vice president of regulatory operations, said in remarks at this year’s SIFMA Anti-Money Laundering and Financial Crimes Conference.
“We consider these assessments when determining the strategy for a firm’s examination and, if a review of a firm’s AML efforts is warranted, we have developed specific examination content to guide the examiners in their reviews,” Axelrod said.
New initiatives. In addition to its usual priorities, FINRA plans on starting two new initiatives this year. One will be to provide a summary report that outlines key findings from examinations in selected areas to inform firms of deficiencies FINRA has observed, including in its areas of priority and give firms that have not yet been examined the opportunity to fix any similar deficiencies.
The second initiative is to identify additional compliance tools and resources FINRA can provide small firms to assist them in complying with applicable regulatory requirements. One new resource, for example, will be the roll out this year of a new “compliance calendar” and a directory of compliance service providers.
“While these tools and resources are being designed with small firms in mind, all firms regardless of size and business model will be able to use them,” Cook said in remarks at the SIFMA Compliance and Legal Society’s annual seminar.
Both initiatives are based on member-firm feedback from Cook’s self-described “listening tour,” in which he has been meeting with member firms, investor groups, regulators, and trade associations to hear about “what FINRA is doing well and what we could be doing better,” he said.
This listening tour will have no definitive end date, Cook added. “I see it as something I need to continue doing on an ongoing basis,” he said. “Thoughtful listening should be part of the DNA of our organization.”
FINRA and SEC coordination. In other recent developments, the SEC’s Office of Compliance Inspections and Examinations (OCIE) has taken steps to enhance its oversight of FINRA by establishing a dedicated FINRA inspection team, called the FINRA and Securities Industry Oversight (FISIO) unit.
The FISIO will be focused on “assessing FINRA’s operations in terms of its core mission of regulating its member broker-dealers,” Marc Wyatt, OCIE director, said in remarks at the National Society of Compliance Professionals National Conference. The impetus to create the unit is “because we will be somewhat more dependent on them for broker-dealer exams,” Wyatt said.
The inspection team will oversee FINRA in two ways: programmatic examinations and oversight examinations. The former will focus on providing guidance and recommend improvements to FINRA’s programs and operations, while the latter will involve FSIO sampling, examining, and providing feedback to FINRA on specific examinations of member firms.
Wyatt further emphasized that the plan is to work collaboratively with FINRA. “As always, we will continue to coordinate with them on examination initiatives in order to minimize duplicative efforts as well as leverage their regulatory reach into the broker-dealer industry,” he said.
As a result, however, an empowered FINRA may seek to increase the assertiveness of its examination and enforcement programs, Greer of Morgan Lewis says. “The idea that there is going to be increased scrutiny on FINRA examiners suggests that our clients can also anticipate, in turn, additional scrutiny.”
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