Inside the Litigation Lion

Reading The FINRA Enforcement Tea Leaves

What the 2013 FINRA enforcement results lead one to conclude

For several years the FINRA enforcement arm grew bigger and bigger.  Its staff increased.  The number of actions increased.  The number of fines increased.  The number of bars and suspensions increased.  And the number of litigations/arbitrations was on the rise. 

Last year, however, appears to have finally fared better for the brokers.  Here are the numbers.

In 2013, the number of actions commenced was relatively stable compared to 2012.  Specifically, FINRA commenced 1,535 disciplinary actions in 2013, a small decrease from 1,541 initiated in 2012.  While FINRA reports that 2013 was the first year the number of disciplinary actions went down since 2008, the number was relatively constant between the two years.  As for results, those numbers are in as well. 

In 2013, the total number of fines imposed against registered reps and other licensed individuals and/or firms dropped by 27% from 2012.  The drop is sizable as the fines in 2012 were $78 million and the fines in 2013 were $57 million, a decrease of $21 million.  Similarly, the number of firms expelled by FINRA went down from 30 to 24 in 2013, a decrease of 20%.  The fines in suitability cases, a favorite of FINRA enforcement, went down significantly from $19.4 million in 2012 to $5.1 million in 2013.  Further, the restitution numbers, a dollar amount that the broker or brokerage firms have to pay to customers, either voluntarily through settlement or involuntarily through an enforcement award, decreased.  According to FINRA, firms and registered representatives paid $24 million in restitution in 2013, compared to the nearly $34 million that FINRA ordered be paid in 2012. 

From those statistics, one would conclude that the brokers/firms are doing better fending off FINRA actions.  However, the bars and suspensions are up.  That is, the number of registered representatives suspended increased approximately 22% from 549 in 2012 to 670 in 2013.  And the number of individuals barred shot up from 294 to 429 in 2013; an increase of close to 50%. 

What does all of this mean?  Are brokers winning more?  Is it the environment?  Some have argued that the fines have fallen because the number of cases that revolve around the 2007 financial crises have fallen off.  Others have argued that FINRA is bringing cases that do not require hard fines.  Is there a possible third reason?

I believe there is.  Brokers and their firms have sat back too long.  Realizing that a “ding” on a license now stays with a broker for the duration of his career, brokers and firms are fighting back.  The days of merely consenting to what FINRA desires are over.  No longer is the industry just laying down when big bad FINRA knocks on the door. 

I have conducted my own informal survey and have concluded that brokers and firms are “lawyering up.”  They are ready, willing and able to aggressively defend against FINRA enforcement actions.  Gone are the days where the broker says, “an OTR?  Ok.  I will go it alone.”  And attorneys are equally recommending that their client not simply give in.  That is, many firms are finding ways to negotiate a fair fee for their clients to enable that client to fight. 

I further believe that the same is true with enforcement actions commenced by the SEC.  While those numbers are always high, because of the effect that those claims have on the livelihood of the broker/firm, those defendants are also “lawyering up.”

Knowing that the industry is much more willing to battle against FINRA allegations, FINRA, when it has a questionable case, in turn, is willing to settle with brokers on far more favorable terms than in the past.  Yes, of course, there are “guidelines.”  And yes, of course, each matter is fact sensitive.  That is, FINRA’s desire to settle and, equally, the registered representative/brokerage firm’s willingness to fight, are all a function of the actual allegations, their strength and their proof.  That fact explains why bars and suspensions are up.  Where a broker’s case is indefensible or where the acts are so egregious, those brokers know that fighting will be a colossal waste of time and money.  But, certainly, one of the reasons that certain numbers are down is due to the industry’s strong response to FINRA’s aggressiveness. 

While I am unable to obtain concrete data on which cases are defended, in which matters attorneys are employed and in which matters brokers go it alone, my tea reading leads me to conclude that the broker/firm is fighting FINRA now more than ever. 

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What's Inside the Litigation Lion?

An inside view of trends in SEC/FINRA regulatory and compliance issues and how it affects individual financial advisors and their firms.

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Richard Roth

Richard Roth is the founder and president of The Roth Law Firm, PLLC, a boutique litigation firm that concentrates in litigating securities arbitrations and SEC/FINRA enforcement actions. He...
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