Disciplinary actions out of the Financial Industry Regulatory Authority fell for the third straight year in 2022, while the total number of fines and amount of restitution drastically dipped largely due to a record-breaking levy the year before, according to the law firm Eversheds Sutherland.
The annual analysis of FINRA’s disciplinary actions was released Wednesday by partners Brian Rubin and Adam C. Pollet, who also noted that the regulator’s first Reg BI–related case last year would be one “of many Reg BI cases we will see in months and years.”
To determine their findings, Rubin and Pollet studied the regulator’s monthly disciplinary reports, as well as its online database for disciplinary actions and press from throughout 2022.
Last year, the total amount of FINRA-reported fines fell to $45 million from $103 million in 2021. But the latter number was mainly due to a mammoth $57 million fine against the online brokerage app Robinhood. FINRA fined Robinhood for misleading millions of customers dating back to 2016 and including lapses in a March 2020 outage.
The company was ordered to return $12.6 million to harmed investors; to date, it’s the largest fine FINRA has ever imposed. But discounting the Robinhood penalty, there would have been only a 2% decrease in total fines between 2021 and 2022, from $46 million to $45 million.
Notably, the amount of restitution year over year also dipped from $47 million to about $21 million, a 55% drop, according to Rubin and Pollet. The partners said this was largely because the number of “supersized” restitution orders (totaling $1 million or more) fell from 10 in 2021 to three in 2022, with total sanctions ordered falling to $72 million from $150 million.
Though the number of cases reported by FINRA dropped by 13% year over year (from 534 to 463) and 17% from 2020 (560 cases), the number of fines totaling $1 million or more slightly increased, from eight in 2021 to 11 last year, with two 2022 fines exceeding $5 million, compared with one in 2021 (the Robinhood fine).
The partners noted FINRA brought its first Reg BI–related action in 2022, settling charges last October against a former registered rep at Network 1 Financial Securities that he’d made transactions that were “excessive” in light of the client’s risk profile and not in their best interest (the rep was fined $5,000 and suspended for six months). Pollet saw it as the first volley in an area that would consume registrants even more in the coming years.
“We wouldn’t be surprised if Reg BI cases are soon ranked in the Eversheds Sutherland Top Enforcement Issues list,” he said.
Rubin and Pollet also counted 14 cases from last year having to do with off-channel communications—those on personal devices and email accounts, including the use of WhatsApp, Signal, WeChat and messaging services. Fines exceeded $2 million in total (with a single disciplinary action leading to a $1.5 million fine).
Rubin expected the number of those types of cases will “ramp up,” though he doubted the total amount of fines would reach that of the Securities and Exchange Commission, which levied $1.1 billion against 16 Wall Street firms for similar lapses (including a whopping $125 million against J.P. Morgan alone).
“The next issue the securities regulators may be addressing is how firms surveil these messages when they retain them,” Rubin said.
