FINRA brought its first Regulation Best Interest-related enforcement action in 2022, but it’s already among the top five issues for the brokerage regulator, according to a new study from Eversheds Sutherland.
Reg BI-related cases brought in the fourth-highest amount of fines in 2023, according to the law firm’s annual assessment of FINRA data. FINRA reported 15 Reg BI cases in 2023, totaling $6 million in fines (including one $5.5 million penalty against LPL Financial).
There’s no sign the pace of Reg BI-related cases will decrease, according to Brian Rubin, a partner with Eversheds Sutherland, who co-authored the analysis.
“Indeed, because FINRA is the primary regulator for broker/dealers, we expect that as FINRA expands its Reg BI examinations and investigations, we will see a corresponding decrease in the role played by the SEC,” he said.
Adam Pollet, a partner with the firm and co-author of the report, told WealthManagement.com that FINRA acts as the day-to-day regulator for b/ds, with more routine and risk-based examinations in that space compared with the SEC. As such, it would make sense that over time, Reg BI would show up more in FINRA actions and less at the SEC, he surmised.
The issue raising the most fines for FINRA in 2023 was spoofing, mainly due to one mammoth $24 million fine against Bank of America. In that case, investigators learned two former traders engaged in 717 instances of spoofing U.S. Treasury secondary markets between October 2014 and February 2021. There was only one other spoofing case last year, but the combined total marked the first time spoofing appeared in Eversheds Sutherland’s top five.
Cases related to trade reporting held the second spot; FINRA reported 14 such cases last year, with a total of $20 million in fines. Anti-money laundering and Bank Secrecy Act violations came in third, with 13 related cases last year and a total of $8 million (due mainly to one $6 million penalty against Merrill Lynch). These cases held the top spot for six years on Eversheds Sutherland’s annual list before dropping off the list entirely last year.
Reg BI-related cases held the fourth spot, while suitability cases rounded out the top five, with $5 million in fines (though there were 33 suitability cases last year, more than any other issue in the top five list).
FINRA fines and penalties jumped 63% to $89 million in 2023 from $54.5 million in 2022. However, the $24 million Bank of America fine distorts this jump; according to Rubin and Pollet, if that fine were removed, the increase would be 19%, not 63%.
Large fines also increased, with 14 fines of $1 million or more in 2023, compared to 11 in 2022. There were four fines of more than $5 million last year, two more than the prior year.
However, Rubin and Pollet found that FINRA-ordered restitution dropped 66% from 2022 (from $21 million to $7 million). This paralleled the drop in large restitution orders; in 2023, only one firm had to pay $1 million, while in the prior year, three firms were required to pay restitution totaling $17 million (in 2021, ten firms needed to pay a total of $42 million).
Although the amount of fines increased, Rubin and Pollet found that the number of disciplinary actions and restitution orders continued its multi-year decline. FINRA reported 453 disciplinary actions in 2023, a 9% drop from 496 in 2022 and a 13% drop from 2021, when FINRA reported 569 actions. FINRA cases have steadily declined since 2015, in which FINRA reported 1,344 actions.
Pollet believed these gradual dips since 2015 were in large part due to Robert Cook’s tenure as FINRA’s CEO. He expected that the number of actions would level off at its current range.
“It does match up with his leadership of FINRA, and hearing some of the concerns of the industry and responding to them,” Pollet said. “You’re seeing that play out in enforcement.”
