FundFire (May 13, 2015) - The Financial Industry Regulatory Authority (FINRA) is adding some teeth to its sanction guidelines, urging tougher consequences for brokerages and reps that commit fraud or make unsuitable recommendations to clients.
FINRA’s National Adjudicatory Council (NAC) has amended the guidelines to advise FINRA adjudicators to strongly consider barring an individual respondent or expelling a firm in cases involving fraud violations, when aggravating factors are involved, the regulator announced yesterday.
In addition, is the new guidelines call for adjudicators to strongly consider barring reps for failures to recommend suitable investments, when a case involves aggravating factors. NAC also notched up the recommended sanction for reps who violate the suitability rule, advising adjudicators to issue suspensions for periods ranging from ten days to two years, compared with a range of ten days to one year previously.
The guidelines apply to enforcement cases brought by FINRA against individuals or firms, but not to arbitration disputes brought by investors, says Robert Herskovits, an attorney and managing member of New York-based Herskovits Attorneys at Law. While the amended guidelines may not be a "game-changer," they could result in some tougher sanctions, he says.
While under the previous guidelines, an industry bar was already a typical result for a fraud case, setting that as the baseline sends a message that the regulator is serious, Herskovits says.
Under the new guidelines, "in a fraud setting, the hearing officer is going to say to himself or herself, ’I ought to be barring this person, absent some mitigating circumstance,’” Herskovits says. "That’s going to be the starting point. It’s going to ratchet up the possible negative outcome for a respondent."
But perhaps the bigger impact could fall on suitability rule violators, he says. "Two years is essentially a bar," Herskovits says. "If somebody’s out of the business for two years, their whole book of business is gone. Their ability to earn a living in this industry is basically crippled."
And since adjudicators can also argue for a bar from the industry, for repeat or aggravated suitability rule violators, respondents may sometimes be forced to accept a one or two year ban to settle charges with FINRA, says R. Craig Zafis an attorney with Zafis Law, in San Diego.
"With respect to the FINRA suitability rule, now the regulators have a bigger hammer," Zafis says. "It will result in settlements in which registered reps and firms will be forced to agree to longer suspensions."
The changes around fraud sanctions are less likely to have a big impact, Zafis says.
"FINRA already has a lot of power with respect to fraud cases," Zafis says. "If you’re a registered rep or a broker-dealer who is found to have committed fraud by FINRA, you’re likely out of the industry, whether they bar you or not. In today’s regulatory climate, nobody will hire you."
FINRA’s NAC first published its sanction guidelines in 1993, aiming to make brokerages familiar with what types of violations typically occur and what range of disciplinary sanctions might result from breaking the rules. While the guidelines aren’t meant as set sanctions for specific violations, they do influence how adjudicators apply sanctions.
NAC is also revising the general principals behind the sanction guidelines, underscoring an intention to protect the public, deter misconduct and uphold high standards of business conduct, and emphasizing a policy of imposing progressively escalating sanctions for rule breakers.
The changed enforcement guidelines won’t likely have much of an impact on arbitration disputes, says Hugh Berkson, an attorney who represents investors in disputes with brokerages, with Cleveland, Ohio-based Hermann Cahn & Schneider.
"I’m absolutely in favor of FINRA’s disciplinary arm trying to go out and weed out the bad brokers," Berkson says. "But I don’t think it will help most of the clients that we help on a day to day basis."
He argues that bad actor brokers aren’t likely to be deterred by marginally stronger enforcement sanctions.
"[Rule-breaking] brokers don’t think about the sanctions," Berkson says. "The bad folks are going to do what the bad folks do."