WASHINGTON - The Financial Industry Regulatory Authority's appellate tribunal has revised its sanction guidelines, proposing significant increases in the highest level of fines for disciplinary actions and tougher sanctions for cases involving fraud and recommendations of unsuitable investments.
The revisions were made by FINRA's National Adjudicatory Council (NAC), the 14-member committee of industry and non-industry members that hears appeals of disciplinary actions.
The sanction guidelines are used, not only by FINRA adjudicators in hearing panels and the NAC, but also by officials in FINRA's enforcement and market regulation departments who determine sanctions when litigating and settling cases. FINRA enforces Municipal Securities Rulemaking Board rules and shares the monetary penalties it collects from muni disciplinary actions with the MSRB.
The sanctions are not fixed for particular violations, but are used as guidance. Adjudicators, market regulation and enforcement officials consider a range of appropriate sanctions for particular violations and then take into account aggravating or mitigating factors in determining which to apply to firms and individuals.
Under the revisions, the highest of a range of monetary sanctions for a particular violation would be indexed to the Consumer Price Index, and therefore significantly raised by about 46% to reflect the increase in CPI from June 1998 until now. The lower sanctions are to remain unchanged.
So for example, if there were monetary sanctions ranging from $10,000 to $100,000 for a particular violation, the higher sanction would now be $146,000. The lower sanction would remain $10,000.
The NAC chose 1998 as a starting point because that was the last time FINRA fines were generally raised. Going forward, the NAC said it will apply the CPI index to monetary sanctions every three years, rounding the amounts in increments of $1,000.
The NAC said it is toughening the sanctions for "fraud, misrepresentations, or material omissions of fact" to "reinforce the tenet that fraudulent conduct is unacceptable and warrants the imposition of strong sanctions."
The revised sanction guidance urges adjudicators and other FINRA officials to "strongly consider" barring individuals, and expelling firms, from the industry for intentional or reckless fraud. Individuals may be barred "unless mitigating factors predominate" and firms may be expelled "'where aggravating factors predominate the firm's misconduct," the NAC said.
Earlier guidance had proposed these sanctions merely be "considered" in egregious causes. The revised guidelines also advise that individuals be suspended for 31 calendar days to two years for negligent misrepresentations or material omissions of fact.
The NAC said it toughened the recommended sanctions for violations of its suitability rule, FINRA Rule 2111, "to ensure that the sanctions imposed for unsuitable recommendations to customers are meaningful and have significant deterrent effect."
Under the revisions, the NAC recommends adjudicators and FINRA market regulation and enforcement officials "strongly consider" suspending individuals for up to two years, rather than one year, for making unsuitable recommendations to customers.
The NAC urges them to consider suspending a firm involved with unsuitable recommendations for up to 90 days from a limited set of activities. In egregious cases involving unsuitable recommendations, they should "strongly consider" suspending a firm for any and all activities for longer than 90 days, or even ordering the firm's expulsion, the NAC said.
In revising the general principles applicable to all sanction determinations, the NAC emphasized that FINRA's disciplinary actions "are designed to protect the investing public, deter misconduct, and uphold high standards of business conduct by the individuals and firms that participate in the securities industry."
The principles reiterate FINRA's long-standing position that sanctions in disciplinary cases should be more severe for recidivists.
The NAC said it revised the sanction guidelines after reviewing them to determine if they were sufficient to achieve deterrence and reflect trends in litigated and settled cases of disciplinary actions.
