WASHINGTON – The Financial Industry Regulatory Authority’s sanction guidelines now include sections for vulnerable customers and long-term supervisory failures as well as new considerations for a firm’s mitigating actions and suggestions for churning punishments.
The changes are the result of a recent FINRA review of its sanction guidelines. The self-regulator periodically reviews the guidelines to ensure they are relevant, up-to-date, and in line with FINRA rule changes and disciplinary outcomes.
The guidance does not fix sanctions for certain activities but instead offers a range of sanctions that FINRA thinks is appropriate for different violations. Those sanctions can include both financial and non-financial penalties, like suspensions.
“The central idea contained in the sanctions guidelines is that adjudicators start with a range of appropriate sanctions for a particular violation and consider aggravating and mitigating factors in order to arrive at an appropriate sanction for the particular circumstances,” FINRA said in a release announcing the updates. Dealers have complained in the past that the method contributes to too much uncertainty about how fines are going to be assessed.
The process now includes more considerations such as whether firms and individuals have faced sanctions from other regulators or whether individuals have been the subject of firm-level action because of a violation. The guidelines instruct that weight should be given to sanctions that result from nearly identical underlying actions and to individuals who received sanctions similar to what FINRA would have also given out. However, the self-regulator added that those deciding on sanctions may choose to disregard prior sanctions for similar conduct if the violations are severe.
The new consideration of vulnerable customers FINRA is now including is one of 19 principles that could help determine a sanction and asks those deciding on a sanction to assess whether the respondent in the action exercised undue influence over the customer.
“This new consideration reaffirms that financial exploitation of senior and other vulnerable customers should result in strong sanctions,” FINRA said. “While FINRA’s decisions have acknowledged that exercising undue influence is an aggravating circumstance on a case-by-case basis, the new principal consideration makes clear that the sanctions guidelines contemplate coverage for vulnerable individuals or individuals with diminished capacity, which may include senior investors.”
The new systematic supervisory failures portion of the sanctions guidance applies to instances where a supervisory failure “is significant and is widespread or occurs over an extended period of time,” according to FINRA. Under the guidelines, an individual found responsible for systematic failures could face a fine of between $10,000 and $73,000 as well as a 10-day to two-year suspension depending on the severity of the violation. Firms could face a fine of between $10,000 and $292,000 and between a ten-day suspension and an expulsion, depending on the severity.
There are eight principles FINRA’s guidance lays out for consideration, including: whether failures allowed violative behavior to happen; the number and dollar value of the transactions not adequately supervised; the extent to which the deficiencies affected market integrity; and the quality of controls or procedures available to the violators.
The strengthening of sanctions for individuals found to be involved with churning and unauthorized transactions were part of a series of monetary and non-monetary penalty hikes that FINRA undertook with the changes. Individuals found to have engaged in churning would now face a low-end suspension of one month and a high-end suspension of two years. That is a change from the 10 business days to one year they would have faced under past guidance. If the violations were more egregious, the individuals could face a bar.
