Each month, FINRA releases a Disciplinary Action report documenting any enforcement actions brought against its roughly 612,000 registered representatives throughout the year. Compared to FY 2021:
- Enforcement cases decreased by 15%
- fines assessed decreased by 60.5%
- fines collected decreased by more than 50%
Although enforcement cases and fines appear to be trending downward, don’t be fooled. From 2020 to 2021, the number of fines, customer complaints, and restitution nearly doubled from the previous year. 2022’s numbers don’t necessarily mean that FINRA Enforcement efforts are declining. There was still a significant number of enforcement actions brought against brokers and broker-dealers as well as a substantial amount of fines collected.
Though it has yet to publish its 2022 statistics, FINRA’s actions and fines against reps and firms will likely be higher than those in 2020. Over the past year, there was an alarming number of enforcement actions related to Regulation Best Interest (Reg BI) and Books and Records, among others.
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So far, here are the top-five violations related to customer arbitrations:
- breach of fiduciary duty
- failure to supervise
- breach of contract
Trends & Predictions For 2023
In effect since June 2022, this rule permits FINRA to penalize BDs that it determines to be high-risk. Through metrics focusing on negative BrokerCheck disclosures, such as customer complaints, terminations, and brokers who were previously employed at expelled firms, FINRA will decide whether to place a “restricted” label on the firm, effectively giving firms two options: (1) terminate brokers with disclosures; or (2) give FINRA a ton of money.
Firms have now received their preliminary criteria reports which essentially provide an outline of how to remove the restriction label, as well as a deadline for completion. Learn more about Rule 4111 here. Over the course of the next year, firms will be forced to fulfill these requests, which we predict could send a wave of mass layoffs throughout the industry.
Restrictions To FINRA’s Expungement Process
In a discussion paper released in May of 2022, FINRA proposed a host of new limitations to its expungement procedure. Read a summary of the proposal here. For advisors, the harshest and most formidable of the measures proposed in the discussion paper are:
- the six-year exemption
- involvement of state regulators in the expungement process
- the inability to strike arbitrators
- three-person panels selected at random
- the inability to withdraw an expungement case once proceedings start
- the requirement to act no later than three years after a consumer complaint is filed or two years after an arbitration or civil lawsuit has concluded
This proposal will likely be passed by the spring of 2023 and will completely strip some reps of their ability to remove disclosures from their public record, regardless of their validity. Even though only four percent of disclosures were removed from BrokerCheck and the CRD from 2015 to 2020, FINRA is determined to bring that number down to zero.
Outside Business Activities
OBAs are always a common target of FINRA Enforcement actions, and it will be no different going into the new year. According to FINRA, firms lack “sufficient controls to confirm adherence to restrictions put on OBAs or PSTs, such as the prohibition on registered representatives soliciting firm clients to engage in an OBA or PST.” As a result, FINRA is emphasizing whether businesses are appropriately reviewing, recording, and teaching brokers regarding their “responsibilities to the business and the business’s consumers” and whether such obligations are interfered with or compromised in any other way.
Protecting Yourself In 2023
These Enforcement results serve as a warning to registered investment advisors and reps that FINRA is paying close attention to their activities. It’s important for advisors and firms to ensure that their business practices are in compliance with all applicable regulations — or face harsh penalties.
Don’t let Enforcement catch you unprepared. As a financial advisor, staying up to date with the latest enforcement results and regulations is essential for running an efficient business. The best way to stay compliant with all applicable regulations is to have a trusted partner who understands how the system works and can provide advice when needed. That’s where AdvisorLaw comes into play.
Our team has years of experience helping advisors navigate the complexities of regulatory systems like FINRA. AdvisorLaw’s team of enforcement defense attorneys and legal transition experts can help you protect your livelihood and cover your bases. When it comes to staying on top of enforcement and keeping in compliance with regulations, financial advisors should never go it alone — having an experienced partner like AdvisorLaw can make all the difference in protecting your reputation and career.
Our team is dedicated to helping advisors understand their obligations under FINRA’s rules and regulations so that they may continue providing quality services without fear of violating any rules or laws — which could lead to severe penalties down the line! If you ever run into trouble with FINRA, AdvisorLaw can help get you back on track, quickly and efficiently.