Finra may boost enforcement actions in 2009

Finra may have given broker-dealers and registered representatives a reprieve of sorts last year as the amount in fines and enforcement actions it levied against firms plummeted.

Finra may have given broker-dealers and registered representatives a reprieve of sorts last year as the amount in fines and enforcement actions it levied against firms plummeted. But on the heels of the historic collapse of Wall Street and the stock market, that doesn’t mean firms and advisers should expect the same in 2009, according to a new report.

Last year, the Financial Industry Regulatory Authority Inc.’s first full year of existence, saw fines against firms and individuals plummet 55% to $35 million, compared with $77.6 million in 2007, when NYSE Regulation and the former NASD merged enforcement and arbitration operations, according to the report, “Finra 2008: An Oscar-Winning Year?”

The industry should not expect a repeat in 2009, the authors said.

Last year “may have been the calm before the storm. Given the financial crisis, it is likely that Finra’s enforcement activity will increase in 2009,” the report said.

Indeed, the potential realigning of the industry that would lessen the divide between investment advisers and reps could also result in an increase in enforcement activities by Washington and New York-based Finra, the report concluded.

“Furthermore, if Finra is successful in its efforts to regulate investment advisers, significant enforcement activities will likely result,” the report stated. “Recently, new blockbuster issues have already emerged, including sales of auction rate securities, which are producing “supersized’ agreements in principle,” the report said. “How active Finra will be in 2009 remains to be seen, as the anticipated onslaught of regulatory activity has yet to fully materialize.”

And the push in Washington to overhaul and consolidate regulators such as the Securities and Exchange Commission and the Commodity Futures Trading Commission will likely result in a spurt of enforcement activities, said Jay Nagdeman, president of Suasion Resources Inc., a Roseland, N.J., consulting firm that specializes in marketing.

Such changes “may lead to significantly more regulation, and that would then create a rush of enforcement at the end of 2009, into early 2010,” he said. “That’s probably what should be expected” by the industry, Mr. Nagdeman added.

In 2008, Finra regulators found less reason to levy fines and enforcement actions against broker-dealers and their reps, according to the report, which was released last Wednesday and prepared by Deborah Heilizer and Brian Rubin, partners with Sutherland Asbill & Brennan LLP of Washington, along with Shanyn Gillespie, an associate with the firm.

Finra was tackling fewer big issues and pursued fewer cases that resulted in fines of more than $1 million, according to the report. In 2008, Finra levied three such fines, compared with 19 a year earlier.

“The reduction in “blockbuster’ cases with outsized fines may be due, in part, to the industry’s adoption of policies and procedures in response” to major issues that surfaced in 2005, such as market timing, late trading, directed brokerage, revenue sharing and mutual fund share class issues,” according to the report.

“It is also possible that Finra is no longer rulemaking by enforcement,” the report said. “Finally, Finra may have been affected by the SEC’s well-publicized retrenchment on the enforcement front.”

The top five issues that Finra focused on in 2008 in terms of fines were: mutual funds, suitability, licensing, excessive brokerage compensation and electronic communications, the report said.

A few key trends can be gleaned from an analysis of recent disciplinary actions. Huge mutual fund cases of the past few years, those that focused on market timing, late trading, unsuitable sales of Class B mutual fund shares and directed brokerage, are on the wane.

The issues that Finra has been trying to turn into major cases, such as variable products and hedge fund sales, as well as sales to seniors and anti-money-laundering actions, have not yet generated fines of $1 million or more.

And Finra seems to have paid more attention to more traditional individual sales practice and gate-keeping violations, such as suitability and licensing violations, than to industry violations, such as market timing, the report said.

Herb Perone, a Finra spokesman, didn’t return a phone call seeking comment.

E-mail Bruce Kelly at [email protected].