More On Legal & Compliancefrom The Advisor's Professional Library
- Risk-Based Oversight of Investment Advisors Even if the SEC had a larger budget and more resources, it is doubtful that the Commission would have the resources to regularly examine all RIAs. Therefore, the SEC is likely to continue relying on risk-based oversight to fulfill its mission of protecting investors.
- Client Communication and Miscommunication RIA policies and procedures must specify what type of communications should be retained. The safest course of action is for RIAs to retain all communicationsto clients, from clients, and about client accounts. To comply with fiduciary obligations, communications must be thorough and not mislead.
When the going gets tough, some reps and broker-dealers get going in suing the Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA)—and sometimes it pays off.
That is the finding of the just-released annual study by Sutherland, Asbill & Brennan analyzing whether it pays for reps and BDs to litigate against regulators instead of settling. The Sutherland study analyzed cases from October 2010 through March 2012 where BDs and individuals were charged with violating SEC and FINRA statutes, rules and regulations.
Reps and BDs often cower from hitting back against the SEC and FINRA. However, Sutherland details in its report the four areas in which reps and BDs did indeed find some success.
Of the 126 charges that were litigated by the SEC and FINRA and resulted in SEC initial decisions or FINRA Hearing Panel decisions during the study period, BDs and individuals succeeded in getting 12.7% of the charges dismissed.
- SEC Respondents
Only seven respondents litigated against the SEC during the study period, and none persuaded the administrative law judge (ALJ) to dismiss any charges.
- FINRA Respondents
These respondents succeeded in getting 14.3% of the charges dismissed, nearly double the success rate of respondents during fiscal years 2009 and 2010 (7.6%).
- Representation by Counsel in FINRA Proceedings
FINRA respondents with counsel were significantly more successful than pro se respondents. FINRA respondents represented by counsel succeeded in getting 18.8% of charges dismissed. FINRA respondents without counsel, on the other hand, went 0-for-27 during the period. Since January 2006, only one pro se FINRA respondent has succeeded in getting any charge dismissed.
During the study period, SEC staff successfully proved all three of the fraud charges brought. FINRA, however, failed to prove two of its nine fraud charges, or more than 22%, which Sutherland says is far less than its success rate for charges generally. In fiscal 2009-2010, FINRA succeeded in proving all of its fraud charges (five fraud charges against four respondents).
FINRA Enforcement Priorities
Sutherland’s annual survey on FINRA sanctions, released in early March, identified five categories of charges in which FINRA, in 2011, had obtained the greatest aggregate amount of fines through disciplinary actions. Those categories were advertising, auction rate securities, suitability and improper form U4, U5 and Rule 3070 filings. FINRA generally has had success in proving those categories of charges, an analysis found. FINRA succeeded in proving all five of its advertising charges and all nine charges relating to Forms U4 and U5. With respect to suitability, FINRA staff succeeded in proving three of five charges. However, FINRA successfully proved only one of four charges in its only case during the study period involving auction-rate securities.
When SEC and FINRA respondents were found to be liable for one or more charges, 31.3% of the time respondents persuaded the ALJ or Hearing Panel to impose lower monetary sanctions than those sought by the staff. Respondents in fiscal 2009-2010 had a similar rate of success (33%).
These respondents convinced ALJs to impose lower monetary sanctions 28.6% of the time during the study period. In contrast, in FY 2009-2010, ALJs lowered monetary sanctions approximately 50% of the time.
These respondents persuaded Hearing Panels to reduce the proposed monetary sanction 33.3% of the time during the study period.
When fines were reduced, the proposed fine ranged from $15,000 to $30,000, and averaged $21,250. The amount ordered ranged from $5,000 to $20,000, and averaged $9,250 (a reduction of approximately 56%). FINRA respondents were more successful during the study period than during FY 2009-2010 when their success rate was 27%.