“The primary reason for the drop-off in fines was because there were no auction rate securities cases in 2012,” said Brian Rubin, partner in the Washington, D.C., law firm Sutherland Asbill & Brennan. “In 2011, those cases accounted for $9.5 million of the fines in advertising cases.”
Sutherland, which represents advisor and broker-dealer firms being prosecuted by the SEC, FINRA and other regulators, publishes an annual analysis of FINRA’s disciplinary actions. Ad violations generated the fourth-largest amount of fines for FINRA in 2012, which was the first year since 2009 that advertising was not ranked first on Sutherland’s Top Enforcement Issues list. (Suitability, due diligence, and research cases all brought in more fines during 2012.) The total number of advertising enforcement actions that FINRA has reported has climbed from 8 in 2006 to 50 last year.
In its review of advertising sanctions in 2012, Sutherland described two cases that accounted for a combined $3.2 million in fines, about 30% of the total.
FINRA ordered a firm to pay a $2.3 million fine and $12 million in restitution for the sales of a real estate investment trust and collateralized mortgage obligations (CMOs). The firm, the sole distributor of the REIT, used allegedly misleading advertisements in offerings to investors, many of whom were unsophisticated and elderly. Website advertisements and seminar slides used for promotion were also found to contain misleading and exaggerated statements about the REIT’s performance. Although FINRA told the firm to stop using those slides, it continued to do so.
In what Sutherland termed a “unique” case, FINRA alleged that a firm made inaccurate representations about the firm’s services, rather than improper advertisements about a particular security. The firm provided a trading platform, software, and support services for day traders; FINRA found that the risk disclosures on the firm’s websites were separated from its claims of effectiveness and were not featured prominently. In addition, the firm’s websites noted that it was the only direct-access trading firm on a magazine’s list of America’s fastest-growing companies, without disclosing that this list was more than 10 years old and that the firm had to pay a fee to be included. Even after FINRA notified the firm about these advertisements, the firm continued to use them. These alleged violations not only led to a $900,000 fine by FINRA, but the New York Stock Exchange, NASDAQ, BATS Exchange, and the Securities and Exchange Commission also ordered the payment of $5 million in additional fines and disgorgement.
In both of these cases, firms persisted in questionable actions after being put on notice by FINRA. When asked why firms would behave in such a manner, Rubin replied that he couldn’t really explain why these firms acted as they did. “It’s possible,” he said, “that the firms didn’t ‘hear’ or appreciate the message that FINRA previously delivered. It’s also possible that the firms thought they had adequately addressed FINRA’s concerns but, at the end of the day, FINRA disagreed.”
Sutherland concluded its report on advertising sanctions by saying that firms “may want to review the disclosures made in their advertising provided to investors, and in their internal marketing or training documents, especially those involving complex products, for accuracy and completeness.”