The Financial Industry Regulatory Authority is on pace for a significant yearly increase in fines and disciplinary actions against broker-dealers and their associates, according to a new analysis by the law firm Sutherland & Asbill and Brennan.
In the first half of 2012, FINRA has levied fines of $39.4 million, Sutherland found, a figure that includes a growing number of so-called "super fines," or penalties that exceed $1 million.
At that rate, FINRA is on pace for a 15% increase in the volume of fines it will collect this year, according to Brian Rubin, a partner with the firm who helped conduct the study.
"Essentially, we are looking at a jump from $68 million in 2011 to projected fines of $78.4 million in 2012," Rubin said in a statement.
In the first half of the year, Sutherland tallied 609 disciplinary cases that FINRA has initiated, a pace that tracks to a 9% increase over last year.
The findings of Sutherland's latest survey continue the trend of increased enforcement activity at FINRA that the firm has identified over the last several years. Last year, for instance, Sutherland documented a 51% increase in fines over 2010.
The sheer number of actions that FINRA pursued against its members jumped 13% over the past two years, and up 8% from 2008 to 2009.
What accounts for the recent spike in enforcement activity?
"It's hard to say," Rubin wrote in an email. "Two possible reasons. First, it could be that some of these cases stem from the market meltdown. Second, it could be that FINRA wants to be perceived as tougher, particularly after [Bernard] Madoff and [Allen] Stanford and because being perceived as a tougher regulator will help build its case that it should be the SRO for advisers."
Sutherland's report comes amid a policy debate that could result in expanded enforcement authority for FINRA, as the head of the House Financial Services Committee has been trying to gin up support for a bill that would empower a self-regulatory organization, likely FINRA, to take on oversight of investment advisers, a responsibility currently shouldered by the Securities and Exchange Commission.
Backers of the bill maintain that a lack of funding and other factors have inhibited the SEC from effectively policing the industry, arguing that a group such as FINRA would be best suited to take on the responsibility of auditing advisers as it currently does with broker-dealers.
Headlining FINRA's enforcement activity in the first half of 2012 was an $11 million fine the organization levied against Goldman Sachs for improper practices of its research analysts. That fine was paired with an equal penalty of $11 million levied by the SEC.
The Goldman action accounted for the lion's share of the $11.9 million in penalties FINRA assessed in the first half of the year involving research-analyst communications improprieties, according to Sutherland's analysis, with the remaining $900,000 spread among seven other cases.
The firm counted 64 actions brought against broker-dealers concerning suitability violations, with penalties totaling $6.6 million. Suitability infractions were the most common source of FINRA's disciplinary actions.
Sutherland reported four cases relating to unit investment trusts in the first half of 2012, with penalties totaling $3.9 million. Enforcement actions involving markups or markdowns accounted for 14 cases and $3.7 million in penalties, while 24 cases related to municipal securities, totaling another $3.7 million in fines.
Additionally, FINRA has levied seven fines of at least $1 million, amounting to $24 million, so far this year, what Sutherland calls "supersized" penalties. That pace would exceed last year's tally of 10 such penalties.
"So far, 2012 is turning out to be a year of significant growth in FINRA's fines and disciplinary actions," said Sutherland Partner Deborah Heilizer, the other co-author of the study, noting the rise in cases involving "product-specific" violations. "If these trends hold, 2012 will turn out to be a solid year for FINRA."
Kenneth Corbin writes for Financial Planning.
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