RIA Compliance Blog
On April 10, 2017, the Financial Industry Regulatory Authority’s (“FINRA”) National Adjudicatory Council (“NAC”) updated FINRA’s Sanction Guidelines. The purpose of these updates is to “ensure that the guidelines reflect recent developments in the disciplinary process, comport with changes in FINRA’s rules, and accurately reflect the levels of sanctions imposed in FINRA disciplinary proceedings.”
FINRA’s Sanction Guidelines are designed to acquaint FINRA-member firms with common securities-industry rule violations that take place and the variety of disciplinary sanctions that may be imposed because of those rule violations. The Sanction Guidelines also serve as a tool to help FINRA’s adjudicators find suitable sanctions in disciplinary proceedings. From time to time, FINRA conducts reviews of the Sanction Guidelines to account for “changes in FINRA’s rules” and to reflect accurately “the levels of sanctions imposed in FINRA disciplinary proceedings.”
The first change that the NAC added to the Sanction Guidelines is a new principal consideration providing that FINRA judges must consider whether a member employed undue influence over a client. According to FINRA, this new principal consideration was added to discourage financial exploitation of seniors and other vulnerable adults. As previously discussed, in November 2016, FINRA filed with the Securities and Exchange Commission (“SEC”) proposed rules designed to protect seniors and other vulnerable adults from financial exploitation. The new principal consideration was likely added in response to these proposed rules.
The second change to the Sanction Guidelines involves supervision violations. Previously, the Sanction Guidelines pertaining to supervision violations emphasized limited supervisory failures, such as those that concerned an individual or a small number of associated persons. The new guideline places an emphasis on violations involving systemic supervisory failures and firm wide supervisory problems.
The third change to the Sanction Guidelines relates to short interest reporting. Previously, FINRA judges imposed sanctions for short interest reporting violations based on a guideline involving short sale violations. However, FINRA determined that this guideline did not factor in “the unique set of factors that short interest reporting violations typically present.” In response, the NAC drafted the guideline for short interest reporting to take into consideration issues that are limited to short interest reporting cases.
The fourth change involves borrowing and lending arrangements between registered representatives and customers. Over the years, there have been many litigated and settled cases that concerned borrowing and lending arrangements, but the previous version of the Sanction Guidelines did not include a guideline dealing with violations involving borrowing from or lending to customers. In response, the NAC drafted such a guideline to assist adjudicators in choosing an appropriate sanction in cases involving borrowing and lending arrangements.
FINRA also introduced a new general principle, General Principle No. 7, that considers possible ameliorating effects of regulator or firm-imposed sanctions and remedial action. General Principle No. 7 is intended to give FINRA judges more comprehensive guidance in regards to sanctions delegated by another regulator or corrective action that a member firm took. General Principle No. 7 is set to replace the old Principal Consideration No. 14.
Finally, FINRA announced that there will be “an increase in penalties for selling unregistered securities where a high volume of penny stock transactions are involved.” FINRA also plans to increase suspensions for broker-dealers found to have been involved in “churning,” which involves participating in unauthorized transactions or making trades on customer accounts principally for the purpose of obtaining commissions and fees.
Parker MacIntyre provides legal and compliance services to investment advisers, broker-dealers, registered representatives, hedge funds, and issuers of securities, among others. Our regulatory practice group assists financial service providers with complex issues that arise in the course of their business, including compliance with federal and state laws and rules. Please visit our website for more information.