FINRA just released its 2012 Year in Review
Report.
In its opening remarks, FINRA’s Chairman and CEO, Richard Ketchum,
stated, “FINRA fulfilled its role as the first line of defense for
investors through a comprehensive and aggressive enforcement program,
supported by a realigned and more risk-based examination program and
the provision, for the first time, of cross-market surveillance
programs that more effectively detected electronic manipulative
trading. Protecting investors and helping to ensure the integrity of
the nation’s financial markets is at the heart of what we do every
day.
Regulatory
FINRA noted that one of its regulatory highlights was the success
of its referral program in which the Office of Fraud Detection and
Market Intelligence (“OFDMI”) shares regulatory intelligence with
the SEC and other law enforcement agencies. Its intelligence stems
from OFDMI’s fraud and insider trading surveillance of nearly all
U.S. equities markets. In 2012, FINRA referred a total of 692
matters to the SEC and other law enforcement agencies, of which 347
involved insider trading and 260 involved fraud.
Disciplinary and Enforcement
In addition to its referrals program, FINRA brought 1,541
disciplinary actions against registered firms and individuals, levied
fines in excess of $68 million, and ordered $34 million in
restitution to harmed investors. FINRA expelled a total of 30
firms from the securities industry, barred 294 individuals, and
suspended 549 brokers from associating with FINRA-regulated firms.
Some of the complex products involved in 2012 disciplinary and
enforcement actions were non-traded REITs, exchange-traded funds
(ETFs), and structured products. Other enforcement actions
involved research analyst conflicts, mispricing, and improper
reimbursement fees to lobbying groups.
Another critical aspect of FINRA is its examinations of member
firms and associated persons. In 2012, FINRA initiated 1,846
routine examinations, over 800 branch office examinations, and 5,100
examinations resulting from customer complaints, terminations for
cause, and other regulatory tips. FINRA’s exam procedures
were made more efficient due to advances in technology which has
provided FINRA with a modernized framework that allows it to identify
and prioritize areas of risk exposure at firms.
Investor Protection
Of grave importance to investors was FINRA’s new suitability
rule that was implemented July 9, 2012. The rule requires
broker-dealers and/or their associated persons “to have a
‘reasonable basis’ to believe a recommended investment is
suitable for the customer, based on information obtained through
‘reasonable diligence’ to understand a customer’s investment
profile.” For more investor information on FINRA’s
suitability rule, click
here.
FINRA also proposed an investor-protection initiative in 2012 that
attempts to address conflicts of interest relating to recruitment
compensation practices of member firms offering incentives to recruit
registered representatives. Currently these compensation
arrangements are not disclosed to the representative’s customers
when they are asked to transfer their accounts to a representative’s
new firm. The rule would require the member firm to provide
certain disclosures before a customer makes the final determination
to transfer an account to the new firm. The view the text of
the proposed rule, click
here.
In September 2012, FINRA obtained approval to file proposed rules
that would require firms to include a reference and a link to
BrokerCheck on their websites to make it easier for investors to
obtain information on firms and brokers. FINRA also increased the
user friendliness of BrokerCheck by including a zip code search and a
combined search function that provides for easier access to the SEC’s
Investment Adviser Public Disclosure (IAPD) database.
In November 2012, FINRA Dispute Resolution released data which
reflects the outcomes of cases heard under its all-public panel
program that was implemented in February 2011 which allows investors
the option of a panel comprised of all public arbitrators versus a
panel made up of one arbitrator with securities industry experience
(nonpublic arbitrator) and two public arbitrators. The all-public
panel option represents an investor-friendly change to the program,
designed to ensure a fair playing field for all parties. To date, the
data indicates that in cases decided by three public arbitrators,
customers were awarded damages 51 percent of the time, whereas in
cases decided by a panel including one nonpublic arbitrator and two
public arbitrators, investors were awarded damages 32 percent of the
time. For the full data report, click
here.
Notably, FINRA and the FINRA Investor Education Foundation have
continued to enhance its outreach strategies and investor education
by distributing educational brochures, holding live events, and
creating an Outsmarting Investment Fraud curriculum. The
Foundation also put more focus into providing services for
military families through their military financial readiness
project.
Crowdfunding
A hot new topic in 2012 was “crowdfunding” since new
provisions relating to crowdfunding were introduced in the April,
2012 JOBS Act. To ensure that the capital-raising objectives of
the JOBS Act can be advanced while simultaneously protecting
investors, FINRA has requested and solicited comments on specific
rules it should adopt for registered funding portals that become
FINRA members. In addition, FINRA has also asked for comments
on the application of its existing rules to broker-dealers engaging
in crowdfunding activities.
If you’re a FINRA member firm, associated person, or an investor
involved in a potential FINRA-related claim, contact the experienced
attorneys at Cosgrove Law Group, LLC for assistance.
