Q&A with Tara LaClair
Self-regulatory firm dsees increase in enforcement actions
Q: What is FINRA?
A: While sometimes mistaken for a government agency, the Financial Regulatory Authority, or FINRA, is actually a “self-regulatory organization” of the securities industry, registered as such with the SEC. FINRA, the largest independent regulator in the United States, regulates “member firms and their brokers and investment advisers.” FINRA was formed by a consolidation of the enforcement arm of the New York Stock Exchange and the National Association of Securities Dealers (NASD) in 2007 and describes its mission as “to protect America's investors by making sure the securities industry operates fairly and honestly.” In addition to administering, promulgating and enforcing securities rules and regulations, FINRA also provides information and educational resources to investors and operates the nation's largest arbitration (dispute resolution) forum for investors, member firms and their employees.
A: Since the turmoil in the financial markets during 2008 and the first quarter of 2009, FINRA enforcement and disciplinary actions have steadily increased. In 2009, FINRA reported filing 1,158 disciplinary actions, an increase of 8 percent from 2008, according to the recently released FINRA Sanctions Survey. In 2010, this number grew by 13 percent to 1,310 actions, and in 2011, the third straight year of growth, FINRA brought 1,488 disciplinary actions, another double-digit increase. These numbers represent a reverse of the slowdown that occurred between 2006 and 2008. FINRA also imposed 51 percent more fines in 2011 at $68 million, up from $48 million in 2010. While nowhere near the $184 million imposed in 2005, this increase may mean continued enforcement efforts in the near future. FINRA also barred more individuals from involvement in the industry in 2011, up 14 percent to 329 from 288 in 2010.
A: Much of the 2011 increase was due to penalties related to improper advertising. In this area, the fines rose $21.1 million in 2011, an increase of 344 percent over 2010. A significant amount of the fines related to auction rate securities, which will likely decrease next year as the auction rate matters are concluded. Nine cases related to allegedly misleading advertising materials available to investors on firm websites. Additionally, actions related to suitability violations doubled in 2011, up from 53 in 2010 to 106. It is worth noting that FINRA's new suitability rule, which is due out this summer, could mean an increase next year, as well.
A: In January of this year, FINRA issued its 2012 Annual Regulatory and Examination Priorities Letter. The Priorities Letter provides insight into FINRA's regulatory and enforcement objectives for 2012. This year, FINRA's stated enforcement priorities are “informed against the economic environment investors faced in 2008, which included conditions that foster increased risk of aggressive yield chasing, inappropriate sales practices, unsuitable product offerings and misappropriation and fraud.” In this regard, FINRA noted some specific product areas that it intends to prioritize, including mortgage-backed securities, municipal securities and variable annuities, as well as some more general areas of concern, such as the manner in which fees are charged and/or disclosed to customers.
A: When the new suitability rule goes into effect, it may mean new or more frequent profiling forms by the investor's broker. But, while the new rules may present a specific opportunity for investors to sit and down and talk to their financial advisers, investors should also be reviewing their account statements each month and asking questions. They should schedule regular meetings or calls with their adviser and discuss any changes in their circumstances, as well as specific goals and needs and how those may have changed. As FINRA noted in its Priorities Letter, investors should be cautious about chasing higher and higher returns, since higher returns always involve higher risk of losses, particularly in volatile markets.