In April 2017, FINRA announced that it had revised its sanction guidelines for violations of its rules. The new revisions, among other things:
- contain a new factor requiring that the exercise of undue influence over a customer, such as an elderly investor, be considered when adjudicating violations;
- introduce three new sanction guidelines: “Systemic Supervisory Failures,” “Short Interest Reporting,” and “Borrowing From or Lending to Customers”;
- create a new factor related to the mitigating effect of regulator or firm-imposed sanctions and corrective actions that have been taken; and
- amend a number of sections of the sanction guidelines to revise sanctions for more serious FINRA rule
The revised sanction guidelines became effective immediately, and may be found on FINRA’s website at the following link: finra.org/Industry/Enforcement/SanctionGuidelines.
By way of explanation, the sanction guidelines do not stipulate fixed punishments or penalties for violations of the FINRA rules. Instead, the premise of the sanction guidelines is that FINRA adjudicators have a range of potential sanctions for a particular violation, and they may consider aggravating and mitigating factors in order to arrive at an appropriate sanction for the relevant violation.
The new revisions are the result of FINRA’s most recent review of the sanction guidelines. FINRA has indicated that additional review is currently in process as to potential additional changes.
Our Take and a Few Additional Points
The new guidelines address a number of issues that have recently been of significant interest to U.S. regulators. For example, consistent with recent regulatory attention, FINRA has introduced a new principal consideration that examines whether a broker-dealer’s employee has exercised undue influence over a customer. This new consideration reaffirms the notion that financial exploitation of senior and other vulnerable customers should result in more severe sanctions. This focus on vulnerable investors is consistent with the concerns behind FINRA’s recent rule changes relating to senior investors, which we discussed at: http://www.bdiaregulator.com/2017/04/sec-approves-finras-rules-to-protect-seniors-from-financial-exploitation/.
As to short interest reporting, under the prior guidelines, violations involving short interest reporting would have been determined under the guideline related to short sale However, FINRA believed that this method of review did not account for the different factors typically presented by short interest reporting violations. Accordingly, the introduction of the guideline for short interest reporting sets forth considerations that relate specifically to these cases.
FINRA also implemented changes relating to rule violations that involve churning or unauthorized transactions. The low end of the suspension range for an individual respondent who engages in churning or unauthorized transactions increased from 10 business days to one month. The high end of the suspension range for churning and unauthorized transactions for an individual respondent has increased from one year to two years; in addition, the revised guidelines for churning or unauthorized transactions recommend that FINRA adjudicators strongly consider imposing a bar from the industry on an individual respondent when the respondent acted recklessly or intentionally. This change reflects FINRA’s 2017 exam priorities letter and its emphasis on excessive trading.