Sutherland Partners Deborah Heilizer and Brian Rubin and Associate Shanyn Gillespie recently completed an analysis of disciplinary actions reported by the Financial Industry Regulatory Authority (FINRA) in 2008, which was FINRA’s first calendar year. Click here to obtain a copy of the complete analysis, called “FINRA 2008: An Oscar Winning Year?”

The analysis found that FINRA had a slow year in 2008, obtaining lower fines and bringing fewer actions compared to prior years. FINRA fined firms and individuals approximately $35 million in 2008, approximately 55% less than the combined fines obtained by FINRA, National Association of Securities Dealers (NASD) and the New York Stock Exchange (NYSE) in 2007. In addition, FINRA resolved 1,007 formal disciplinary actions in 2008, a 9% drop from 2007. Compared to 2005 and 2006, the declines are much greater.

The following issues were identified as the top five for FINRA in 2008:

  • Mutual funds generated the largest fines in 2008 (approximately $10.3 million), but those fines represent a fraction of the fines obtained in similar cases in 2005 and 2006.
  • Suitability cases produced the second-highest total fines (approximately $4.5 million), but those fines were small compared to 2005 and 2006.
  • Licensing cases (including registration, testing and continuing education) resulted in twice as many disciplinary actions (66 actions) as any of the other top five categories, but ranked third in total fines (approximately $4.35 million).
  • Excessive commissions/markups/markdowns appears to be an area of increasing focus for FINRA, which brought 21 cases in 2008, more than FINRA, NASD and the NYSE brought in 2005, 2006 and 2007 combined. The total fines were approximately $3.5 million.
  • Electronic communications cases generated approximately $3 million in fines. FINRA’s priorities in this arena appear to be shifting from traditional email retention to more novel issues (e.g., substantive email review and retention of instant messages).

The analysis also highlighted the following trends:

  • Cases involving “blockbuster” issues (defined to be industry practices which, according to FINRA, resulted in significant customer harm) are on the wane. Examples of past “blockbuster” issues include market timing.
  • Supersized" fines (greater than $1 million) have fallen significantly. In 2008, there were only three "supersized" fines, compared with 19 in both 2006 and 2007.
  • Issues that FINRA has been trying to turn into “blockbusters,” such as variable product and hedge fund sales or sales to seniors, have not generally resulted in “supersized” fines.
  • FINRA seems to be focusing more on traditional violations (e.g., suitability and licensing violations) rather than on novel rulemaking-by-enforcement violations, such as market timing.