United States: Sutherland Issues Annual Review of FINRA Sanctions: Finds FINRA slowdown began to reverse in 2009

Last Updated: July 26 2010
Article by Brian L. Rubin and Deborah G. Heilizer

Originally published July 12, 2010

Sutherland Asbill & Brennan LLP has completed its annual review of disciplinary actions brought by the Financial Industry Regulatory Authority (FINRA) in 2009. On June 22, 2010, FINRA issued its "2009 Year in Review." By reviewing FINRA's notices and releases, Sutherland Partners Deborah G. Heilizer and Brian L. Rubin and Associate Shanyn L. Gillespie found that FINRA reported modest increases in fines and disciplinary actions in 2009, as compared to 2008, but was less active than in 2005, 2006 and 2007. Sutherland also identified the top enforcement issues for FINRA in 2009, as well as disciplinary trends.

The Results

Fines and Disciplinary Actions

FINRA fined firms and individuals approximately $50 million in 2009, almost twice as much as in 2008 (approximately $28 million). While that increase is noteworthy, FINRA's fines in 2009 were still significantly smaller than the fines obtained by FINRA and its predecessors (NASD and the New York Stock Exchange) in 2005, 2006, and 2007 ($184 million, $111 million, and $77 million, respectively). In addition, FINRA resolved more disciplinary actions in 2009 (1,090) than in 2008 (1,007), but fewer than were resolved in prior years (1,344 in 2005; 1,147 in 2006; and 1,107 in 2007).

Top Enforcement Issues

  1. Mutual Funds, which generated the most total fines in 2008, once again produced the highest aggregate fines (approximately $12 million), narrowly edging out Suitability. Mutual fund cases accounted for nearly one-fourth of FINRA's total fines in 2009. More than one-half of the mutual fund cases (representing approximately $6.6 million in fines) also included suitability allegations (e.g., share class cases, discussed below). FINRA also levied significant fines in cases involving mutual fund specific issues, e.g., $2.1 million in fines levied against 25 firms for failing to comply with NASD's breakpoint self-assessment. It should also be noted that the $12 million in mutual fund fines, while significant, represents a small fraction of the fines in mutual fund cases in 2005 and 2006 ($104 million and $95 million, respectively).
  2. Suitability cases finished a close second in total fines (approximately $11.9 million). Fines were imposed for excessive trading and unsuitable sales of various products, including collateralized mortgage obligations (CMOs), hedge funds, unit investment trusts, installment plan contracts, and variable products. Not surprisingly, the biggest fines were in mutual fund suitability cases, including "supersized" fines (defined as over $1 million) in the following cases: (a) $4.41 million fine of a firm for, among other things, unsuitable sales of Class B and Class C mutual funds; and (b) $3.05 million fine of a firm for, among other things, failing to supervise two registered representatives who persuaded customers to take early retirement and executed unsuitable mutual fund transactions in those customers' accounts. Also notable is the $1.65 million in total fines assessed against five bank broker-dealers for failing to have adequate systems and procedures to supervise the suitability of variable annuity, mutual fund and unit investment trust transactions.
  3. Variable Products cases generated approximately $6.45 million in fines in 2009. "Supersized" fines were imposed in the following cases: (a) $1.75 million fine of a firm for executing 250 unsuitable variable annuity sales and exchanges, which included transactions that were part of an alleged "mass switch" campaign by a particular registered representative; and (b) $1.5 million fine of another firm for alleged "complete meltdown" of supervisory systems and procedures for the review of variable annuity sales.
  4. Licensing violations (including failures related to registration, testing and continuing education) were found in 50 disciplinary actions in 2009, in which more than $5.6 million in fines were imposed. The largest fines were levied against firms that violated licensing-related regulations, while also committing other unrelated violations. For example, one firm was fined $1.75 million for permitting at least 22 Series 6 registered representatives to execute equity and bond transactions and for allowing an individual to park his securities license, while the firm was also charged for unsuitable variable annuity sales and exchanges. In another example, a firm was fined $1 million for allowing an unregistered person who had been barred by the SEC to perform stock loan functions requiring registration; that firm was also charged for failing to supervise stock loan activities.
  5. Advertising came in fifth place with $5.5 million in total fines. Of those fines, approximately $3.5 million or 64% were imposed in auction rate securities (ARS) cases. In those cases, FINRA found, among other things, that the firms used advertisements, sales literature and/or internal use only communications that: (1) were not fair and balanced; (2) did not provide a sound basis for evaluating the facts regarding ARS purchases; and (3) failed to adequately disclose the risks of investing in ARS. The cases involving internal use only pieces may suggest that FINRA is pursuing a new standard, establishing the same risk disclosure requirements for internal use only pieces for trained professionals registered with FINRA and materials used by the investing public (even though investors are presumed to be less informed than securities professionals).


  • "Supersized" fines. In 2009, FINRA imposed 10 "supersized" fines (greater than $1 million), representing a significant increase compared to 2008 (which had only three "supersized" fines). However, the number of "supersized" fines in 2009 was far less than those imposed in 2006 and 2007 (19 in each year).
  • Advertising and AML. While the top enforcement issues in 2009 included several of the "usual suspects" (e.g., mutual funds and suitability), Advertising and Anti-Money Laundering, came in fifth place and sixth place, respectively, after not making the prior years' lists. Advertising resulted in $5.5 million in fines, while AML (which has been touted as an enforcement and examination priority for the past several years) generated approximately $4.9 million in fines. In addition, as explained above, FINRA may bring more advertising cases involving internal use only pieces.
  • Electronic Communications. During the past several years, cases involving electronic communications have generated significant aggregate fines, but in 2009 they did not, generating only $4 million in aggregate fines. One explanation for this trend is that most firms have probably adopted email retention systems. Instead, FINRA has been primarily focusing on narrower issues, like retention of instant messages and the use of external email accounts, which tend to generate lower fines. The results may differ in 2010 as FINRA has been examining firms' failures to follow up on "glitches" or "hiccups" in email retention. For example, in May 2010, one broker-dealer was fined $700,000 for failing to retain approximately 4.3 million emails, and for failing to inform FINRA of its email retention and retrieval "glitches," which impacted the firm's ability to comply with production requests from FINRA. These types of issues may cause electronic communications to climb back to the top five in 2010.
  • Past Priorities. Purported FINRA enforcement priorities like sales to seniors and retirees, alternative investments, private placements, and Ponzi schemes did not make the list of top fine-generating enforcement issues in 2009. However, this trend may reverse in 2010. In February 2010, FINRA fined a firm $200,000 for failing to supervise sales of reverse convertible notes and for making unsuitable sales of reverse convertible notes to a retired couple. In addition, in March 2010, FINRA expelled a firm for facilitating fraudulent private placement sales that were marketed as income-producing investments, but in reality, the firm's affiliate engaged in a classic Ponzi scheme.

© 2010 www.sutherland.com. All Rights Reserved.

This article is for informational purposes and is not intended to constitute legal advice.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

In association with
Related Topics
Related Articles
Up-coming Events Search
Font Size:
Mondaq on Twitter
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions