Client Alert: Analyzing The Revised FINRA Sanction Guidelines

  • FINRA’s NAC Revises the Sanction Guidelines (17-13)

    The revised Sanction Guidelines were published and became immediately effective on April 10, 2017.

    These new guidelines are the result of a suggestion made by the National Adjudicatory (NAC), which is a self-regulatory 15-member committee composed of industry and non-industry members that serve as an appellate tribunal for disciplinary cases. The goal was to ensure that the guidelines reflect recent developments in the disciplinary process, comport with changes in FINRA’s rules, and accurately reflect the levels of sanctions imposed in FINRA disciplinary proceedings.

    The Sanction Guidelines are not supposed to prescribe fixed sanctions for particular violations. Yet they provide direction for Adjudicators in imposing sanctions consistently, fairly, within recommend ranges for sanctions and suggest factors that may be considered in determining for each case where within the range the sanctions should fall or whether they should be above or below the recommended range in certain cases. The central idea of the guidelines is that adjudicators start with a range of appropriate sanction for the particular violation and consider “aggravating” and “mitigating” factors in order to arrive at an appropriate sanction for the relevant violation.

    The new and modified principles introduced through the revised Sanction Guidelines are:

    • Consideration for Vulnerable Customers: The new consideration endorses that financial exploitation of vulnerable customers should result in strong sanctions and contemplate coverage for those vulnerable individuals which may include senior investors
    • Sanction guidelines:
      • Supervision – Systemic Supervisory Failures: The guidelines refer to violations related to systemic supervisory failures and firm wide supervisory problems.
      • Short interest reporting: The use of this guideline fails to account for the unique set of factors that short interest reporting violations typically present. The introduction of this guideline sets forth principal considerations unique to short interest reporting cases and results in related changes to the guideline for Short Sale Violations.
      • Borrowing from and lending to customers: Adjudicators are now for the first time provided with guidance in the assessment of sanctions in the case of borrowing and lending from and to customers.
    • Consideration of regulator or firm-imposed sanctions: FINRA adjudicators are provided with more detailed guidance for sanctions imposed by a member firm. This new general principle (no. 7) will replace the guidance provided in Principle Consideration in Determining Sanctions (no. 14), which has been deleted.

    Through these new Sanction Guidelines FINRA modified both the non-monetary and the monetary range of sanctions. The amended guideline adds principal considerations that focus on a respondent’s penny stock activities and advises adjudicators to consider lengthier suspensions and higher fine ranges.

    Conclusion:

    The new guidelines for adjudicators give guiding principles concerning which sanctions are appropriate for certain infringements and extend from monetary to non-monetary sanctions.

    Paul Lieberman has more than three decades of experience preparing and revising policies and procedures, developing effective supervision structures, leading and coordinating internal investigations and defending regulatory enforcement proceedings before the SEC, FINRA and state securities departments/commissions.

    Laura K. Kues assisted in the preparation of these Alerts. Laura graduated from Johannes Gutenberg University in Mainz (Germany) in June 2015 (First State Exam) with the priority area in Competition Law Intern at Eaton & Van Winkle, LLP (USA) during the 2017 German legal clerkship at the district court of Mainz (Germany).

    © Eaton & Van Winkle, LLP, 2017. All rights reserved. This memorandum was prepared as a service to clients and friends of the firm to report on recent developments that may be of interest to them. The information in it is therefore general, and should not be considered or relied on as legal advice.